The last few days I’ve been harping a bit on the importance of “knowing your numbers”.
Yesterday, I said that the “Key” numbers for the owner of a solo or small law firm to be on top of are as follows:
2. Budget Variance Report
3. Cash Flow Projection (6 weeks rolling)
4. Aged A/R By Account
6. Cash Position (Operating & Trust)
In response, a few lawyers asked me to explain why Balance Sheet is not on my “short list”.
A couple more thought their YTD revenues should make my top six list. They all made very nice arguments that I’m not going to distract you with here.
Instead, here’s the explanation to each of these questions, so you don’t let yourself get distracted…
Balance Sheet: Financial accountants love balance sheets. So do book keepers. Management CFO’s aren’t nearly as impressed with the balance sheet however. There are two principal reasons for this big difference in who cares more about what.
First, the balance sheet for solo & small law firms is mostly fictitious. In other words, the assets don’t really matter. Assets don’t pay bills. Cash flow does. Assets don’t hire staff or fund marketing campaigns. Cash flow does.
Balance sheets, which are driven by the estimated value of assets against the estimated total of liabilities tell you how much “equity” you have in your law firm. So what? Who cares?
Would you rather own a law firm with one million dollars of “equity” and flat, anemic or even negative cash flow; or a law firm with half as much equity but twice as much positive cash flow?
THAT is why Management CFO’s of law firms don’t worry too much about balance sheets.
Because cash flow (which is driven by the 6 key numbers) is what really makes a difference in how you manage a small law firm.
YTD Revenues: Year-to-date revenues are nice to know about. This number helps put everything into perspective. It’s a great way to pat yourself on your back and congratulate yourself for a job well done. I look at my YTD revenue every month and every year I look forward to “Breaking The 7 Barrier” earlier & earlier in the year.
But YTD revenues don’t drive forward-looking decisions.
YTD revenues are like looking in your rear view mirror or at a line on your GPS screen that tells you where you have been.
YTD numbers are good for nostalgia and filing your tax returns. But they don’t drive ongoing, forward-looking management, marketing, sales, staffing or any other of the critical decisions that management of the law firm must make on an ongoing basis to ensure profitability and a balanced lifestyle.
If this is all news to you, don’t worry.
You’re not alone. None of this is anything they teach any of us in law school.
If you “know” this stuff but you’re not making monthly management decisions based on what your six key numbers are telling you, then I absolutely-promise you that you are NOT coming close to having the most profitable, predictable and/or the most professionally-satisfying law firm that you COULD be enjoying.
There is a reason why the MOST successful law firms in the country have a CFO on their team too.
You can be your own CFO. It just might be a thousand times harder for you to be your own CFO than to get some outside help. And way-more-expensive for you to try and be your own CFO too. But not as expensive as NO-ONE being the CFO of your business. That’s REALLY expensive!