As the year winds down, everyone is looking forward to holiday festivities and a well-deserved break from the whirlwind of cases, clients, and courtrooms.  

But there’s a looming task you have to take care of before that end-of-year break: year-end accounting. 

Wrapping up the year is an excellent opportunity to analyze the year’s progress, ensure compliance, and set the stage for a prosperous new year. But it’s easy to feel overwhelmed, especially when the weight of the entire year’s financials rests on your shoulders.  

The good news is that those tasks aren’t insurmountable, and addressing them proactively is well worth it. Tackling them now means you set your firm up for strategic growth and success in the upcoming year—and you get to enjoy a truly relaxing holiday season. 

Let’s look at the five essential year-end accounting to-dos that every legal team should prioritize. 

1. Review your firm’s financials

Before you move forward into the new year, take the time for a thorough review of your finances. Comprehensive reports from your business accounting software can provide insights that will guide your decisions moving forward. 

Some financial reports to generate and review include: 

• Actual prior year revenue and expenses 
• Current year revenue and expenses 
• Actual current year cash flow by month 
• Current year-to-date (YTD) actual compared to YTD budget 
• Opening and ending operating account balance 
• Profit/loss by month 
• Accounts receivable each month 
• A cash flow projection 

With such a comprehensive view of your finances, you can compare this year’s revenue to the previous year and your budget. This will highlight areas of success or where improvements are needed. Pay close attention to your operating account’s opening and ending balance, looking for patterns to start each month on solid financial footing.  

Finally, review your accounts receivable. If this number is growing, it’s a sign you need to be more proactive with collections. 

2. Invoice all clients

Invoicing is a reflection of the value you’ve provided to your clients, so invoicing all clients at the year-end sets the tone for financial health in the new year. 

To make the process seamless and effective, you should: 

• Make sure that all hours are tracked through November to kickstart December with accurate billing 
• Run an accounts receivable report to see exactly what’s owed 
• Identify large and/or old outstanding balances and write off those deemed uncollectible by December 31 
• Send out your invoices and collect all outstanding payments 

If you’re having trouble receiving payments, consider offering a small year-end discount or flexible payment plans, implementing bi-weekly billing in December, automating payment reminders, and offering online credit card payments. 

3. Pay all bills

As the year winds down, you also have to settle your dues. Paying all your bills demonstrates your firm’s integrity and commitment to its partners and vendors. It also provides a clean slate as you transition into the new year so you can focus on growth without lingering liabilities. 

Some bills you need to evaluate include: 

• Vendor invoices such as office supplies and outsourced services 
• Utilities 
• Subscriptions such as software or online services 
• Professional fees from consultants and other professionals your firm collaborates with 
• Miscellaneous expenses, including travel, client entertainment, or any ad-hoc expenses 

How to do it 

It may seem self-explanatory, but you can pay your bills more efficiently by taking a systematic approach. Here’s a quick guide in six steps: 

1. Year-end bill audit: Use legal practice management software to run reports for a comprehensive audit of all outstanding bills from the year. 
2. Prioritize outstanding payments: Rank bills based on their due dates, with those due immediately at the top. 
3. Allocate year-end budget: Set aside a specific budget for year-end bill payments so you can clear all outstanding amounts without affecting next year’s budget. 
4. Review recurring subscriptions: Decide which subscriptions you need for the next year and which you can discontinue. 
5. Document everything: As you settle each bill, document the payment details meticulously for accurate financial reporting and a clear record for tax purposes (streamline this with practice management software). 
6. Plan for the upcoming year: Draft a preliminary budget for the next year to help you anticipate and manage expenses more effectively. 

4.Run reports on assets and liabilities 

Running reports on assets and liabilities provides a clear snapshot of the firm’s financial health at the end of the year.  

For a comprehensive view of assets and liabilities, run these reports in your practice management software: 

• Balance sheet: A consolidated view of your firm’s assets, liabilities, and equity at a specific point in time 
• Accounts receivable report: All amounts owed to the firm 
• Accounts payable report: All amounts the firm owes 

Next, look for trends in your reports. For example, are assets growing year-on-year? Are there any long-term liabilities that need restructuring? Do any uncollected dues need to be written off?  

Answering these questions helps your firm adjust your financial strategies to maximize assets and minimize liabilities. 

Once you’ve done your analysis, address any outstanding amounts, plan for tax implications, and reassess your financial strategy accordingly. This could involve restructuring certain liabilities, making investments, or divesting from nonperforming assets. Inform stakeholders of any changes to keep everyone on the same page. 

5. Examine your profit and loss statement

Your profit and loss (P&L) statement—often referred to as the income statement—is a financial report that provides a snapshot of financial performance over a specific period.  

For legal firms, this statement is a comprehensive overview of revenue generated from client billings, settlements, and other income sources, offset by the expenses incurred in operations, salaries, overheads, and other costs. 

Essentially, the P&L narrates how well you’ve run your operations, collected fees, and managed your expenses. This statement is important because your net profit or loss figure plays a pivotal role in tax calculations and strategic planning for the upcoming year. 

So, how do you make use of your report?  

Use your legal accounting software to generate a detailed P&L statement. Investigate any anomalies, such as sudden spikes or drops in revenues or expenses, to find any underlying issues or opportunities. Then, compare your P&L with the previous year’s to identify growth trends, areas of improvement, or potential concerns. 

Make end-of-year accounting easy with CosmoLex 

End-of-year accounting doesn’t have to be yet another burden on your shoulders during the busy holiday season. CosmoLex offers a fully integrated platform for law firms to manage their practice, with tools like… 

• Business accounting 
• Trust accounting 
• Practice management 
• Client relationship management 
• Billing and payments 

…all housed under one digital roof for a seamless, streamlined experience. 

Are you ready to transform your legal practice’s financial management? Sign up for a free trial to see how CosmoLex can simplify your year-end accounting.