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The Financial Crisis Facing Law Firms With < 25 Employees? (And how to fix this)

Updated: Nov 12


An experienced advisor addressing the financial challenges small law firms face, such as trust accounting, compliance, and cash flow management. Emphasizes solutions for firms without the resources for in-house financial teams.

Opening Insights


If you're not managing your law firm's finances correctly every week, you’re likely losing cash, adding unnecessary stress, and potentially putting your firm at risk. Small law firms—especially those with fewer than 25 employees—often lack the resources to manage these critical financial tasks effectively. The burden falls on you, resulting in lost income, poor cash flow, sleepless nights, and sometimes even a damaged reputation.


The truth is, The Bar Associations across the country don’t differentiate between small and large firms when it comes to financial compliance. Every firm must meet the same standards, regardless of size. Here’s a checklist of what every law firm finance system should include, for your peace of mind, your clients, and regulatory compliance.


How many of these essential functions does your firm have in place?


A notebook and pen, representing the need for essential financial controls in small law firms, including expense management, financial reporting, and regulatory compliance to protect client funds and firm stability.

Essential Financial Management Functions for Law Firms


  1. Trust Accounting and Compliance


    Trust accounting is foundational to managing a law firm's client funds, particularly when these funds must be held separately in trust accounts until they are earned or used for authorized expenses. Without proper trust accounting, a firm risks not only financial losses but also severe regulatory penalties. Mishandling these accounts can lead to disbarment or other disciplinary actions by state bar associations.


    Compliance with trust accounting standards means tracking every dollar of client funds, ensuring each is allocated appropriately, and that withdrawals are made only with proper authorization. Law firms must regularly reconcile trust accounts, often on a monthly basis, to ensure accuracy. For small firms, maintaining regulatory compliance with trust accounting standards may seem daunting without an in-house CFO or specialized finance team. Partnering with a CPA firm can streamline this process, ensuring trust accounts are managed accurately and meet all regulatory guidelines.


  2. Billing and Revenue Management


    Revenue management extends beyond sending invoices; it involves creating systems to track billable hours accurately, accommodating various fee structures, and reducing billing errors. An efficient billing process ensures prompt collections, keeps cash flow steady, and builds trust with clients by preventing surprises in their bills. For small law firms, the challenge lies in balancing time on cases with ensuring every hour worked is accounted for and billed promptly.


    By integrating automated billing software and clear billing guidelines, law firms can simplify this process. Partnering with financial experts who understand the nuances of legal billing can help ensure systems are efficient, while reducing the risk of lost revenue due to missed billing or client disputes.


  3. Expense Management and Cost Control


    Effective expense management means tracking operational costs meticulously, from case-specific expenses to overhead costs. Small law firms often face cash flow issues, especially when unforeseen expenses arise or when case costs are not accurately tracked. When expenses exceed projections, cash flow can be impacted, leading to financial strain.


    Expense management software tailored for law firms can assist in tracking these costs and linking them to specific clients and cases. This ensures clients are billed appropriately, and the firm has a clear view of its financial standing. CPA firms that specialize in law firm finance can provide insights into cost control, helping firms minimize unnecessary expenses and ensure funds are allocated effectively to support long-term growth.


  4. Financial Reporting and Analysis


    Financial reporting and analysis go beyond numbers; they offer insights into the firm’s overall health, profitability, and growth potential. Regular reports that measure profits by practice area or even by individual partners allow firm leaders to make strategic decisions grounded in data.


    Monthly, quarterly, and annual reports provide a snapshot of the firm's financial standing and forecast future cash flow. Financial analysis can reveal which areas of the practice are most profitable and identify patterns that suggest a need for change, such as reallocating resources to high-performing areas. Small firms, however, often lack the time or in-house expertise for such analyses. This is where collaboration with a CPA firm proves beneficial, providing law firms with insights to optimize profitability and manage growth strategically.


  5. Tax Planning and Compliance


    Law firms must comply with complex tax regulations while optimizing for tax savings where possible. Effective tax planning not only ensures that the firm remains compliant with state and federal tax laws but also improves cash flow and reduces tax liability. Small firms without an in-house tax advisor may miss valuable tax-saving opportunities and potentially face issues if compliance standards aren’t met.


    By working with a CPA specializing in law firms, firms can plan proactively for tax season, take advantage of deductions, and avoid costly penalties. A CPA firm can provide guidance on quarterly estimated tax payments, deductible expenses, and the best practices for recording business expenses, ultimately ensuring that partners and the firm as a whole keep more of what they earn.


