It’s that time again! Fourth quarter is upon us and year end will be here before we know it. For the accounting personnel at a law firm, it can be one of the more stressful periods of the year. But some of that stress can be avoided by planning properly.
Careful consideration and analysis of the firm’s financial state should be monitored all year long, but it is particularly critical at year end when decisions are being made about bonuses, draws, and capital expenditures. Budgeting for the new year should be underway, as well as tax planning. If you wait until January to get things in order, it is often too late to take many of the actions that may reduce the firm’s tax liability.
One of the smartest things you can do is make sure your books are in good shape now, rather than waiting for the end of the year. Confirm data entry is up to date, all bank reconciliations are current in both trust and operating accounts, and that stale/unreconciled items are being monitored and addressed timely. Confirm aged items in Accounts Receivable and get any applicable write-offs done or confirm collection efforts are appropriately being made. Similarly check aged Work in Progress and get things billed out that shouldn’t be lingering. Aged Accounts Payable may also need to be checked.
Other items to review are your unallocated payments, credit balances and unused retainers and trust monies. Should these monies be applied to work done? You should apply as many of these balances as possible before year end. Remember that the IRS takes exception to law firms who use their trust accounts as tax planning tools. If you have earned a fee, you are obligated to apply those trust monies to WIP prior to the end of the tax year. If you try to defer taxable income into the new year and ever come under audit, this will be an issue.
You should also confirm that the balance showing on your financial statements for client costs advanced are in line with your AR & WIP balances. Per Chapter 3 of the IRS Attorney Audit Technique Guide, firms are supposed to show these costs on their balance sheet as an asset. Thus, at any given point in time the amount of client costs advanced in your AR & WIP should equal what is outstanding on your balance sheet. If it does not, then you may need to make adjustments. Making sure this number is accurate and not over-inflated will have an impact on your taxes.
A review with the firm’s CPA to go over Year to Date financials is always wise as they can often project taxes based on that information (if it is accurate) and help suggest ways to minimize those taxes. But if the data they are reviewing isn’t accurate or complete, then you can’t expect them to help you plan appropriately.
Timekeeper metrics are something else to review at this time of year. If there are annual revenue goals for timekeepers, where does each stand with respect to actual v. goal? Communicate with your timekeepers accordingly and make sure they are aware of their status, particularly if they don’t have access to these relevant reports themselves. This may also lead to discussions about workloads, staffing and overall utilization within the firm. That, in turn, may affect your budget for the new year, as inevitably employee overhead is the largest expense a firm typically has. It is all part of a giant financial puzzle!
There are a myriad of other items we recommend reviewing at year end. If you want to learn more, please attend our free year-end best practices webinar on October 9 at 1 pm. We hope that you will join us! To register, click here.