One of the biggest differences I have noticed between Biglaw and owning a small firm is the level of personal involvement by partners with respect to year-end financial matters. Sure, in Biglaw partners are asked to work on their clients to pay any outstanding bills by year-end. Well-run firms may also ask partners to work on their business plans for the upcoming year as part of their review process. But other than those tasks and participation in year-end compensation meetings, the vast majority of Biglaw partners are insulated from the nuts and bolts of year-end accounting. Firm and practice group leaders may have more responsibilities, but the rank-and-file partners can usually rely on the firm’s accounting department to handle most year-end financial matters.
In contrast, small-firm partners must take an active role in all aspects of the year-end process, including spending significant time on making sure all firm expenses are categorized and logged appropriately. This effort can be time-consuming, but is absolutely essential for tax purposes and ensuring that the firm’s books are maintained as necessary. Of course, small-firm partners must also do what their Biglaw brethren do at year-end as well, including chasing after clients for collections, deciding on associate and employee compensation, and working on their respective business plans for the upcoming year.
Even if the firm is too small for a dedicated in-house accounting department, the need to follow proper accounting practices remains an essential one. To that end, a good accountant/bookkeeper is an essential asset for any small law firm, both to maintain the firm’s books, and to provide money-saving tax advice. For example, accelerating certain known firm expenses before the end of the year could have favorable tax benefits for the firm and its partners. Knowing which expenses can be accelerated, as well as the potential benefits, can help the firm’s partners make an informed decision on whether any accelerated expenditures make sense. Likewise, firm partners can also learn what retirement savings options are available, and the tax implications of making retirement contributions at certain times of the year.
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One of the most critical year-end tasks for any small firm is making sure that the books are as reflective of the firm’s actual financial performance as possible, before they are reviewed by the firm’s accountant for purposes of preparing the firm’s tax returns. Some firms use their accountant as their bookkeeper, while others may rely on software to handle the firm’s books. Either way, small-firm partners are well-advised to make sure that they submit all their business expenses to the firm’s bookkeeper in a timely manner. Year-end is a great time to review credit card statements and receipts to make sure that all of the past year’s expenses have been properly reported. The potential tax benefits are obvious, with the added benefit that keeping the books updated in a timely manner can help reduce the costs of outside accounting help — by making tax return preparation a lot easier.
We are lucky as a firm that in addition to a good set of outside accountants, one of our partners, with the help of solid accounting software, takes the laboring oar in managing the firm’s books on an ongoing basis. The other partners help by getting bills out on a timely basis, and making sure that he gets copies of invoices that are sent out, as well as records of money received from clients in as close to real-time as possible. On the expenses front, each of our firm partners carries a firm credit card, and the individual cards are all linked to a single account. Charging as many business-related purchases as possible to that card helps us keep track of expenses, and the robust reporting capabilities of the credit card company help with expense logging for tax purposes. These may seem like obvious and straightforward steps, but they really help save time, particularly at year-end.
Once the prior year’s books have closed, it is also advisable for the small-firm’s partners to mimic their larger Biglaw brethren and collectively review the prior year’s income statement. As I wrote a while back, zero-based budgeting can be an effective tool for keeping firm expenses lower – thereby increasing the size of partner distributions. In zero-based budgeting, the idea is that expenses must always be justified anew, line item by line item, with little deference given to the fact that the firm has spent a similar amount on such expenses in the past. Every dollar counts for a small firm, and a review by the partnership of the prior year’s expenses can be illuminating and help identify wasteful spending for eventual elimination.
For example, maybe the prior year was an expensive one for the firm in terms of attendance at industry events that did not do much for client development purposes. Rather than simply assume that going to those same events this year will be more productive, a review of the income statement may provoke a conversation amongst the partnership as to whether there may be better uses for the firm’s marketing dollars. Similarly, if the firm has been paying for technology-related services or equipment that are seldom used, perhaps there are more cost-effective ways available for achieving the same results. Shining a light on each expense line-item can help the firm identify the waste, and re-direct the firm’s resources to more productive ends. Otherwise, wasteful spending can remain on the books indefinitely, simply for want of attention.
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Ultimately, one of the privileges of owning your own business is having a say into how the business spends money. But as with any privilege, there is also responsibility attached. For small-firm partners, that means doing their part to help record and manage the firm’s expenses, while also taking some time early in the year to review the prior year’s income statement as part of an effort to identify wasteful spending. Understanding how individual partner decisions contribute to the firm’s tax burden and bottom line is also critical. Of course, you can choose to ignore your responsibilities. In that case, there is a good chance that hard-earned money will be running away from you. Better to participate in the process, and help run the numbers in the right direction.
Please feel free to send comments or questions to me at [email protected] or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.
Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique. The firm’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at [email protected] or follow him on Twitter: @gkroub.