Are Your Firm Finances Ready for 2024?
The end of the year is barreling towards us – are you ready? If not, here are a few tips for tidying up the financial side of your law practice.
Financial Management
For many lawyers, financial management is the business area of practicing law that provides the most heartburn. It’s completely understandable. Hire financial advisors to aid you in better understanding your business.
Be aware of potential landmines. A major red flag is having one employee who has all financial responsibility: check writing, bookkeeping, trust account management, financial reconciliation, as well serves as the gatekeeper for all communication with your financial partners and bank. Checks and balances are key. Often, there is no ill intent on the part of the employee, just a lack of knowledge. If, as the owner, you do not understand the process, you will have a hard time finding the flaws in your system or properly supervising.
Analyze Your Cash Flow
Brenda Barnes, law firm consultant and compensation expert, has this to say about law firm finance, “A good system of cash flow management can spell the difference between a successful business and a failed one. You need positive future cash flow to meet your debt commitments. Strong cash flow management also provides the ability to invest in growth. Getting to a position of excess cash flow helps your company operate in a strategic, proactive way, and can help keep you from operating on the defensive. Year end is an excellent time to document your cash flow, prepare a cash flow budget, and look for areas of improvement.”
Financial Review
Here is a checklist for law firms to strategically maximize profitability in 2024.
- Review realization rates and compare to prior years
- Review client profitability to assist with determining billing rate adjustments
- Review attorney and paralegal billing rates, when they were last raised, and your costs to provide your services. Is it time to make an adjustment?
- Set timekeeper budgets including billable hours, collections, and origination goals
- Review your general ledger and correct coding adjustments as necessary
- Review your Profit & Loss report. Where do you stand? If you have a larger than expected profit, are there any major investments in your firm you should make?
- Verify loan accounts and clean them up if necessary
- Reduce your receivables – follow up with clients to get paid
- Write off bad debt if necessary but work on getting paid first
- Make SEP IRA or 401k contributions and donations to charity to reduce taxable income. Talk to your CPA tax advisor.
- Verify your 1099 information is set up properly in your accounting system. Ensure you have W9’s and Tax ID numbers for issuing correct tax forms.
- Begin to think about year-end bonuses. Will you give these this year or in January?
- Review benefits that should be reported on W-2’s such as health and life insurance, transportation subsidies, moving expense reimbursements, and education debt or education reimbursement programs
- Create budgets for 2024
- Focus on your balance sheet – verify all your account balances
Strategic Look Ahead
How is the current economic market impacting your law firm.
- How is your area of practice performing? Are your clients able to pay their bills timely? Are your rates supporting your practice?
- How are your employees faring? Are your work from office / work from home protocols meeting the firm’s needs? How stable is your remote work plan? Does your post-pandemic work force plan need further adjustment?
- How is your personal mental health holding up? Do you have the support you need to continue to serve your clients? Are you able to support and encourage your team members?
Too often in our busy lives, we don’t take time for reflection. Schedule time to reflect on the current state and future of your firm. Ask your employees for input as their front-line communications with clients may reveal stresses or successes that don’t see from your point of view.
Use a year-end review to see how your law firm performed in 2023 and to make the changes necessary to strengthen your practice in 2024. With an objective look back, you can plan for moving forward.
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