The end of the year is a great time to spend with family, catch up on some much-needed rest, and…balance your accounting books! While you might not think about reviewing your law firm’s financials around the holidays, prioritizing your firm’s financial wellness now can keep your firm organized and profitable in the year ahead.
Making a plan to review your firm’s financials ahead of time can help tasks feel more manageable and prevent them from cutting into your holiday plans. Stick to this year-end accounting checklist to balance your books and ensure your firm’s financial health in 2023.
Why law firms should review their financials each year
Reviewing your firm’s financials each year isn’t just a best practice for law firms—it can provide firms with tangible benefits in the year ahead. Every law firm should review its accounting system at least once a year to:
Help you catch errors
Mistakes happen. Numbers get transposed on important financial documents, client payments get lost in the mail, and some billable work isn’t invoiced.
While errors are inevitable, it’s possible to catch them before they cause serious problems. If you wait to review your firm’s financial data until you need to report it, like on your taxes or when being audited, you will have a buildup of mistakes to correct—and financial mistakes just get more complicated with time. Reviewing your books annually helps firms catch errors when they still have the documentation on hand to fix them.
Prepare you for spring taxes
Tax time is a busy season for any business. Make your year-end review do double duty by organizing your firm’s financial documents well in advance of tax season. While spending time in a year-end review might feel time-consuming now, it will save you time in the spring.
Organize your documents in case you’re audited
In addition to saving you time preparing your taxes, organizing your firm’s financial statements at the end of the year can give you peace of mind in the event your firm is audited in 2023. Audits are unexpected by nature, but investing in your firm’s financial health now will ensure you’re prepared if one occurs.
Guide decision-making and long-term planning in the new year and beyond
Most importantly, understanding your firm’s financial health today can help you make intelligent business decisions in the year ahead. Boost revenue, decrease your bottom line, or scale your business by understanding your annual expenses—including where your firm is losing revenue, and the areas of business that were most profitable.
Business accounting software that provides you with comprehensive financial reports can help you review your performance in 2022 and plan for success in 2023.
Year-end checklist for law firms
Now that you understand the importance of reviewing your firm’s financials before the calendar turns over to 2023, let’s get started! Follow these steps to perform a comprehensive review of your firm’s 2022 financials.
Step 1: Invoice clients through the end of the year
The first step to ensuring your firm’s financial health in 2023 is making sure you get paid for the work you did in 2022. But before you can bill your clients through the end of the year, you need to ensure all team members have accurately tracked their time on each matter. Using automatic time tracking tools, you can effortlessly keep up to date with all time entries.
Once time and expenses are tracked, invoicing accounts can be done with a click.
Once you’ve invoiced all new work through the end of the year, review previous months to ensure all payments billed for were received. Running an accounts receivable report with your business accounting software can help you identify any unpaid or past-due invoices in the system. Some firms may decide to write off long-overdue bills during this time, while others may resubmit outstanding bills to clients.
Either way, do your best to ensure you’ve received payment on all your outstanding bills by the time 2023 rolls around.
If you’re struggling to collect on long-overdue bills at the end of the year, here are a few tips to help encourage clients to pay their bills on time:
- Give clients the payment methods they’re looking for, like online credit card payments, debit card payments, or automated clearing house (eCheck) payments. Bills that can be paid online are typically paid 39% faster than payments that must be made in person.
- Set up payment plans or offer discounts to entice clients to get their bills paid by a new deadline. Increased spending around the holidays may make some clients hesitant to pay a large legal bill at the end of the year, but providing incentives can show clients the benefit of making payments in the timeframe you desire.
- Provide clear bills, and bill every two weeks instead of once a month to help keep your accounts up to date. If clients are questioning your charges, they might hold onto a bill instead of paying it promptly. Make sure all bills are clearly itemized to get paid faster.
Step 2: Pay all bills due in 2022
You expect your clients to pay their bills before the end of the year, and so do your vendors and partners. Before you can accurately analyze your firm’s financials, ensure you’ve paid all outstanding bills that will be due by the end of the month.
Step 3: Reconcile your bank accounts and credit card statements
Once all payments that should be coming in or out of your firm’s account have been made, it’s time to reconcile your bank accounts and credit card statements.
Start with your bank accounts, and check your credit card statements next. Review any fees that were charged to your account as well as any interest or cash rewards you collected. If there are recent transactions that haven’t cleared, make sure to record those for your accountant. If your accounting software doesn’t automatically connect client expenses with the appropriate matter, make sure all expenses are labeled appropriately.
Step 4: Review your trust accounts
If you use dedicated trust accounting software, like CosmoLex, double-checking your trust accounts for errors should be a relatively simple process.
Start by running a Work in Progress report to ensure you’ve been paid for all work you’ve performed on trust accounts. Next, reconcile trust account balances against bank statements to make sure all funds are handled appropriately. With CosmoLex, it takes just a few clicks to generate trust recordkeeping reports and auto-reconcile trust accounts, ensuring compliance in 2022.
Step 5: Run end-of-year reports
After verifying each of your accounts, it’s time to take a broad look at how your firm performed in 2022. The easiest way to do this is to run end-of-year reports and examine:
- New liabilities in 2022
- New assets
- Capital contributions
- Any income for the business owner
Step 6: Review your profit and loss statements
The last thing you need to do before closing up shop in 2022 is to review your firm’s profit and loss statements. Confirm all income, expenses, and client retainers were paid appropriately throughout the course of the year. Prepare 1099-Misc forms for any vendors or non-employees who were paid more than $600 in 2022, since these forms will need to be submitted in January.
Finally, compare your numbers from 2022 to your numbers from 2021. Hopefully, you will see business growth over the course of the year, but if not, this is a good opportunity to examine your current business practices and make changes for 2023.
Make CosmoLex your project management partner in the new year
Running a law firm can be complicated. That’s why CosmoLex has created a suite of matter management tools to help firms boost efficiency, confidently manage their finances, and improve the client experience. From time tracking tools to trust accounting to our brand-new legal client relationship management tool, CosmoLex CRM, we help firms do business better. If you’d like to see how CosmoLex can improve your business practices in 2023, schedule a demo or register for a free trial today.
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