What Financial Reports Should I Review Monthly?
I often get asked what reports should be monitored on a regular basis. From a financial perspective, there is no one report you can monitor that will tell you how your firm is doing. It is a combination of reports and measurements. I will review what I consider a few critical that will give you the data you need to see how your firm is doing, and what to look for.
The Monthly Cash Receipts Report for the month tells how much accounts receivable were collected. You should have a good idea of what you monthly operating expenses are, including partner or member distributions, so the objective is to make sure you collect at least this much. For instance, if your monthly operating expenses are $500,000, you would like to collect at least this amount each month. Firms will vary on the regularity of meeting this objective on a monthly basis, but over time, must exceed this, or you are operating at a loss.
I also calculate what percentage the cash receipts represent of accounts receivable. A great benchmark is to collect 40% of accounts receivable each month. In a perfect world, you would collect 100%. By collecting 40%, you are collecting receivables within 75 days, which is a reasonable timeframe. If you are not meeting these goals, you may have some dead wood in your accounts receivable. Getting bills out timely can also help this statistic.
Billable hours generated is another critical report. If you are not generating enough billable hours, you will suffer the consequences down the line. If your average billing rate is $200 per hour, and you generate 2,500 billable hours, you will generate $500,000 in fees. Most firms would need to generate more than this, since few get 100% realization on their work in progress. So if we assume the firm gets 90% realization, you need about 2,800 billable hours per month, or 700 per week, to break even.
Realization reports are great sources of information. The firm should have a benchmark of realization for the firm. There are two realizations, one on how much work in progress gets written off, and another on how much accounts receivable get written off. In the example above, I used 90%, which means 10% gets written off. Obviously a higher realization will lead to more profitability. Follow up with billing responsible attorneys that are below the firm benchmark to learn what is causing the lower realizations, and determine whether they have reasonable explanations.
The balance sheet is the backbone to it all. It tells you where you are financially at any point in time. I like to compare balance sheets with prior periods to see what has changed over time. This is useful in analyzing phantom income, the concept where a partner or member is getting taxed on income they do not receive in cash. I look for what assets and liabilities have gone up or down. If an asset has increased or liability decreased, this is an indication income has be realized. This is also a good way to analyze how much capital is being retained in the firm versus distributed to owners. A firm should retain a certain portion of net income to fund future growth and expansion.
The income statement tells you how you have done over a period of time. The income statement should be compared with the budget, and significant variances noted and followed up on. Every successful firm should have a budget to measure and plan where it wants to go.
Monthly work in progress aging is a useful report. Work can be generated, but if it is never billed, is worthless. Each month the firm should strive to bill the amount of cash it needs to operate. If you are billing less, collections will be less, and there were be issues in the future. For work that is over 60 days old and over a certain materiality level, i.e. $5,000, follow up with the billing responsible attorney to determine what the expected time frame is before it gets billed. Work that sits in WIP is costing the firm money, because the firm has already paid the cost of creating the work through salaries and overhead costs. The longer it sits there, the less valuable it becomes, and the more difficult it will become to bill and collect.
The accounts receivable aging will show you how successful you have been in collecting billed work. The firm should have a policy of following up on clients that reach over 60 days. My experience has been much easier collection when they are followed up on here, rather than waiting until they hit the over 90 column. Certain trends may be revealed that you can learn from. Communication with clients is the key, and I generally advise having the billing responsible attorney call the clients.
These are some of the basic reports that will help you understand how you are doing on a regular basis. Financial information is most useful if you have an expectation of what should appear, so that when things differ, you can make judgments about them. Watch for trends over time.
