Law Firm Financial Management: A 5-Step Checklist to Close Out the Year

This checklist will help you tidy up by the end of the year and give you a clear picture of your firm’s financial performance.
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No matter how confident you are in your law firm’s financial management systems, end-of-year reporting is high-key stressful! Here’s a helpful checklist from Peggy Gruenke to keep you on track when closing out the year.

Your law firm’s year is coming to a close, but before you celebrate, we recommend conducting a year-end review of your finances. This checklist will help you tidy up by the end of the year and give you a clear picture of your firm’s financial performance.

Follow these steps — and be sure to refer back to our six-month review recommendations. We’ve added the condensed PDF version of the checklist at the bottom of the article for you to print out and follow.

Where should you begin? With the fun part: outstanding balances.

1. Review and Collect on Outstanding Balances

Your accounts receivable deserve a review. Trends data tells us that from 9% to 11% of invoices are likely to go unpaid and the risks of not receiving payments rise the longer the invoice remains outstanding.

Review all of your time tracking and billing. Verify that all billable hours through the start of December have been finalized. It’s also a good time to look at your staff’s utilization rate.
Run your accounts receivable report. Review all open invoices, whether current or outstanding (ensure deposits have been recorded).
Create a list of balances that remain unpaid and the date they became overdue. You may want to write off old accounts with no chance of payment.
Begin collecting on unpaid invoices. Make calls, send reminders and push for payments.

You can speed up collections by “sweetening the deal” with discounts for fast payments.

Automating your invoicing makes it easier to bill promptly, schedule payment reminders and nudge your clients to pay on time. Making it easier for clients to pay electronically and offering incentives and payment plans will also improve your annual collections rate.

Receiving payments for outstanding invoices is a top priority, and once complete, you can move to reviewing your trust accounts.

2. Review Trust Accounts

Trust accounting keeps your clients’ money safe, but it’s easy to forget to transfer your earned fees over to your operating account when you’re scrambling to get everything done by year’s end. Start this process by creating a Work in Progress (WIP) report, which will show you any:

Outstanding billable time
Outstanding expenses

If you don’t have any outstanding time, that’s great. Otherwise, invoice yourself and pay from the trust account.

Before December 31, be sure to reconcile your trust accounts to make sure your records are accurate.

Now that your trust accounts are reconciled and you’ve collected on outstanding invoices, you can begin reviewing your law firm’s financial performance for the past year.

3. Review Your Financial Statements

Of course, every law firm’s year-end review should include a review of the year’s financial statements. Evaluating your financials will paint a clear picture of your firm’s performance and show whether you’re on track to reaching your goals.

Start by reviewing your:

Prior year’s and current year’s expenses and revenue. Was your firm in the red or black each year?
Actual monthly cash flow. Were you able to maintain a steady cash flow throughout the year? If not, identify trends to prepare for potential cash shortages or windfalls in the future.
Year-to-date actual and budget. Compare the two. Did you stay on budget, or do you have to make adjustments?
Profit and loss statements. Identify trends and prepare for potential slow periods in the future.
Accounts receivable. How much was your firm owed each month? How long did it take to collect?

Are you overspending, underperforming or right on track?

Now that you have a big-picture view of your law firm’s financials, you can begin comparing this year’s revenue and budget figures to last year’s to gauge your firm’s performance. Be sure to analyze the total accounts receivable report you generated in step one to see if you need to update your collections processes.

If you haven’t done so already, consult with a CPA about filing your BOI report (if applicable to your situation).

4. Prepare for Tax Season

Tax season will be here before you know it, but if you’re prepared, the entire process will be smoother and less stressful.

At year-end, make sure that you tick these tax-related tasks off of your checklist:

Review your owner’s draw account and ensure all entries are accurate.
Gather and organize receipts, and ensure you have reimbursed yourself for business expenses paid via your personal accounts.
Get your travel expenses in order, and take the time to prepare expense reports for mileage.
Ensure you’re up to date on your quarterly tax payments.

Tax planning is a key element of law firm financial management. This is also a great time to consider increasing your tax-deductible expenses to offset revenue and help reduce your tax burden.

5. Reflect on Your Law Practice’s Past Year

Conducting a financial review for your law firm may not be at the top of your to-do list, but it’s important to have a clear understanding of your firm’s financial fundamentals. Following the steps above will paint a clear picture of your law firm financial management. Consulting with a CPA or a financial advisor can help you put this data in perspective and use it to make smarter decisions for your firm.

More Law Firm Financial Management Tips

5 Checklists to Make Your Law Firm More Efficient — and Profitable by Peggy Gruenke
Understanding Law Firm Profits — And What to Do With Them by Brooke Lively
“Black Box” Comp Plans vs. Percentage-based Comp Plans by Erik Mazzone
How Are Law Firm Owners Paid? by Brooke Lively
Law Firm Overhead: What It Is — and What It Isn’t by Brooke Lively
What Should Be on Your Law Firm’s Dashboard by Brooke Lively
Are Your Law Firm’s Financial Systems Ready to Scale? by Brooke Lively

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