Beyond Net Profit….. What your Profit and Loss Statement Can Do For You.

Do you spend a lot of time balancing, preparing, and reviewing your law firm’s financial statements but still struggle to understand your financial health? Understanding your firm’s profit and loss statement will help you uncover key insights to improve profitability, cash flow, and long-term outlook.

Contact Firmly Profits today for the experienced guidance you need to make better business decisions to improve your financial stability. Our law firm financial services will help you turn your financial information into an attainable strategy for your law firm’s profit, sustainability, and success.

“So happy I found Leah! She’s my bookkeeper and fractional CFO for my law practice. I no longer worry about having to do it myself on the weekends and can focus on making the money. So grateful for her advice and guidance to reach my big goals. She’s a genuine cheerleader and makes financials easy to digest. Highly recommend her services! She also works seamlessly with my CPA and my books were ready ahead of time!” – Ruma M.

What is a Profit and Loss Statement?

Profit and loss statements, or P&L, assess a company’s financial health. Sometimes called an income statement, this document provides a snapshot of a company’s financial performance over a specific period, typically a month, quarter, or year. It summarizes the revenues, expenses, and resulting profit or loss during that time frame. The P&L can be customized to fit your planning needs.

Types of Profit and Loss Statements

Your law firm can choose between various types of P&L statements. Different types of profit and loss statements can dramatically impact the insights they reveal and how you communicate your financial information to others.

Single-Step Profit and Loss Statement

This basic type of P&L lists revenue and expenses and then subtracts total expenses from total revenue to calculate law firm profitability.

Multi-Step Profit and Loss Statement

This statement adds multiple steps to separate income and expense components. It can offer more detailed insights into metrics such as operating income, gross profits, and net profits.

Pro Forma Profit and Loss Statement

This P&L statement forecasts future expenses and revenues. Firms use it to help inform financial management decisions, like budgeting.

Cash Method

This financial accounting method records revenue upon receipt and expenses when paid. Because of its simplicity, smaller businesses tend to rely on this method.

Accrual Method

The accrual method records revenue when the firm earns it. Similarly, this method records expenses when incurred. For instance, a firm might record hours when billed even before a client has settled the invoice. This method lets companies account for accounts receivable and accounts payable, which may offer better insight into a firm’s financial position.

What Are the Key Components of Income Statements?

A P&L statement includes two main parts: revenue and expenses. Law firm accounting practices may break these down into several components, depending on their needs.

Below are the key components of a typical P&L statement:

• Revenue (sales): This figure represents the total income from primary operations, such as legal services. Our law firm clients like to break this down by various service areas to help understand which ones generate the most revenue.
• Cost of goods sold (COGS): This section accounts for the direct costs of producing or delivering those goods or services. For a law firm, it would include direct costs associated with legal clients.
• Gross profit: You can figure out the gross profit by subtracting the COGS from total revenue. This sum represents the profit before considering operating expenses.
• Operating expenses: These expenses cover the day-to-day expenses to run a business, including salaries, printer ink, rent, utilities, marketing, and administrative expenses.
• Operating income (or loss): Determine operating income or loss by subtracting operating expenses from the gross profit. A positive number indicates an operating profit, while a negative number reflects an operating loss.
• Other income and expenses: This section accounts for non-operating income (e.g., interest income) and non-operating expenses (e.g., interest on loans).
• Net income (or loss): The bottom line of the P&L statement, net income, is the final profit or loss after considering all revenues, expenses, and taxes. A positive net income is a profit, while a negative net income represents a loss.

Why Are P&L Statements Important?

P&L statements serve all business owners as an essential tool to gauge financial performance, plan for the future, and communicate with other stakeholders, like lenders, partners, and investors. For instance:

• The P&L is an important tool for assessing a company’s financial performance over time. By comparing P&L statements from different periods, you can identify trends and fluctuations that may require attention.
• The P&L is a valuable tool for creating budgets and financial forecasts. It helps the financial management team make informed decisions about resource allocation, cost control, and revenue growth strategies.
• P&L calculates the company’s taxable income, which is crucial for tax planning and compliance.
• You can find key performance indicators, like net and gross margin, on your P&L to measure various aspects of your firm’s financial health.

How to Read Your Profit and Loss Statement

Your law firm’s financial management team needs to learn how to interpret the numbers on their P&L. Key metrics include operating expenses, revenue, and gross profits. You can use this data to gauge profitability for specific periods or a range of periods.

For instance, your revenue has plateaued while operating expenses have climbed from one quarter to another. Consider increasing billing fees or trimming costs.

“Working with Leah Miller, MBA, as our fractional CFO at Proper Paralegal Services has been a game-changer. Leah brings a unique blend of expertise, insight, and enthusiasm that is rare in the financial world. Her strategic approach and keeping financial acumen have been instrumental in steering Propel toward sustained growth and success. Leah’s impact was immediate and profound from the moment we started. She understands the nuances of financial management and aligns them perfectly with out business goals. Her ability to translate complex financial concepts into actionable strategies is remarkable…” – Heather P.

