Year-End Law Firm Financials: Everything You Need to Know

Taking stock of your law firm’s finances before year-end is critical. Setting aside time to methodically review your records, close on outstanding receivables, and budget for the months ahead can give your firm a competitive edge and set you up for success in the new year. 

Moreover, consolidating your firm’s financial information at year-end simplifies tax season for both you and your accountant. By proactively organizing these details now, you’ll be better prepared to make strategic decisions for the year ahead.

Read on to learn best practices to get your year-end law firm financials in shape—so that you’ll be set up for success in the new year.

Did you know Clio has legal accounting software? With Clio Accounting you can connect your bank accounts, manage your firm’s expenses, vendors, and payments, reconcile your trust accounts, produce financial reports, and more!

What are financial statements?

Financial statements are reports and records that summarize important financial accounting information, activities, and performance over a specific time period.

Key financial reports for law firms

When it comes to law firm financial reporting at year-end, we can look at three main law firm financial statements:

1. The balance sheet: Reviewing and interpreting your firm’s balance sheet at the end of the year provides important insights into its financial status. It shows a snapshot of your firm’s financials—specifically, assets, liabilities, and equity— as they stand at a point in time.
2. The profit and loss statement: Also known as the “income statement,” the profit and loss statement indicates how profitable your firm was in terms of revenues and expenses over a period of time (e.g., month, quarter, year, etc.).
3. The cash flow statement: By showing you how much cash entered and left your firm over a particular period, the cash flow statement provides valuable insights to assist with better firm financial management.

Together, these law firm financial statements provide a holistic overview of your law firm’s financial position.

When you know how these statements work (both individually and collectively), you can start seeing all the ways you can optimize your firm’s financial performance. And, as we mentioned earlier, this comes in handy when you’re preparing year-end financial statements. 

Let’s explore key steps that can help get your law firm financial statements in tip-top shape.

1. Identify and collect on outstanding balances

It’s best practice to collect on all accounts receivable promptly. After all, the longer an invoice is outstanding, the less chance you have to collect the full value that your firm earned.

Despite this, the medium amount of revenue that’s uncollected at any given time (referred to as collection lockup) is about 27 days, according to Clio’s latest Legal Trends Report research. What’s more, 9% of invoices never get paid by clients.

For those clients that are slow to pay, making an effort to close them out in December will make things a lot less messy for your law firm financials the following year.

Step 1: Ensure time entries, expenses, and bills are current

Before you can look at your collections, it’s important to ensure your firm has stayed on top of time tracking and billing. 

One way to achieve this is to ensure everyone at your firm has tracked their hours and expenses through the end of November so subsequent billing can take place at the beginning of December.

If you’re using the right software, this step should be easy. For example, Clio Manage’s legal time and expense tracking software makes it simple to accurately track hours and expenses in real time. With Clio, you can easily add time entries directly from your legal calendaring software, track time from your inbox, track time and expenses via Clio’s mobile app, and more—and send out bills and organize your law firm financials.

Step 2: Run an accounts receivable report

An accounts receivable report will provide amounts outstanding on all open and past-due invoices.

The accounts receivable tab in Clio Accounting allows firms to sort the unpaid or partially paid balances by client, due date, or balance owed. This ability to see AR aging status allows firms to improve cash flow more efficiently and effectively.

Step 3: Identify large and/or old outstanding balances

Because your chances of collection decrease with time, it’s also a good idea to identify long-overdue balances before the end of the year.

Why? As Saville’s David Epperson explains in his year-end law firm financials checklist, this leads to another important year-end action: “For any accounts deemed uncollectible, write them off as of December 31.”

You can see any overdue balances in Clio under Outstanding Balances (located within the main Billing tab of Clio Manage) and easily send payment reminders by email to clients. In Clio Accounting, you can track all invoices, payments, and expenses at a glance, with information sharing between Clio Accounting and Clio Manage. This helps you keep a real-time view of your firm’s financial standing, including all outstanding payments.

Taking this step can boost your bottom line: Research from a previous Legal Trends Report found that law firms that use the outstanding balances summary had collection rates that were 5% higher than firms that weren’t using it.

Step 4: Collect!

If you have several unpaid accounts, December can be a tough month to do collections—clients are focused on the holidays and are spending money on gifts, travel, and festivities. Again, it’s best practice to stay on top of your collections all year round—but it’s not always possible to keep up.

However, there are a couple of positive reasons to collect in December:

• Bonuses = extra funds to pay invoices. Many companies give out bonuses during the holidays which means your client may have an additional source of revenue in December to pay your invoice. 
• It’s everyone’s year-end. If you represent businesses, they’re usually looking to pay all their expenses before year-end. It’s best to send bills early in December so your clients can get on top of payments.

Clio Payments, included in all Clio Manage subscriptions, provides several ways to make collecting money from clients easier. For example, with Clio Payments, you can offer clients the ability with the following:

• In person using the tap to pay featuring in Clio’s mobile app
• QR code
• Secure payment links
• “Pay Now” buttons on your firm’s bills or law firm website

Clio Payments also makes it easier to offer your clients more accepted payment methods to make paying more convenient and accessible—including the ability to collect by debit, credit, and eCheck for law firms.

