How is your law firm doing?

You may not be getting a completely accurate answer by simply looking at your firm’s annual financial statements. Law firm financial reporting is an art form and sometimes, a bit of a black art.

Most law firms utilize modified cash basis accounting to report on their results. However, in some instances, some law firm managers using this method of financial reporting to gloss over issues which may evidence of a systemic fault line in the firm.

Here is a guide to understanding law firm financial reporting, particularly financial reports prepared on the modified cash basis of reporting. And, more significantly, we have also provided a guide for conducting basic due diligence giving the reader the tools necessary to perform a basic forensic analysis of any firm’s financial health.

Most significantly, ditch reliance on Profits Per Partner and Profits Per Equity Partner as a metric of anything meaningful. PPP and PPEP numbers are showpieces which bear little relevance in understanding a law firm’s financial performance, its profitability or even its ability to stay in business.