5 Essential Accounting Reports for Solos and Small Firms
If you’re a solo or small firm lawyer, you not only have to worry about your clients and cases, you also have to be an accountant as well.
You have to keep track of profits and losses, revenue flow, accounts payable/receivable, return on investments and other financial indicators that gauge the health of your practice.
In a small practice, it’s easy to let these things slide. You don’t have the time. Or you’re more interested in the substantive work of the law.
But without some basic business accounting, you won’t have an accurate picture of how you’re doing. You won’t know if your firm is trending in the right direction. You won’t know how to best allocate resources, cut expenses or leverage your personnel to grow your business.
Not to mention tax preparation and planning.
If you’re fortunate, you have someone in-house who takes care of the bookkeeping and accounting, or you have budgeted for outsourcing these duties. Even then, you have to be able to read and understand the reports. And if something is overlooked or botched, it’s you who will likely have to pay the price.
Five Key Accounting Reports
A recent article by Eric Rosenberg in Entrepreneur is helpful. It explains – clearly and concisely – five important accounting reports for law firms and other small businesses.
- Profit and loss/income statement. The most important report, Rosenberg says, is the profit and loss statement (also called a P&L or income statement). This shows you how your money comes in and how it goes out. “I can look at my P&L for a quick summary of how much I make from writing, how much I make from advertising, how much I spend on business travel and how much I pay for computer and internet costs,” he writes. “Each business would have different accounts for its own income and spending categories.”
Study your P&L at least monthly. Compare one period to another and look for trends. Pinpoint where revenue is coming from and move eggs into the basket. Identify unnecessary expenses and cut them.
- Balance sheet. This is a snapshot of your assets and liabilities. Assets are bank accounts, savings and surplus accounts, investment accounts, receivables. Also property, office equipment, and other saleable, tangible items. Liabilities are debts, credit cards, business loans and anything your business owes.
“The accounting equation is based on the balance sheet. It tells us that assets plus liabilities equals equity. The difference in what you have and what you owe should ideally be a positive number and one that grows over time. When examining the balance sheet, also look at the short-term assets versus short-term liabilities. If you have payments owed soon, you won’t want to run out of cash without noticing that your assets are illiquid.”
- Accounts receivable aging. “You don’t work for free, and your business isn’t a charity. Doing the work and sending the invoice is just part of the battle. You also have to make sure those payments get paid and collected. Your accounts receivable (A/R) aging report tells you how well you are doing on the collections side.”
- Revenue by client. “[This] report tells you how much you made from each customer over a period of time. Building good relationships with quality clients can turn into a lucrative, reliable, and healthy income stream.”
Ideally, you have a healthy and growing roster of paying clients.
- Accounts payable aging. “Do your vendors a favor and pay them on time as well. Your A/P aging report tells you who you owe and how much. Paying late can sour relationships and may lead to late fees and other costs. Just pay on time. You might even get an early payment discount from some vendors. That’s a big win-win!”
What other accounting reports do you use in your solo or small firm?