The Financial Review Every Law Firm Owner Should Do Before Q4
Somewhere in early September, it hits. Summer’s over, the calendar fills back up overnight, and you look at the date and realize the end of the year does not feel very far away .
For a lot of law firm owners, that realization brings a small knot in the stomach. You can’t pinpoint anything that’s gone seriously wrong. You’ve been busy. Work’s been steady. But if someone asked you today whether this year is going to finish better than last year, you’d have to guess.
That’s where a law firm financial review can fill in the gaps. In January, all you can do is explain the previous year. By September, you have enough real information to see how the year is shaping up, with time left to make changes before Q4 is over.
Why a review now is better than January
January reviews are basically autopsies. You look at what happened, you feel whatever you feel about it, and then you set goals to try to prevent it from happening again.
September gives you two things January can’t: first, enough year-to-date information to see patterns you can act on. And second, enough time remaining to act on what you find. .
If your overhead crept up in the spring, you can still pull it back before December. If you’ve been slower to collect than you were last year, you can still fix the process and see some of the cash come in during Q4. If you’ve been thinking about a hire, this is when you find out whether the numbers support it, before you hire on a feeling in January and hope for the best.
Start with your trust account, before anything else
If your firm handles client funds, this comes first. It may not feel like the most interesting number in your books, but it’s the only one on this list that’s a bar compliance issue.
Your IOLTA bank balance should match your trust liabilities on the balance sheet. Not approximately. Exactly. And your individual client ledger balances should add up to that same figure, which is the three-way reconciliation your state bar expects you to be able to produce on demand.
Most firm owners assume this is handled, and sometimes it is. But trust errors aren’t always obvious. A bank fee posted to the wrong account. A transfer made before the work was earned. A disbursement recorded twice. Small, seemingly boring, and completely capable of turning into a bar complaint eighteen months later.
A firm asked me last year to look at two deposits that had gone into their trust account by mistake. The balances still looked off for those two clients, and they couldn’t figure out why. What had happened was that the deposits went in as one lump entry with no client attached to either one, so the bank balance looked fine while two client ledgers didn’t. It took an afternoon to split the deposit, attach the clients, and get it matching again. It had been sitting that way for a while.
So before you spend time analyzing profitability, confirm that this reconciles. If it doesn’t, it moves to the top of your Q4 list.
Your P&L is one third of the picture
Most reviews go wrong in the same place. Someone opens the P&L, sees the number at the bottom, and decides how the year is going based on that.
Your P&L can’t tell you how the year is going on its own. It’s one of three reports that need to be open at the same time.
The profit and loss statement tells you what you earned and what you spent on business expenses over a period of time. It’s a story about activity. (This report does not tell you what you paid on a loan, what you paid out in owner distribution, or assets that you purchase. Instead, it tells you about day-to-day operating expenses.)
The balance sheet tells you what you own and what you owe on one specific day. It’s a snapshot. Your trust liabilities live here, as does the loan you took out two years ago and your distribution.
The cash flow statement tells you where the money actually moved. (I’ve found that very few owners read it.)
Read together, these three explain things that get overlooked in isolation. A law firm can show a loss on the P&L and still have more cash in the bank than it started the month with, because clients finally paid on previous invoices that were already counted as income. A firm can show a healthy profit and still feel broke, because owner draws and loan principal payments pulled cash out without ever touching the P&L.
If you’ve ever looked at a profitable P&L and thought “then why does it feel like we’re scraping by,” the other two reports are usually where your answer is.
Read the year month by month
Pull your P&L by month rather than as a single year-to-date total. Most systems will do this in a couple of clicks. Then read across the rows.
You’re watching for trends and direction. Did payroll grow faster than revenue? Did a category climb from $600 a month in February to $1,900 a month in August without anyone noticing? Did revenue dip in June and never fully recover, or did it dip and bounce back? Is there a month that looks nothing like the others, and do you know why?
Do the same comparison against the same months last year. Last year wasn’t the goal, but it’s the honest baseline you have for your own firm. Industry benchmarks are interesting, but they’re general – your own trajectory is the thing you should act on.
These are the patterns to take seriously. Think of a single month’s report like the weather report; a month-by-month trend is more like climate.
Four questions the numbers can’t ask for you
The reports give you information. What you do with it depends on the questions you bring to them. These are the four I’d want most firm owners to consider.
Where’s my cash going that the P&L doesn’t show? This includes items like owner draws, loan principal, equipment purchases. If profit and cash seem to keep disagreeing, that’s often where the answer is.
What did I pay for this year that I wouldn’t choose again? Go through months of recurring charges with fresh eyes. Software you tested in March and never adopted. A subscription tier you outgrew (or one you haven’t grown into).
Can I afford the thing I’ve been putting off? The new software. The raise. The paralegal you keep almost bringing on. You can’t answer that from a feeling, and you shouldn’t have to. Months of real revenue plus a cash forecast can give you valuable data that can help you make that decision.
Make three decisions before October 1
A review that doesn’t end in decisions is basically an afternoon spent with a spreadsheet. Before more time goes by, here are three questions to answer.
Staffing. Are you hiring in Q4 or holding off? Any of those is a valid answer, but it’s one that you should think about now. Still wondering about it in December won’t do you much good.
Your own pay. Are you paying yourself consistently, or taking what’s left when it’s there? Inconsistent owner pay is one of the clearest signals that a firm is running on “cash feel” rather than cash planning. Decide what you’re taking in Q4 and whether the numbers support it.
One thing you’re stopping. An expense, a process, something you’re doing because you’ve always done it. Pick it now and work with your team to change it in Q4. (Many firms slow down somewhat during the holiday season – it’s often a great time to work on something like this anyway.)
The part most firms skip
Doing this once, in September, is worth your time. You’ll find things you didn’t expect. You’ll make better Q4 decisions than you would have otherwise. A lot of firms find value in having someone review and analyze their numbers every month.
Think about that category that climbed from $600 a month in February to $1,900 in August. It was catchable in April. It only became a September problem because nobody looked in between. That’s what a monthly rhythm buys you: somebody who already knows what last month looked like, so an April change gets noticed in April.
Not long ago I found an ACH payment that had been rejected about a month after it was made. The firm had no idea. We go through payment processor reports twice a month, so it turned up on a routine pass, and the attorney was able to call his client and get it paid. There was nothing sophisticated about it. Somebody was just looking on a schedule.
That’s the difference between having a bookkeeper and having someone paying attention. Clean books tell you what happened. Someone reading them tells you what it all means and what to do about it.
If you want to talk through whether that kind of support makes sense for your firm, book a Connection Call. It’s fifteen minutes and it’s just a conversation about fit.
