We get it-you’re sick of the games. The guessing game of law firm financial reports, that is. It’s hard to know what reports your firm should be running and even harder to interpret the data from those reports and connect the dots into a useful strategy. And most bookkeeping or accounting software, like QuickBooks, is just too hard to understand and too complex for your needs.
But it doesn’t have to be that difficult.
Your firm might be brand new to data analytics, or maybe it’s dipped a toe into the waters and has the basics down. Either way, keeping close, regular tabs on certain metrics and understanding financial reports will increase the effectiveness and efficiency of your firm and lawyers and, in turn, your law firm’s profitability. Technology can streamline this process and make collecting and interpreting your firm’s data easy.
This guide will provide a basic overview of legal reporting and analytics and tell you why they’re important and how they can help you intelligently run your firm. Then we’ll go in-depth into the different kinds of financial reports your firm should be running to help you understand your bottom line.
A basic overview of legal analytics and reporting
Legal analytics is the process of collecting, organizing, and applying data to the practice of law. If that sounds overwhelming, think of it as paying close attention to the heartbeat of your law firm’s finances and making adjustments as needed.
The goal of legal analytics is to use the collected data and subsequent reports to make informed choices for your firm. Is one practice area soaring? It might be time to hire another associate. Is your cash flow tighter in January right after the holiday season? You can prepare for that by increasing your savings in December.
With the right tools in place, your firm can review its information and create reports on all aspects of its business model. You can then use those reports to inform actionable steps that will best serve the health of your firm.
Let’s get a bit more specific.
Why are law firm analytics and reporting important?
It’s simple: law firm analytics and reporting go beyond simple financial forecasting, giving your firm a competitive edge. With legal analytics and reporting, your firm can dive deep into its functioning and gain valuable insights into its daily, weekly, monthly, and yearly net income and operations. Then you can use that information to implement workable solutions targeting both short-term and long-term goals.
Legal analytics can help you forecast with facts. You’ll be able to view data represented in charts and graphs to make sense fast of things like billable hours by attorney, money spent last week (last month, last year), and invoices. Analytics tools translate raw data into knowledge, and knowledge translates into power.
Legal reporting software offers your firm real-time reports that can be pulled daily, hourly, or even faster. This means you can quickly get your hands around potential problems before they become threats to your law firm. Basic data points for legal reporting include law firm accounting, billing, compensation, and productivity—all vital aspects of your firm’s day-to-day operations.
What kinds of nonfinancial reports should my law firm be running?
Below is a shortlist of the types of reports your firm should consider when building out its reporting structure. We highly recommend using practice management software with a built-in reporting tool — it’s simply the best practice. We’ve also got you covered with more detailed information regarding what these reports include and how regularly to run them with our legal analytics and reporting guide.
Productivity – Billable hours matter, and tracking them is important both for individual bonus payments and overall firm vitality. Analytics and reporting can help your firm track straight billable hours, nonbillable time, billable processes, profitability per attorney, and matter origination credit.
Practice area performance – If your law firm has multiple practice groups, keeping track of performance is important for both staffing and resource allocation. You should review the performance of your firm’s practice areas at least annually (and ideally quarterly).
Marketing and business development – Reporting and analytics can take your law firm’s marketing and business development to another level. Don’t spend money on marketing and campaigns without analyzing the effectiveness of those efforts. The following market performance indicators should be part of your law firm’s regular reporting processes: source of clients, client retention and referrals, website conversion and hits, return on investment, and production and origination.
With certain reporting and analytics tools, your firm can identify which clients always pay on time (and those that don’t), which attorneys are developing a specialty based on time billed to certain matters, which months are busiest, and which are slowest. Raw data points can be turned into complex spreadsheets and pivot tables that are easily viewable, accessible, and actionable.
What this means for you and your firm is that you can determine appropriate billable rates, monitor, and adjust financial performance targets, hire when you need, and generally make informed business decisions to improve your firm’s financial position. And you don’t have to wait till year-end to get all of the data. No matter whether you’re a small law firm or a megafirm, this data is available at the touch of a button all year long, without having to call your CPA.
