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In this episode, Sherri Mansell, Director of Bookkeeping That Does Not Suck shares reliable and actionable bookkeeping practices that will help law firm owners become more profitable. Sherri shares her passion for numbers and how understanding the story behind the numbers empowers law firm owners to make data-driven decisions.
The Seven Key Monthly Reports
Sherri outlined the seven essential reports every law firm (and small business) owner should examine monthly regardless of their practice area or billing model.
1. Balance Sheet
2. Profit and Loss (P&L) Statement
3. Budget Variance Report
4. Accounts Receivable (A/R) Report
5. Work in Process (WIP) Report
6. Cash Flow Forecasting Report
7. Three-Way IOLTA Trust Reconciliation
She emphasized the importance of looking at Balance Sheet and P&L Statement on a rolling 12-month basis to identify trends and spot areas for improvement. Sherri shared three of the most common questions and stressed the importance of receiving timely reports from your bookkeeper, ideally by the 8th business day of the month and no later than the 20th of the month.
The Consequences of Neglecting Your Numbers
Sherri shares cautionary tales of law firm owners who put off dealing with their finances, leading to stress, panic, and potential loss of their license when faced with a bar audit. She encouraged listeners to schedule a regular time each month to review their numbers.
Key Takeaways
- Review the seven key financial reports with your bookkeeper every month
- Use detailed charts of accounts to make data-driven business decisions
- Breakdown payroll expenses by department for accurate labor ratio analysis
- Address any IOLTA discrepancies within 30 days to remain compliant with your state bar
Classic Questions
In this segment, Sherri introduces a clip from the audiobook studio recording that addresses the distinction between cash flow and profitability. In this clip, RJon recounts a story of a multi-million dollar law firm with positive cash flow that was actually losing money. This is an all too common example of how cash flow can be misleading.
Sherri expands upon this story by comparing two hypothetical companies to illustrate the difference between cash breakeven and profit & loss breakeven. Some expenses, like loan payments and owner distributions, affect cash flow but do not appear on profit & loss statements, underscoring the importance of understanding financial reports beyond bank balances.
Both Sherri and RJon emphasize the importance of law firm owners asking questions, being curious about their finances, and working with financial advisors who are able to explain these concepts in simple terms.
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