How to use financial software

Today's financial information systems and software can, and do, produce extremely detailed assessments of law firm financial performance and, in fact, may provide far more data than the typical attorney can assimilate intelligently.

The most practical approach to understanding your firm's finances is to use software that makes the assessment process virtually automatic and points out major variances for attention.

New tools from companies such as Juris and Redwood Analytics can replace static financial information with a continuous flow of automatically collected current operating metrics.

For example, these companies, among others, take the raw accounting information from individual firms and compile them with similar accounting information from other law firms. Then, the information is filtered into quartiles such that all law firms that participate can assess where they are relative to other firms.

For example, using key metrics, a law firm can review PPP (profit per partner), billing turnover rates (how frequent is the accounts receivable turning) and a host of other important financial measurement tools.

Financial software typically provides both accounting and disbursement modules (with the latter including firm expenses, client expenses, trust transactions, receipts from clients and disbursement write-offs) and can provide information according either to cash or accrual benchmarks.

Accrual records reflect income irrespective of whether cash has been collected, including billings, work in progress and accounts receivable. Cash accounting reflects only collections. Larger firms typically use accrual accounting, while smaller firms typically use cash accounting. Either way, financial software can provide useful assessments by showing, among other figures:

• actual performance compared to budget, including variance by amount and percentage;

• profit/loss, balance sheet, cash flow and special purpose statements;

• comparative statements that show changes from prior periods;

• reports on accounts receivable and payable at any time for the current period and compared to prior months and years.

The right financial measurement software can offer other benefits. For example, the software can provide the physical framework for a client to receive and monitor a budget. Reports can be provided as text documents or downloaded into spreadsheet format. Financial software can also support electronic invoicing of clients.

At the same time, it may also place small firms at a competitive disadvantage because they generally can't afford the cost of the software, the learning curve and the additional staff required to handle the electronic process.

Also, unless there is full uniformity between firm and client electronic systems, billing errors may be slow to correct.

The bottom line on financial software is that, like most technology innovations, it should be seen as a tool to make your practice more effective, but not a shortcut to relieve you of responsibility.