What are the most important words in a dictionary? For lawyers, the most important words deal with accounting. Like any other profession, the world of accounting has its own language, and a knowledge of key financial terms will be valuable for any lawyer involved with financial matters. The following financial “dictionary” should give you a good overview of key terms.
Accounts Payable: Money (usually expenses) that is owed to others and not yet paid out.
Accounts Payable Aging: Similar to the accounts receivable aging, the accounts payable aging is a monthly expense report that tells you how much is owed to whom and for how long. Based on your cash availability, you can use this report to pay your bills.
Accounts Receivable: Money that is owed for work performed and billed but not yet collected or received.
Accounts Receivable Aging: Prepared monthly with weekly updates, the “aging” shows how much money is owed by each client and the month in which the bill was sent or how many months the bill is outstanding. This is an essential document for the effective practice of law.
Accounts Receivable Schedule: This monthly report shows how much money is owed by each client.
Aging: An analysis of how old billings and accounts receivable are.
Balance Sheet: The least-important report for a professional service business, a balance sheet is a snapshot of a firm on a certain date. It lists all assets and liabilities.
Cash Flow Projection: This is the most important report available to a law firm (or any small business). Cash flow projections are usually in the form of a spreadsheet with months (12 to 18) listed across the top and expense and revenue items listed to the left from top to bottom. (There are two separate sections: revenues and expenses.)
The amounts of money collected and spent by the month should be inserted into each grid “cell” with totals for the month and for the year computed. Cash flow reports are usually created annually and updated each month as more information is learned. A monthly variance report can be created separately or included as columns in the cash flow projection. A daily cash report can also be used, where the previous balance is modified by the change in the day’s cash position (cash in minus payments mailed out).
Cash v. Accrual Accounting: Cash-basis accounting reflects only the collection of cash into the practice, not billings or work in progress (work not yet billed). Keeping track of cash coming in or going out is the basis for most small-firm finances. Accrual-basis accounting reflects income from billings (in contrast to collections).
Expenses: Costs of operations, including salaries, rent, supplies, insurance, etc.
Hours Worked: A regular report that compares hours worked and billed with the total hours that you set for your billing goal for the day, week, or month.
Income and Profits: These are accrual accounting terms referring to what is left over after expenses have been deducted from sales or revenues. These are of little relevance to small firms using cash-basis accounting.
Income Statement: This is also called the “profit and loss” statement, or “P&L,” and is used to chart the figures used in accrual accounting. As such, it is not that important for cash-based law firms, although it does give an overview of the relative financial health of the business. Income statements are typically prepared on a quarterly or annual basis.
Revenue: All of the sources of cash to the firm, including fees, awards, recoveries, etc.
Write-Offs: A monthly report that tells you how much billing you have eliminated. There are two basic types of write-offs: time that never gets billed because you do not want to charge for it, and money previously billed but “written off” in response to a client’s complaint or a negotiated resolution because of a billing disagreement.