Our firm is a 7 attorney firm in Evansville, Indiana - four partners and three associates. I am one of the partners in the firm. Each month we are provided with a profit and loss statement, a billable hours report, fees received reports broken by lawyer, and accounts receiveable reports by lawyer. In 2014 our fee collections are up significantly over 2013 - our expenses are lower - profits are up - yet the money is not there for partner draws and we are having to draw less than we did in 2013? What do you think is happening?
A couple of reports that are missing from your list - a balance sheet and a statement of cash flows. Even if you are on cash-based accounting not all cash disbursements flow through the profit and loss statement which is the report that reports profit/loss. For the following types of cash disbursements flow through the balance sheet and are not considered expenses:
- Client advances - in law firms that capitalize them as an asset.
- Repayment of debt, credit lines, etc.
- Purchase of furniture and equipment when booked as a capital asset.
- Payment of payroll and other accured taxes.
- Partner draws and distributions.
- Payment of accured pension liabilities.
So while the profit and loss statement may be showing a higher level of profit there could have been other uses of cash that are not reflected on the profit and loss statement. Take a look at the balance sheet and the statement of cash flows reports.
John W. Olmstead, MBA, Ph.D, CMC