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Here is the next in the Law Firm accounting series. If you missed the first two, you can view them here: Law Firm Accounting and the CPA You Hire For It and Hiring a CPA: Trust Accounting and IOLTA Compliance
One mistake I see law firms make is assuming revenue is revenue.
Here's a scenario to consider: two law firms each report $2 million in revenue. One is a contingency fee practice waiting on cases to settle. The other collects flat fees up front, before most of the work is done. The revenue line looks identical, and the two firms have almost nothing in common.
This is one of the reasons I think law firm owners should ask prospective CPAs about revenue timing. The answers tell you how well they understand the way law firms operate.
Contingency Fees: Waiting for Payday
Contingency fee practices often spend months or years working a case before collecting a dollar.
The work happens today, and the firm covers payroll and overhead the whole way through.
That timing gap creates unique challenges:
- Forecasting future cash flow
- Planning owner distributions
- Managing tax liabilities when a large settlement finally arrives
- Determining whether growth investments should be made before revenue is collected
Work and revenue are disconnected here, so a firm can be busier than it has ever been and still feel tight on cash.
Flat Fees: The Reverse Problem
Flat fee arrangements create the opposite situation. The cash comes in early and everyone likes logging into the bank account and seeing money, while the work it pays for gets delivered over the weeks or months that follow.
Strong accounting helps leadership understand:
- How much cash has been collected
- How much work remains outstanding
- Whether current staffing levels can support future obligations
- How much revenue is truly earned versus received
What to Listen For When You're Choosing a CPA
If I'm interviewing a CPA for a law firm, I don't want to hear a discussion limited to tax forms and bookkeeping entries. I'm looking for someone who understands that the real issue is how cash flow, profitability, taxes, and business operations interact.
The best advisors understand both sides of the equation. Tax returns and books record what happened; the hiring decisions, the new office, the partner distributions and the payroll run all depend on when the money is coming in.
A CPA who works with law firms can tell you where your revenue sits between earned and collected, and what that means for the next decision you're weighing.
If you've been following this series and have questions about your own firm, let's talk .
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