  6. Cash Flow and Liquidity Management


    Cash flow challenges are common in law firms due to the unpredictability of revenue cycles, especially for smaller firms. Managing liquidity means ensuring funds are available during lean periods without relying excessively on credit. Effective cash flow management involves forecasting, planning for slow periods, and maintaining a reserve to cover unexpected expenses.


    For law firms that handle long cases with delayed billing, the ability to forecast cash flow accurately is essential to staying operational. Financial experts can help create strategies to manage cash flow, such as setting aside a portion of revenue for reserve or offering flexible payment plans for clients to encourage faster collections.


  7. Risk Management and Internal Controls


    Implementing internal controls is crucial to protecting a law firm’s financial integrity. Internal controls help prevent fraud, safeguard client funds, and ensure that financial records are accurate and reliable. For small law firms, risk management may seem less of a priority, but the absence of controls can lead to both financial and reputational risks.


    Internal controls can include processes such as regular audits, segregation of financial duties, and authorization checks for financial transactions. Risk management also extends to cybersecurity, especially when handling sensitive client data. A CPA firm can assist in establishing internal controls that fit a small firm’s size while ensuring that risks are managed and compliance standards are met.


  8. Technology and Financial Systems


    Law firms today benefit from using specialized legal and financial software like CLIO, which streamlines billing, trust accounting, and case management processes. Technology not only boosts efficiency but also enhances data security, which is crucial for client trust. Implementing the right financial software is essential for small law firms aiming to compete with larger firms without adding unnecessary overhead costs.


    A CPA firm can guide law firms in choosing software that aligns with their needs, integrates with other tools, and provides robust data security features. These systems often come with built-in features for financial reporting, trust accounting, and compliance, helping law firms manage finances with greater accuracy and less manual intervention.


  9. Strategic Financial Advisory


    Beyond day-to-day accounting, law firms benefit from strategic financial advisory services, which support long-term growth and stability. A financial advisor assists in setting profit-sharing structures, preparing for potential mergers or acquisitions, and aligning financial practices with the firm’s broader goals.


    For small law firms, strategic advisory is often seen as an unaffordable luxury, but access to such expertise is critical for growth. Partnering with a CPA firm offers law firms a cost-effective way to gain these insights, helping them to scale operations, plan for expansion, and make decisions that align with both short-term and long-term objectives.


A single dollar bill symbolizing the critical financial practices small law firms need, like trust accounting, billing accuracy, and strategic financial advisory, to improve cash flow and prevent compliance issues.

The Cost of Not Having These in Place


Without these financial systems, law firms risk the following:


  • Lost Income: Inadequate billing and poor collections mean money is left on the table.

  • No Track of Money: Lack of accurate tracking makes it hard to understand the firm’s financial health.

  • Cash Flow Challenges: Unstable cash flow can jeopardize operations.

  • Compliance Failings: Non-compliance risks costly penalties and could threaten the firm’s license to operate.

  • Increased Stress: Financial uncertainties and potential cash shortages add to daily stress.

  • Lost Sleep: Financial worries often lead to sleepless nights for partners and management.

  • Lost Wealth: Poor tax planning and financial mismanagement cut into profits.

  • Operational Inefficiencies: Lacking proper systems leads to wasted time and resources.

  • Reputational Damage: Financial missteps can harm your firm’s reputation and client trust.


Why Most Small Law Firms Lack Proper Finance Systems


For law firms with fewer than 25 employees, putting this comprehensive finance structure in place requires a team: a bookkeeper, an accountant, a CPA, a compliance manager, a part-time CFO, a tax accountant, and a financial planner. Small firms often can't afford or find the right mix of talent, so they simply “make do.” But over time, these gaps lead to bigger financial and compliance problems.


Our Solution: Full-Service Financial Support for Law Firms


We offer a streamlined model that provides everything your firm needs—bookkeeping, accounting, CPA services, compliance management, CFO-level insights, tax planning, and financial advising—all in one simple service. With our solution, you have just one point of contact and the same financial support big law firms can afford, but at a fraction of the cost.


Ready to take control of your firm’s finances and regain your peace of mind?

Contact us today to see how we can help your law firm achieve financial stability and success.



A professional analyzing financial data on a computer, highlighting the importance of specialized financial support, like tax planning and cash flow management, to help small law firms maintain stability without an in-house CFO and to contact Counsel CPAs for help and guidance for tax and financial services for Law Firms.



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