Money Makes the Firm Go Round

Topics: Finance, Financial ratio, Equity partner Pages: 8 (2646 words) Published: December 12, 2012
Easy Money?
Even Non-financial Experts Effectively Manage a Firm’s Finances – If They Know What to Watch

By Jay Strother

Is there a moment each month when, reviewing the latest financial statements from your accounting department, the numbers, the terms, and the dollar signs converge and you think, “What does all this mean?” Or, if you understand what you see, can you explain it to your non-accounting staff members (or to partners and associates whose talents are not necessarily in finance and accounting)?

Understanding – and driving – where the money comes from, where it goes and how your firm monitors, reports and plans finances is crucial for executive directors and administrators. However, even a legal management professional with an accounting background may not be fluent in the nuances of accounting and finance as it pertains to your firm. While law firms are businesses, the inherent financial concepts taught in financial management and accounting courses may not prepare you for the reality in the firm.

“There’s such a big difference in accounting and financial management between other businesses and consulting organizations like law firms,” said Joseph Grasso, associate dean for Finance, Administration and Corporate Relations at Cornell University’s ILR School. He cites client trusts, firms’ debt needs/philosophy and no traditional “inventory” as areas that vary from the norm.

How can administrators ensure they watch the right metrics and shape the correct accounting and financial approach? There are some basic hotspots and insightful areas most effective financial managers and legal administrators monitor – even if their backgrounds include little formal training. “I was an English education major in college,” said Paul Morton, an ALA member and executive director at Burns & Levinson in Boston. “I took accounting after college and dropped it – boring! I took macro and micro economics. Everything else I learned on the job or at conferences or through reading.” Morton’s story is reflected in administrator peers across the industry: Administrators and executive directors come to know – through practice and expectation – the important metrics in their organizations. The ebb and flow becomes second nature. “My background of 20 years in Army did not have a whole lot of law firm finance and accounting in the curriculum – I learned more about disassembly and assembly of the M-16,” said Ron Henry, executive director at Wilentz, Goldman & Spitzer (and former ALA president). “I learned what I needed to know on the job and through consulting with the firm’s outside accountants as the need arose. I think anyone with analytical skills and common sense can easily pick up what one needs to know.” So, what does one “need to know” to succeed? There is alignment among the experts (academicians, economists) and the practitioners in law firms: Know where you stand and where you want to be. Watch key metrics. Communicate expectations with partners, staff and your financial institutions.

Knowing What Is Important
In theory, accounting seems deceptively easy: debits and credits – money in, money out. Either the firm has money or it does not. “The basic things law firm managers – and their partners – need to remember is that law firms are businesses. As such, they need to be run by business professionals,” said Richard Bank, a former managing partner at what once was the Graham & James Washington, D.C., office. “Although the final decisions may be made by the partners, it’s the administrators who oversee the daily work. But the bottom line is a simple principle: A law firm is income in, services out.” However simple this may seem, reality is harsh. Tax implications, accounting variations and unique situations make law firm finance anything but clear. There are key financial hot buttons that offer administrators and executive directors ready insight to the firm’s standing – and it is these areas where administrators...
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