What kind of financial reports should my firm be running?
There are a host of financial reports available to you with the right legal reporting software, each of which will help your law firm organize and optimize. Here’s a list of eight essential financial reports that your law firm should be running.
1. Balance sheet report
A balance sheet is like a doctor’s report — a financial statement of your firm’s health. The classic balance sheet report provides your firm with simple insights into its current assets, and liabilities including accounts payable, and capital. It helps your law firm plan for both the short-term and long-term.
2. Rolling 12-month profit and loss statement
This income statement is a backward-looking report that your firm can use to look forward intelligently. It details the past 12 months of earned revenue and expenses paid (e.g., operating expenses like office space, tech, marketing, malpractice insurance, and legal database subscriptions). A profit and loss statement will help your law firm evaluate its most recent annualized figures, reducing the impact of seasonality and helping you visualize your firm’s health on a rolling yearly basis.
With this report, you can view a full year of financials at any time. (For example, if you run a profit and loss statement on May 20, 2022, you’ll use financials from May 1, 2021, to April 30, 2022). This allows for continuous planning for the future performance of your firm.
3. Monthly revenue report
The monthly revenue report helps your firm better understand the flow of capital in and out. It takes into consideration time billed and the collection of funds for that billed time and can be narrowed in scope to reflect your firm’s revenue on a weekly basis as well.
This report gives your law firm tangible knowledge of how to best prepare for short-term fluctuations such as the pending conclusion of a matter or late payment by a client. In short, the monthly revenue report helps your law firm plan for the current moment while also considering trends to help it prepare for the long haul.
4. Accounts receivable report
An accounts receivable report shows the money that clients or other parties owe your law firm. Tracking this amount is key to making sure your law firm is both getting paid for time billed and getting paid on time. These reports track receivables for each client account and matter, whether currently due or past due, and help you forecast your firm’s cash flow (and know when there is a big payday just around the corner). You can monitor accounts receivable on a firmwide basis, per-client basis, and practice group basis.
5. Statement of cash flows
A statement of cash flows helps your firm track and manage cash on hand. It details your net income, adjustments in reconciled net income, cash from operating activities, and depreciation. The statement provides valuable insights that can help you predict when your firm might need more cash and when it can safely stow it away for a rainy day. You can customize the statement to your needs, which may fluctuate over a period of time.
6. Billable professionals’ performance/revenue report
This report provides your law firm with in-depth knowledge of its actual versus target revenue and allows your firm to track performance metrics like utilization, collection, and actualization rates. With this information, your firm can figure out where improvements can be made (and where it’s doing great). The leaders of your firm will get an overview of both the aggregate and individual performance of their various teams, giving them insights into employee performance.
7. Work in progress (WIP) or pipeline reports
Legal work in progress or pipeline reports are project management tools that show the financial health of a project relative to its progress by tracking the amount of time an attorney has worked, the value of such time and expenses executed but not yet invoiced. These reports look at more than expected billing and take into consideration the totality of relevant revenue and expenses.
Pipeline reports help law firms identify red flags early on and track real-time information about where capital is, where it’s coming from, and where it’s headed.
8. Budget variance
This report shows where your expectations did not sync with reality, whether good or bad. Its value is in showing where your firm might have been off for budgeting purposes. Perhaps your firm brought in additional revenue from a marketing campaign. Maybe a big client needs more time to pay a bill. These reports deliver the information that your firm needs to make useful adjustments.
How can legal practice management software enhance reporting?
Good legal practice management software can transform your firm’s reporting practices and increase its optimization and efficiency to boot. Legal practice management software makes tracking and obtaining data easier. And with better, more accessible data, your firm can compile more useful reports.
The best practice management software offers built-in reporting tools so that your data doesn’t need to be copied from system to system, saving your firm time and money and reducing the possibility of human error. With these reporting tools, you can position your firm to thrive — with less risk, time, and effort.