How to Ensure the Financial Health of a Law Firm​

Written by Ashley McDermott
Written by Ashley McDermott

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case management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdomcase management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdom


In business, we strive to provide outstanding service to our clients, but this is not the only key to success. We must also keep a tight hold on the company’s financial health to ensure business longevity. When running a law firm, finances may take a back seat at times, especially if you are more focused on helping your clients. 


However, ensuring your finances are in check is vital if you want to keep your law firm running smoothly and clients happy. Conducting regular financial checkups and accessing essential analytical data will provide valuable financial insights. With this information, you can make practical, informed decisions and ensure your law firm remains profitable.


Not everyone wishes to conduct these reports or has the time to do so; after all, lawyers are not accountants. However, you can take the financial burden off your shoulders by outsourcing this critical task using law firm safe technology. Not only can legal financial software save you time, but it also gives you the added peace of mind that your finances are being managed professionally.


Critical Financial Reports Law Firms Should Track


There are various financial reports that all businesses, including law firms, should follow regularly. While some may be more important to your specific firm than others, at a minimum, you should be tracking the following:


Cash Flow

The cash flow of your business is one of the most important financial indicators to monitor. It shows the amount of cash coming in and out of your business and will give you an overview of income vs expenses.

Utilising technology such as law firm accounting software is a brilliant tool for any legal business to keep track of its cash flow. Ideally, we want the cash flow of your law firm to be consistent, but sometimes this is not possible. If you do have peaks and troughs in your cash flow, it is essential to track this so you can plan accordingly.


Profit & Loss

Your profit and loss statement (P&L) shows your law firm’s revenue and expenses over a period of time. Ideally, you will be creating a monthly P&L to keep on track of your finances every month. Then we should also have an annual overview of profit and loss for the previous 12 months. It is advantageous to have such a report, as you can compare your results year over year and see which areas might need improvement.

P&L statements within a law firm also act as a brilliant legal trends report for lawyers. P&L reports allow you to see which services are most popular, if there are any fluctuations based on season, and where the majority of your profit is coming from.


Balance Sheet

balance sheet shows your law firm’s assets, liabilities and equity at a specific point in time. Generally prepared on a monthly or quarterly basis, and can be a valuable tool to track your progress and ensure your assets are growing at a healthy rate.


When paired with legal cloud technology, your balance sheet will give you a clear overview of your firm’s financial position and help you make informed decisions about where to invest your money.


Financial KPIs

In addition to the financial reports mentioned above, there are several key performance indicators (KPIs) that you should track regularly. These KPIs will indicate the financial health of your law firm and help you identify areas that need improvement.


Some of the most important financial KPIs for law firms include:

  • Revenue growth
  • Profit margin
  • Operating expenses
  • Accounts receivable
  • Accounts payable

Debt Review


If you have outstanding debt, it is important to review your options on a regular basis. You may want to include a debt review as part of your routine financial reports, but having a separate report will give a clear view of any debt accounts. 


Best Financial Health Practices for Law Firms

Alongside taking appropriate steps to manage your finances, there are many best practices that your law firm should consider if you haven’t already.


Business Plan

Every business should have a clear and concise business plan. Having a business plan in place will give you a growth roadmap to follow and help to keep your cash flow in check. This document will outline your law firm’s goals, strategies and how you plan on achieving them.


Budget

Creating a budget for your law firm is essential for financial management. This document will outline your expected income and expenditure for a specific period. 


Financial Model

financial model is a tool that can be used to predict the future financial performance of your law firm; forecasting your law firm’s finances is critical to ensuring growth.


Billing Practices

A clear and concise billing procedure ensures you and your team are getting paid correctly for their time. Legal practice accounting software can automate the process and help everyone get paid on time, avoiding potential delays.


How Technology Can Help You Automate Your Financial Reporting


As a law firm, you likely have a lot of clients and cases to keep track of, making it challenging to find the time to focus on your finances. However, by using appropriate legal technology solutions, also known as lawtech, you can automate your financial reporting and other key areas in your law firm.

Legal technology can automate a number of crucial processes in your law firm, from time tracking and billing to case management and document production. Using law firm cloud technology means you can spend less time on administrative tasks, potentially save you money and allow you to spend more time developing your business.


Final Thoughts


By implementing the best practices and using appropriate legal technology software, law firms can manage their financial health and growth. As a lawyer, your primary focus will be providing the service you spent years training in, but without a healthy financial state, your law firm will not be able to survive, leading to a collapse.

Technology is becoming increasingly prevalent in all aspects of business, and the legal industry is no different. Using technology in the legal sector and automating critical processes in your law firm can save you time and money, helping you to focus on what you do best – practising law.


References

Understanding Your Law Firm’s Financial Levers (2022) – Lawyerist

The Eight Essential Financial Reports Your Law Firm Needs – Centerbase

5 Tips To Improve a Law Firm’s Finances (irvinebookkeeping.com)

6 Areas of Weakness in Law Firms with Financial Struggles (performlaw.com)

The Critical Task of Maintaining Your Law Firm’s Financial Health in 2021  – TimeSolv

Law Firm Finances: Four Financial Health Checks for Your Legal Practice | ATL Small Firm Center (abovethelaw.com)

Key performance indicators (KPIs) for law firms: measuring the financial health of your firm (buzzacott.co.uk)

Assessing Your Firm’s Financial Health | Zola Suite

leaflet_andy_poole_draft_financial_healthcheckweb.pdf (armstrongwatson.co.uk)

Financial Risk – a new focus for law firms – Lockton Solicitors

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