We are receiving many more inquiries from firms looking to overhaul and redesign their partner compensation systems. Based upon these inquiries we believe that many firms are expecting miracles from their compensation systems and are asking and expecting more than they will ever be able to accomplish. Here are our thoughts on the topic.

Many years ago when I worked in a law firm the managing partner came to me and said - "are you free for lunch today - I want us to interview a lawyer that is interested in a position with our firm." I responded - "I didn't know we were looking to hire anyone." The managing partner responded "I am always looking for good talent and am willing to made an investment when I see quality talent - my motto is hire and retain quality talent - and market harder if we must to generate the revenue to pay the overhead - the money will come."

The moral of the story - you are competing in two markets - a market for clients and a market for legal talent - and it takes both to be successful. Sometimes a talent opportunity presents itself before workload levels appear to justify the investment and you must take a risk.

Question I do not have an accounting background and I have questions about our financial statements:

1. Why does the income statement not reflect all disbursements for the month? For example it does not reflect partner draws, client advances, or payments on the firm line of credit?
2. I have only been receiving the income statement. Should I been receiving other financial statements?

Answer: Getting a handle on the financial aspects of your firm will be your most important role - whether you have a bookkeeper or not.

You should also be receiving a balance sheet which reflects the firm's financial position as of a particular point in time. The income statement only reflects income and expense accounts and reports net income for a reported period of time. The income statement is different that a statement of cash flows which reports cash flows during the period. Partner draws, client advances, and line of credit payments are not expense accounts (they are asset, liability, and capital accounts respectively). Consequently, they will not be reported on the income statement. These accounts will be reported on the balance sheet.

Other than reviewing the balance sheet for activity in accounts such as discussed above the balance sheet (without adjustment) has limited use. It's purpose is to reflect the firm's financial position as of a point in time. However, since most law firms maintain their books on a cash basis - the largest assets - accounts receivable and unbilled work in process - are not reflected. Accounts payable and other such liabilities are not reflected either. If you are interested in a true picture of the firm's financial position as of a point in time you must take these items into consideration.

Another report that you may wish to receive is a statement of cash flows. This statement will report actual flows of all cash - in and out of the firm - regardless of account type.

There are additional schedules and reports that you should receive as well. Suggest you review your system and create a report distribution policy as to which reports you and the other partners receive each month.

John Olmstead will faciliating a five hour pre-conference boot camp program entitled - Strategic Planning Hands-On Workshop: A Roadmap for Changing Your Future & Taking Your Practice to the Next Level on June 2, 2011 at French Lick, Indiana. The program will be part of the Indiana State Bar Assn Solo Small Firm Conference. Click here for the Indiana State Bar Assn website and additional details.

We will be hosting a booth again this year at the Missouri Bar Association's Solo and Small Firm Conference on June 9-11th at Lake of the Ozarks. If you are attending the conference drop by our booth and visit with us.