Be sure to check out our accounting for lawyers hub for more resources.

Tips for improving your year-end collections process

Still stuck on how to smooth the collections process? Consider these tips as you sort out your year-end law firm financials:

• Offer a discount. Consider giving a small discount for bills paid before year-end to encourage clients to pay you sooner.
• Be clear and prompt when billing. There are many reasons a bill may go unpaid—be sure you’re not one of them. Clio’s legal billing software makes it easy to generate clear, readable bills quickly, with customized, branded templates, so you can send professional bills out on time. And, if you do so electronically with the Clio invoice email template, billing and collections are simpler and faster than ever before. You can see all of this in action by scheduling a demo.
• Bill more frequently. Try billing every two weeks in December instead of monthly, explaining the change in your billing process with a letter. Again, most clients will understand that you’re simply being proactive and working on getting your law firm’s year-end financials in order.
• Send reminders. Your clients may not be holding off intentionally. Send a brief reminder to ensure your firm is top of mind (you can do this under Outstanding Balances in Clio).
• Start accepting online credit card payments. When you make it easier for clients to pay, you’re more likely to get paid (and get paid faster). According to a previous  Legal Trends Report, credit card payments are the top preferred option among clients for paying a lawyer. So, not surprisingly, law firms that use online payments like these get paid more than twice as fast as those that don’t—with a median waiting period of just seven days.
• Set up a payment plan. If your clients are unable to pay on time, consider setting up a payment plan to get them back on track, and collect what you’re owed within a mutually agreeable time frame. Survey data from the previous Legal Trends Report found that law firms using payment plans collected 49% more monthly revenue per lawyer than firms that didn’t.

Note: If you feel a bit lost when it comes to accounting specifics and want to review the essentials for legal professionals, check out these accounting and bookkeeping best practices for law firms, featuring advice from Clio Cloud Conference speaker Amanda Aguillard, CPA.

2. Review your trust accounts

You’re likely meticulous throughout the year when dealing with your law firm’s trust accounts (as you should be to stay compliant). Even so, it could be helpful to dedicate time as you prepare your year-end financials to double-check that you’ve been diligent about moving money from your trust account to your operating account as fees were earned. Here’s how:

Ensure all of your client ledgers are balanced

Check that client ledgers are balanced by running a Work in Progress (WIP) report to look for any outstanding time or expenses. 

Did you find anything outstanding? If so, you could invoice yourself, and pay yourself out of your trust accounts before year-end.

Reconcile your trust accounts before year-end

Next, you’ll need to reconcile your trust accounts before December 31. That means checking your records against your bank statements to make sure that everything lines up.

In many states, lawyers are required to do this each month, but some states also require annual reports—so check what’s required in your area.

Note: When using Clio Accounting, once the reconciliation is complete, it’s crucial to make sure any uncleared checks are manually added into Clio Accounting to ensure records are accurate—particularly for trust accounts. The double-check is essential at the end of the year because, even if you use your firm’s latest bank statement or bank feed, there’s always a chance that an uncleared check from the previous year could clear in early January.  

Use a connected solution to simplify the process

By removing some of the manual work of managing trust accounting, you reduce the risk of error—which is why technology can simplify the process of checking and reconciling trust accounts at year-end.

• Tools like Clio Manage’s trust accounting software make it easier to keep accurate records of trust funds and transactions—so you can stay compliant and be confident at the end of the year. You can also leverage legal practice management software like Clio Manage to help generate financial reports and provide insights into your firm’s overall financial performance.
• With Clio Accounting, you can connect your bank feeds and conduct three-way trust reconciliation—helping you stay compliant and making year-end reconciliation simpler.
• Accounting tools like QuickBooks Online or Xero help manage your accounting and recordkeeping year-round, and they integrate with Clio Manage’s timekeeping and billing systems.

3. Review your law firm financials

The key to setting yourself up for success in the new year is to clearly see how you’ve done this year by properly tracking your law firm’s finances. Tools like Clio Manage (which allows your firm to generate billing reports like an accounts receivable report) and Clio Accounting (which allows you to generate reports like the balance sheet report, profit and loss statement, cash flow statement report, and more) can help simplify and streamline this process.

Review your law firm’s financial statements, including:

Actual prior year revenue/expenses:

• Were you in the red or black LAST year (and by how much)?

Current year revenue/expenses: 

• Were you in the red or in the black THIS year (and by how much)?

Actual current year cash flow by month: 

• How did you do in terms of cash flow on a month-to-month basis?

Current year-to-date (YTD) actual compared to YTD budget:

• Compare your current year-to-date revenue/expense to your year-to-date budget for the year. 
• Don’t have a law firm budget? This is a great time to make one for next year!

Opening and ending operating account balance: 

• Look at your account balances on a year-to-year and month-to-month basis.
• How is your cash flow? 
• Do you need to be more mindful of when expenses come up?

