Financial Discipline
Financial discipline is one of the cornerstones of any successful business, and that includes law firms. No business can survive if its consistently spending too much money. But what exactly is too much? And how can you tell if you’re reaching that point?
Your Financials
We’ll answer the second question first. For those who have read our column before you’ll have seen us harping on this topic again and again. Read your financial statements! Understand your financial statements! Love your financial statements! (Okay, maybe that last one is a bit of a stretch, but you get the idea.)
Your financials contain much of the information you need to run your firm effectively. And if you want to know if you’re reaching a point where you’re spending too much money relative to what you’re taking in, your financials will tell you.
As we told you last week in our article on Working in Your Business vs. Working on Your Business, the information you find in your financial statements is only as good as the data provided by your bookkeeper. An effective and qualified bookkeeper will make sure that your financial statements accurately reflect the state of your firm at any given time. You’ll be able to act with confidence on the information found within because you’ll know that its rock-solid.
Your income statement will be especially valuable when you’re trying to determine the state of financial discipline in your firm. That statement lists all of your revenues and expenses and will show your net income (or loss) at the bottom.
Too Little, Too Much, or Just Right
But how much spending is too much? Unfortunately, there’s no standard answer to this question. It all depends on your firm. Ideally, you’ll want to consider several factors:
· Your expenses as a proportion of your revenues
· The amount of assets on your balance sheet (especially cash, which you can use in the event of a rainy day, or days)
· The location of your office
· The number of lawyers and staff in your firm
· Your area of practice
Basically, you’ll want to take a close look at your income statement and determine if any of the expenses listed seem grossly outsized or out of place. You’ll also want to consider if any of them have grown faster than your revenue has grown. For example, if your support staff expenses have grown by 100% and your revenue has only grown by 10%, you’ll know that you need to look at improving your operational efficiency.
On the flip side, if your expenses are extremely small, consider whether some wise investments in infrastructure, equipment, or people might improve the profitability of your firm in the long term. Don’t starve your firm of necessary cash just to save a few dollars in the short term
Contact Us!
Are you looking for a legally specialized bookkeeper who can help make sure that the information you’re acting on is up-to-date and accurate? Give us a shout on the contact form below and we’d love to make your acquaintance.