I’ve been reviewing the income statements (profit and loss statements, or P&Ls, which is what I prefer to call them) of law firms lately in my role as a consultant. The P&Ls are a mess.
A messy financial report is useless. You can’t figure anything out if the categories (“accounts” as they’re called by the accountants—I think) aren’t well defined. I see firms with dozens of categories turning the report into a multipage nightmare that is impossible to absorb.
What to Include in Your P&L
You need to keep your P&L simple. You need to limit your categories, and you should actually use the categories you do have each month. I like to break our income into categories as well.
In an ideal world, I’d have income lumped together as one entry and expenses broken down into the following:
- Payroll
- Marketing
- Other
That would really keep things simple. Realistically, however, a few additional categories make sense in my business so that I can figure out what’s happening when something looks wrong. If, for instance, expenses are unusually high, I don’t want to be stuck with “Other” as my only category. I want to be able to drill down a bit.
A Peek at My P&L
My list of categories will differ from yours. Each business has slightly different issues, but I’ll show you what I use, and I think it’s a good starting point.
For income, I break out the money into these categories:
- Initial consultations
- Nonlitigation matters
- Litigation matters
- Other
For expenses, I use the following categories:
- Bank fees (credit card processing mostly)
- Client expenses (meaning reimbursable expenses)
- Dues
- Food and entertainment
- Insurance (health, malpractice, etc.)
- Interest
- IT (all cloud providers, hardware, etc.)
- Leases (copier, etc.)
- Marketing
- Payroll
- Postage
- Publications and research
- Rent
- Services
- Supplies
- Tax
- Telephone
- Travel
That’s four categories for income and 18 for expenses. It all fits nicely on a single page, and it’s quick and easy to read. I can print six months of data in columns on a single page, and it’s something I can absorb without much study.
Setting Up Your P&L
Your P&L will be different from ours, but it needs to be simple. You need to keep it to a single page, and you need to understand the meaning of each line.
Some lawyers simply add new categories all year long, and the list gets longer and longer with each new expense. Some lawyers let their accountant decide on the categories. Neither approach will help you run your business. You need to proactively determine the categories so you can use the P&L to identify issues and make decisions as the year rolls by.
If your existing P&L is a mess, then it’s time to gear up for a switch on January 1. Start planning now for what you’re going to do next year. Figure out what you’re going to call each category and detail which expenses go into each of the categories you select. There’s no time like the present to start planning for the future.
