Law Firm Financial Management – Higher Profit – Lower Partner Compensation

Question:

Our firm is a 7 attorney firm in Evansville, Indiana – four partners and three associates. I am one of the partners in the firm. Each month we are provided with a profit and loss statement, a billable hours report, fees received reports broken by lawyer, and accounts receiveable reports by lawyer. In 2014 our fee collections are up significantly over 2013 – our expenses are lower – profits are up – yet the money is not there for partner draws and we are having to draw less than we did in 2013? What do you think is happening?

Response:

A couple of reports that are missing from your list - a balance sheet and a statement of cash flows. Even if you are on cash-based accounting not all cash disbursements flow through the profit and loss statement which is the report that reports profit/loss. For the following types of cash disbursements flow through the balance sheet and are not considered expenses:

Client advances - in law firms that capitalize them as an asset.
Repayment of debt, credit lines, etc.
Purchase of furniture and equipment when booked as a capital asset.
Payment of payroll and other accured taxes.
Partner draws and distributions.
Payment of accured pension liabilities.

So while the profit and loss statement may be showing a higher level of profit there could have been other uses of cash that are not reflected on the profit and loss statement. Take a look at the balance sheet and the statement of cash flows reports.

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John W. Olmstead, MBA, Ph.D, CMC

Posted at 06:50 PM in Compensation, Financial Management
Tags: Compensation, higher, lower, Partner, profit

Apr 22, 2014

Law Firm Financial Management – Higher Profit – Lower Partner Compensation

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