At Tom Vignali CPA, Inc., we have been providing financial and oversight assistance to one of our clients, a law firm primarily dealing with personal injury cases. There are interesting financial accounting issues facing this type of practice, as well as some other basic issues that should be addressed by any similar law firm.
Expenses and revenues out of sync?
In this type of practice, many expenses are incurred prior to any revenues being received based upon the adjudication of settlements. As a legal case may last longer than one financial reporting period, a huge amount of expenses may incur in one reporting period with no offsetting revenues from that specific case. This results in two key issues: a financial reporting year with extensive expenses and potentially no revenue to offset them, and a subsequent financial reporting year when the settlement revenues have been collected, but the bulk of expenses have been reported in a previous year. This could result in a financial statement showing higher expenses in one year with a potential loss, and higher revenues in a subsequent year with no related expenses, resulting in higher profitability and higher potential tax implications on the profits.
A few issues need to be addressed regarding this process. The firm will need adequate cash flow to fund expenses since revenues might not be received in a timely fashion. This requires extensive financial planning. Additionally, there needs to be some tax planning to address the tax implications that could result from receipt of revenues with no offsetting expenses. One potential solution is to defer settlement payment from one financial reporting period to another.
Finally, there should be a profit-and-loss financial statement for each individual case that might extend beyond the financial reporting period (since some cases might take more than one year to reach settlement). The financial statement for the existing reporting period will not allow for determining the profitability of each individual case. Individual case profit-and-loss financial statements are a critical tool in determining the profitability of each case.
Time tracking: record every minute
It is critical to track all staff time on a specific case, including lawyers, paralegals, and support staff. Specific case time tracking will prevent the firm from overstating general and administrative (G&A) expenses and under-reporting direct case expenses. There are a variety of software packages that allow a firm to track employee time on a case-by-case basis. This greatly enhances the firm’s ability to determine the profitability of each case, while also allowing it to determine the actual non-case related G&A expenses.
Don’t forget about peripheral expenses
Making and providing copies, receiving and sending faxes, sending and receiving emails can be extensive. Staff time for all these services should be tracked, as mentioned above. But, peripheral expenses should also be tracked and billed for. Office equipment can be programmed to track the work being performed by client case. In this instance, just as an example, by billing for copies made for client work, the firm was able to bill out for almost two-thirds of a paralegal’s payroll expense. This expense would normally be categorized as a G&A expense had it not been identified as case-specific. Additionally, it allowed for the firm to bill direct expenses to the client, something that would not have occurred if the direct expenses had not been tracked on an individual client basis.
These are just a few of the financial tips we recommend that law firms should consider.
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at: Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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