Best Financial Statements for an Attorney to Review
As an attorney, you should review your law firm's financial statements to get a sense of the firm's financial health and identify any potential issues that may need to be addressed. Some key financial statements that you should ask your bookkeeper to provide so you can review include:
Profit and Loss Statement/Income Statement (P&L)
Ultimately, reviewing the P&L statement helps the partners make informed decisions about the firm's operations and financial future. By clearly understanding the firm's financial performance, the partner can make strategic decisions that help the firm grow and succeed.
As a partner at a law firm, they are reviewing the profit and loss to understand the firm's financial health. The attorneys can see the firm's revenue, its expenses, and the resulting bottom line. This information can help the partners make informed decisions about the firm's future direction, such as expanding or cutting back on particular practice areas, hiring or letting go of staff, or investing in new technology or infrastructure.
It is also essential for the partners to understand the firm's financial obligations, such as paying salaries, rent, and other expenses. By reviewing the P&L statement, the partners can ensure that the firm has enough cash flow to meet its financial obligations.
Additionally, the Profit and Loss statement will help the partners make informed decisions and identify trends and patterns in the firm's financial performance over time. For example, they can see if the firm's revenue is increasing or decreasing, which practice areas are most profitable, and which expenses are highest. This information can help the partners adjust the firm's operations and strategies.
The Balance Sheet
The balance sheet is a misunderstood statement, and an attorney rarely asks me to provide them with a balance sheet. This statement shows the firm's assets, liabilities, and equity at a specific time. It can help you understand the firm's overall financial position and whether it has enough assets to cover its liabilities.
The balance sheet can help the partners assess the firm's ability to meet its financial obligations, such as paying its bills or paying back loans. The partner can see how much cash and other assets the firm has on hand and its current and long-term liabilities. This information can help the partner make informed decisions about the firm's financial future, such as whether to take on more debt or invest in new projects.
By comparing the balance sheets from different periods, the partner can see how the firm's financial position has changed over time. The balance sheet can provide insight into the firm's growth, financial stability, and overall performance.
Also, the balance sheet can be used to assess the firm's value, which is vital in mergers and acquisitions or if the partner is considering selling their ownership stake in the firm. The balance sheet provides a snapshot of the firm's assets, liabilities, and equity, which can be used to calculate its net worth or book value.
The Cash Flow Statement
This statement shows the firm's inflows and outflows over a specific period. It can help you understand how the firm generates and uses cash, which can be necessary for managing its liquidity. If your firm has ever been in a position to be concerned about needing more cash to make payroll, this is the report to help you plan your spending.
The cash flow statement provides a detailed view of the firm's cash inflows and outflows over a specific period. By reviewing the report, the partner can get a sense of the firm's sources of cash, including operating activities, investing activities, and financing activities. The partner can also see where the firm's money is going, such as paying for expenses, investing in new projects, or paying back debt.
The cash flow statement can help the partners assess the firm's liquidity or ability to meet its short-term financial obligations. By reviewing the statement, the partner can see how much cash the firm has on hand and whether it increases or decreases over time. This information can help the partner make informed decisions about the firm's financial future, such as investing in new projects, paying off debt, or increasing cash reserves.
And although watching the balance in the checkbook is a way to keep a keen eye on cash flow, reviewing the cash flow statement can help the partners identify potential financial risks facing the firm. For example, if the firm's cash flows from operating activities are consistently negative, it may indicate that it is not generating enough revenue to cover its expenses. This information can help the partner identify areas for improvement and take action to mitigate potential risks.
The Statement of Changes in Equity/Retained Earnings
This statement shows the firm's retained earnings changes over a specific period. It can help you understand how the firm's profits are reinvested or distributed to shareholders.
These are the basic reports that every firm needs to run their business and get a good handle on the financial profitability of their law firm. In addition to these financial statements, you can also review other documents, such as budget projections, cash flow forecasts, and of course, that ever-important report for compliance, your three-way bank reconciliation. These documents can provide additional insights into the firm's financial health and help you identify potential areas of concern.
There are many posts here that I have written on the value of tracking KPIs, and some key financial metrics that attorneys may use to measure their financial performance include revenue, profit margin, and client retention rate.
Revenue is the amount of money the law firm brings in from clients. Profit margin is the percentage of revenue left after all expenses have been paid. The client retention rate measures how successful the attorney or law firm is at keeping clients returning for more services.
By tracking these financial KPIs, attorneys can better understand how they perform and where they may need improvements.
We hope you enjoyed reading about the Best Financial Statements for an Attorney to Review. Attorneys need to be aware of their firm's financial statements to maintain their law firms' financial health. Don't hesitate to contact us if you have any questions or need assistance with your law firm's financial statements. We are happy to help you!