Question of the Week: How can I figure out how much my firm is actually making?
It can be hard to tell how much your firm is bringing in at the end of the day. Even if your revenue numbers are the highest you’ve seen to date, it doesn’t necessarily mean you’re making more than you ever have before. To figure out exactly how profitable your firm is you’ll need to review your profit and loss statement regularly; using this financial report to determine where cutbacks may be needed and to decide if your incoming revenue is sufficient.
What is a profit and loss statement?
Also called an income statement, the profit and loss statement (P&L) shows the firm’s expenses and income over a period of time. This all boils down to the key item on the P&L: the total net income, which is the total net revenue minus the total net expenses. Known as the “bottom line,” this is the true indicator of how much your firm is actually making and is a number that can be boosted either by reducing expenses or increasing your number of billable hours.
By itself, a profit and loss statement can provide insight into the firm’s overall financial and operational health, but viewing them in conjunction with the balance sheet and the cash flow statement is considered a best practice to get a full picture of the firm’s financial stability.
Interpreting your P&L
High revenue doesn’t always translate to high profit and firms need to be careful about taking on too many expenses that could result in an overall loss. In evaluating the profit and loss statement you’ll be able to see areas that are eating away at financial resources. You can work with your accountant to create meaningful categories and subcategories that will best show you the data you need to make useful decisions.
For example, if your biggest expense is staffing then it may be time to look at virtual help in comparison to having in-house employees. Areas like administrative supplies, insurances, occupancy expenses (utilities, rental fees, etc.), and marketing are all also often listed on the P&L, making it easy for firms to see where their money is going.
Unpaid invoices are often one of the biggest negative contributors to a P&L and this report can highlight collections issues. If revenue is showing significantly less than you anticipated, the culprit is likely clients failing to pay their bills. Setting up automated billing, invoicing and collections can increase total profits while keeping the manual oversight required to a minimum.
You should review your P&L each month to determine the state of the firm’s expenses and incoming revenue. Waiting to do so quarterly can allow bloated expenses to build and create significant financial issues. Many accounting programs are equipped to regularly run these reports, making it easy to review as long as you’re routinely entering in all expenses and billable time.
The profit and loss statement is a valuable financial report that lawyers, even those who try to avoid accounting when possible, can easily run and review to stay on top of their firm’s current financial standing.
For a more detailed look at what a profit and loss statement looks like and includes, check out: What Is in My Firm’s Profit and Loss Statements?