5 Financial Decisions Law Firm Owners Should Make Before January

Most year-end financial decisions get made by default. You reach the middle of December, the work is heavy, everyone is trying to close files before the holidays, and the questions that should have been answered in October resolve themselves however they happen to resolve.

That’s how a firm ends up taking a distribution it can’t quite afford. Or renewing software nobody has opened since March. Or starting January with the same problem that affected last January.

There is a way to fix this now, before it becomes an issue. It involves asking yourself five questions and answering them early in the 4th quarter, while there’s still time to act.

1. How much cash has to stay in the firm?

Before you take another owner distribution this year, you need a number: the amount that has to remain in the business to cover what’s coming. You need to know what will be left once the obligations you already know about are covered.

Those obligations include things like your remaining payroll runs, any year-end bonuses you’re considering or have already promised, annual renewals occurring in Q4 (insurance premiums are the usual culprit), the reserve you’re setting aside for taxes, and a cushion for collections running slower than normal, which is likely to happen over the holidays.

One clarification on taxes: I’m talking about reserving cash for the bill, not calculating it. What your liability is, and how your distributions are treated, is a conversation for your CPA. 

Decide: what is the number your operating account doesn’t go below? Write it down and keep this number handy.

2. Which unpaid invoices need a phone call from you personally?

Most firms have a handful of outstanding invoices doing most of the damage. Pull your aging report, look at everything past sixty days, and find the three largest. 

Then be honest about why they’re still sitting there. In my experience it’s rare that a client won’t pay. It’s often that nobody has asked, because the person who used to work the past-due list got busy, or left, or the responsibility got missed and was never specifically assigned to anyone.

However, sometimes this has nothing to do with collections. Sometimes what turns up is a payment issue that came in and didn’t get handled correctly. I found a rejected ACH for one firm about a month after the fact. Nobody there knew it had bounced. The attorney called his client and got it paid, but finding it took someone going through the payment processor reports on a schedule.

If your firm works primarily from trust, the answer to this question works a bit differently: are earned fees moving out of trust into operating promptly, and do the balances reconcile afterward? And if you’re contingency, you don’t have receivables in the traditional sense at all, so the question becomes whether your reserve covers the case costs you’re committed to.

3. What’s set to renew that you don’t want?

Pull the last nine months of recurring charges and read them line by line. You’re looking for three things:

• Subscriptions nobody uses. 
• Tiers sized for a headcount you had two years ago. 
• And overlap, where two tools do the same job because you switched and never cancelled the first one.

One thing to realize: answering this question doesn’t always result in cancelling something. Sometimes, it results in being able to make a better decision. A client asked me recently about a new tier their practice management software was rolling out, one that folded accounting in. I looked at it and told them to wait: too new to evaluate honestly, and the cost increase was real. The money you don’t spend counts the same as the money you recover.

4. Bonuses or a hire: can the firm afford it?

You already know whether you want to hire or offer a year-end bonus. What you need to know is whether the business can support it once everything is accounted for.

For a hire, look at what payroll has been doing as a share of revenue across the year, not just the dollar total. If that’s held steady and the cash is there, hiring in Q4 has a real advantage: you’ll have someone who’s trained and productive before Q1 volume arrives. If that number been climbing since spring while revenue hasn’t kept up, it may be better to hold off on hiring and find out what’s driving that discrepancy.

For bonuses, decide on the structure now. Bonuses carry payroll tax implications and timing rules, which are conversations you should have with your CPA and your payroll provider. What I want you to think is the cash cost, and whether your reserve can handle it.

5. The one thing you’ll fix before January

Pick the single financial process causing you the most stress, and fix it before the year ends. 

For most firms it’s one of the following. 

• Billing that goes out later than it should. 
• Owner pay that’s inconsistent, where you take what’s left when there’s something left. 
• Expenses that surprise you, which is usually a visibility problem and not a spending problem. 
• Or financial reports you don’t fully trust, which makes every other decision on this list harder than it needs to be.

If you’re not sure which to pick, here’s the test: which one do you think about on a Sunday night? That’s the one.

And if the real answer is that the books themselves are behind, that’s something we can help with. I’m happy to talk with you and answer any questions you have.

Then you’re planning instead of guessing

The good news is, none of this requires an accounting background. It requires an afternoon and a willingness to dig in.

I’ll be honest, though – this process does go more quickly if it’s not the first time you’ve looked this year. That’s why we offer monthly advisory calls – so that you can stay up to date on what your numbers mean and have a game plan going forward.