Profit/loss by month (which is different than the operating account balance): 

• This is similar to the first two items on this list, but it isn’t quite the same: You’ll be looking at your bottom line each month, which is your revenues and gains minus your expenses and losses.
• Look for any telling trends month-to-month. For example, November might always be a slower month, and March might always be busy.
• For most lawyers, profit/loss will still be fairly similar to your revenue/expenses, but if you’ve made a big investment in technology or hardware for your firm, it’s worth looking at this number, too.

Accounts receivable each month:

• How much were you owed each month? You’ll be able to see this under your accounts receivable report.

A cash flow projection

In addition to looking back on the past year, and forward into the future, you’ll also want to examine where you’ll be for the rest of the year with a cash flow projection. A cash flow projection can help estimate your firm’s cash on hand as of December 31. This should account for items such as:

• December operating expenses
• Staff bonuses
• Quarterly tax payments
• Paying down a firm line of credit
• Profit distributions to equity partners

Putting it all together

Once you’ve got a bird’s-eye view of your law firm’s financials, here’s what to look for:

• Compare your current year’s revenue to last year’s revenue and your current year’s budget. This keeps you aware of areas where you may be overspending, underperforming, or doing great.
• Look at the opening and ending balance of your operating account, and look for yearly trends or patterns to see if you are starting the month out with less in the bank than you thought you would be.
• Look at your total accounts receivable, and keep an eye on whether this number is growing month-to-month. If it is, you need to be more diligent with your collections!

4. Get ready for tax season

Tax season can sneak up on you faster than you think. To make sure you’re prepared (and that you’ve taken advantage of all available tax deductions), consider these steps at year-end:

• Look at your “Owner’s Draw” account. Make sure the entries in this account are correct (these are expenses you ran through the business as non-business-related expenses).
• Clear the receipts. Clean out the pile of receipts in your drawer/purse/wallet/car and make sure you have properly reimbursed yourself for any business-related expenses you paid on your personal credit cards or from your personal checking account.
• Check travel expenses. Review your calendar for appointments and places you’ve traveled that were business related and make sure you have prepared expense reports for mileage.
• Consider tax-deductible expenses. If you’re running your business using the cash method of accounting in the US, you may consider investing in tax-deductible expenses to offset this past year’s revenues. For example, consider purchasing a yearly subscription to Clio Manage and other services you might need to save come tax time, such as Clio Grow or Clio Draft.
• Ensure you’re paid up. Now is also a good time to check that you’re up to date with your tax obligations for the current year. For example, have you met and paid any quarterly tax payment obligations?
• Law Firm Financials key takeaways: Review, reconcile, record.

5. Consider hiring a law firm accounting professional

Organizing your year-end law firm financials can be overwhelming and time-consuming, especially when your firm is wrapping things up for the year.

Hiring a law firm accounting professional, especially a CPA (Certified Public Accountant), can free up more time to focus on other aspects of your law firm and can help you rest easy knowing the details are taken care of. 

In addition, an experienced accountant is also an expert in helping your firm’s financials, tax planning, tax compliance, and more. For the best outcomes, consider working with accountants who specialize in working with law firms. Try asking fellow attorneys for recommendations, or check with your State Bar or any accountant referrals. 

You can also find the right accounting professional by checking out our Clio Certified Consultants.

6. Plan for the next financial year

As satisfying as it can feel to take care of your year-end law firm financials, it’s not a one-time exercise. It’s important to stay on top of law firm finances and use financial metrics to monitor performance year round. 

Using financial statements and reports, look at how you’ve done for the year in terms of revenue compared to your budget, and compared to last year’s revenue, to get an idea of your firm’s performance. Then, set financial goals and make them part of your business plan for the coming year.

You’re ready to get your year-end law firm financials in order

The truth is, there’s no need to be afraid when it comes to organizing year-end financials for law firms. If you’re following best practices for law firm accounting and using the right tools to help year-round, then end-of-year is just a matter of reviewing your firm’s finances and making sure everything is in order before December 31.

To review, below are our top tips for preparing your firm’s year-end financials:

• Review your accounts receivable. Ensure your billing is up to date and collect on outstanding accounts.
• Review your trust accounts. Invoice and pay yourself for any outstanding amounts, reconcile your trust accounts, and report any unassigned fees, if necessary.
• Check in on your performance. Use financial reporting and metrics to stay on top of your firm’s financial performance.
• Get your records in order. Look through your receipts and make sure you’ve reimbursed yourself for business expenses by year-end. You’ll thank yourself come tax time!
• Consider hiring a law firm accountant. An experienced CPA can help with your law firm’s financial strategy, tax planning, tax compliance, and more.

Get your firm’s financials in order for the year, and you’ll be that much more prepared to grow your law firm and enjoy more success in the year to come.

Want more on legal accounting for lawyers? Check out our Accounting for Lawyers resource hub, full of articles and guides.

If you’re ready to have your case management tool and accounting tool in one place, book a demo of Clio Accounting to see how it works with Clio Manage. Set your firm up for financial success in the new year!

Note: The information in this article applies only to U.S. practices. This post is provided for informational purposes only. It does not constitute legal, business, or tax advice.