Professional Services Accounting ARTICLE -

Pulse check: Is your firm in financial trouble?

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Accounting

So maybe 2011 wasn’t your firm’s most profitable year. But you seem to be staying afloat in a slowly recovering economy.

Are you sure about that? Financially troubled law firms don’t always realize they’re troubled until it’s too late. By taking a quick pulse check, you can identify early signs of ill health — while there’s still time to treat them.

Review financial statements

The first, best place to look for signs of distress is your firm’s financial statements. If you don’t already, use them to track quarterly and year-to-year trends that might not otherwise be obvious, such as a long, slow decline in top-line revenues.

Also review statements for:

• Aging work-in-progress and receivables,
• Increasing write-downs and write-offs,
• Line of credit increases, particularly at year end when cash collections should be higher, and
• Significant debt or deferred debt obligations.

Rising expenses are another dangerous trend. You may have recently made major expenditures for real estate or upgraded technology or hired new attorneys and support staff. But if you don’t begin to see a return on these investments, your firm could be in trouble.

Look for subtle signs

While many firms already use financial statements to detect profitability issues, they may pay less attention to the more subtle warning signs. For example, do you primarily serve an industry niche that’s rapidly consolidating? This could mean fewer clients and less work in the future. Or have merger talks with another firm broken down? That firm may know something you don’t.

Internal turmoil is another red flag. This includes frequent and unresolved disagreements among partners over leadership, compensation and business strategy. When partners, particularly your firm’s biggest rainmakers, begin defecting to other firms or even take unexpected early retirements, it’s not just a red flag but a flashing emergency light.

The mood among associates and support staff can be another key indicator. If accounting staff and personnel with direct client contact seem stressed out or associates and paralegals seem bored because they don’t have enough work to fill the day, the firm probably isn’t very healthy.

Action is essential

After conducting a cursory health assessment, you may suspect — or even conclude — your firm is at risk. Act immediately. If revenues have slowed, you may need to refocus energies on marketing and business development. If expenses are the problem, one solution may be a cost recovery system.

Whatever you do, don’t wait for things to get worse. Call in accounting and other experts to evaluate the situation and help you devise an action plan.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

related links