Tools for Streamlining Law Firm Accounting

Today’s law firms rely on accounting software to manage their business efficiently, comply with legal regulations, and better understand their financial position. Automation and integration lighten workloads, reduce errors, and lead to better business decisions. This section compares legal professionals’ top accounting software choices.

QuickBooks

QuickBooks stands out as an industry leader in small business bookkeeping software, including growing legal firms. Beyond the ability to track expenses and revenues, outstanding features include the ability to track critical financial data, generate financial reports, and transform estimates into invoices.

Xero

Xero has become an increasingly common choice for smaller legal firms. This company allows unlimited users under one membership and offers an intuitive interface. Legal professionals find this practice management software makes it relatively easy to manage accounts receivables and accounts payable and generate financial reports.

How to Create a Profit and Loss Statement

Before your law firm can use a P&L statement to improve your bottom line, you must gather information and create one.

Collecting Financial Data

Gather your firm’s financial information from bank accounts, credit cards, and accounting software.

• Organizing income and expenses: You can begin this step by splitting revenue and expenses into categories. For instance, you might separate total expenses into depreciation, subscriptions, and operating expenses.
• Calculating gross profit and net income: Begin with these key metrics for your legal business. Law firms can calculate gross profits by subtracting direct costs associated with cases from total revenue. Subtract all indirect costs, like rent and salaries, from gross profits to calculate net income.
• Using accounting software: Accounting software does more than store and generate accounting statements. Quality software also helps your firm avoid data entry errors, secure data, comply with regulations, and develop effective strategies for the future.

Common Challenges and Solutions

Errors in Categorizing Income and Expenses

Sometimes, errors in categorizing income or expenses can throw off income statements and lead to poor business decisions. For example, legal professionals may mistakenly categorize office supplies as operating expenses instead of supply expenses.

Reconciling Accounts

Law offices should reconcile bank and credit card accounts to detect costly errors, potential fraud or those pesky reoccurring charges you may have forgotten.

Managing Retainers and Trust Accounts

Legal firms face unique challenges when accounting for retainers and trust accounts. They must hold client funds separately from firm funds, reconcile accounts, and adhere to complex regulations.

Tracking Subscriptions and Operating Expenses

Successful firm owners understand the importance of adequately tracking recurring expenses like subscriptions, professional insurance, and office space. By analyzing these categories of costs, legal firm owners and partners may find opportunities to reduce their total expenses over time.

How Collaborating with a Bookkeeper Can Help

Legal professionals who must participate in their firm’s financial management should understand the basics of producing and analyzing financial statements and balance sheets. At the same time, working with a bookkeeper with law firm experience will save time and uncover valuable insights.

Some benefits of working with a bookkeeper include reviewing taxes, analyzing cash flow, asset management, and legal office financial management. You can focus more on your legal business while your financial services partner helps maximize your financial future.

Why Choose Firmly Profits

At Firmly Profits, we leverage our financial and law firm expertise to empower our clients with professional accounting, financial accounting, and educational services. Your legal professionals can focus on their clients because we’re dedicated to your business’s economic health.

Testimonials

“Leah is one of our closest confidants and trusted leaders. While we just recently started using her Fractional CFO services, it has quickly proven to be an excellent investment of our resources and time. She not only provides insight into our finances, and helps with budgeting and forecasting, her experience with running a law firm has proven to be instrumental in our growth goals and vision. She is organized, ready to discuss finances, and provides overall very clear reporting for all of us to understand. And she’s patient. I would HIGHLY recommend Leah and I am grateful for sage advice each time we meet.” – David H.

Related Resources

• Optimizing Your Bookkeeping for Growth Driven Law Firms: Instead of viewing financial management as a routine task, learn how to transform your financial accounting into a critical tool to empower financial decisions and growth.
• Mindset Shift for Growth: Learn why legal firms need to adopt different mindsets and financial services at various stages of their growth and development.
• Maximizing Profit in the New Year: A Guide to Reviewing and Trimming Expenses: Discover how analyzing expenses offers legal businesses many opportunities to reduce costs and increase profits.

Maximize Your Law Firm’s Profitability

The profit and loss statement guides small businesses through complex financial decisions. By understanding the components and implications of the P&L statement, management can make informed decisions, set strategic financial goals, and work toward sustainable profitability. It’s not just a financial report; it’s a strategic tool for financial success.

Firmly Profit’s clients benefit from years of experience providing dedicated, customized solutions to optimize legal practices. To take the next step in maximizing your law firm’s financial security and profitability, by contacting us at 941-202-4062 or using our online contact form.