Most law firms don’t have a “revenue” problem. They have a clarity problem. Partners can feel busy, collections can look decent, and the bank balance can still swing hard because the numbers aren’t structured to answer the real questions.
At Bennett Financials, I see this exact pattern in US-based businesses where CFO-level visibility changes the quality of decisions.
The fix is not “more reports.” It’s law firm bookkeeping that cleanly connects to tax planning and CFO-level decision support—so you can control cash, partner distributions, hiring, and tax outcomes before the year is already over.
Key Takeaways
When bookkeeping, tax planning, and CFO strategy operate as one system, you stop running the firm on instincts and start running it on thresholds. The goal is simple: predictable cash, cleaner partner decisions, and fewer tax surprises. A consistent cadence beats a perfect spreadsheet every time.
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Law firm bookkeeping is the process of recording and organizing income, expenses, and balance sheet items so partners can see profitability, cash timing, and tax exposure clearly. It’s for US-based law firms that want stable partner distributions and confident hiring decisions without financial surprises. Track collections, realization, AR aging, WIP aging, labor cost, overhead per attorney, and cash runway. Review cash and receivables weekly, close the books monthly, and run tax planning and firm-level decisions quarterly.
Best Practice Summary
- Separate operating cash from client funds and keep trust activity clean and visible.
- Structure revenue and costs so you can see profit by practice area and timekeeper level.
- Close monthly within a consistent window so tax planning uses real year-to-date numbers.
- Run a weekly cash + AR cadence so collections don’t become a month-end surprise.
- Set partner distribution and hiring guardrails tied to forecasted cash, not optimism.
- Make tax planning a quarterly operating checkpoint, not a springtime scramble.
Terminology
Trust accounting: Tracking client funds held in trust separately from firm operating funds.
Operating account: The firm’s money used for payroll, overhead, and distributions.
AR (accounts receivable): Invoiced work that hasn’t been collected yet.
WIP (work in progress): Unbilled time and costs sitting in the system.
Realization: How much worked time becomes billed revenue (billing realization) and how much billed revenue becomes collected cash (collection realization).
Lockup: Cash trapped between work performed and cash received (WIP + AR timing).
Partner distributions: Profit payouts to partners/owners, ideally planned from cash forecasts.
Runway: How long the firm can operate with current cash if inflows slow.
What should law firm bookkeeping include?
It should include a clean operating P&L, a balance sheet you can trust, and visibility into the work-to-cash chain (WIP → AR → collections). The standard I use is simple: your books should let you explain why profit and cash changed this month in one sentence.
At a minimum, your bookkeeping system should consistently produce:
- P&L that separates core revenue from pass-through items
- Direct labor and delivery costs separated from overhead
- Balance sheet with cash, AR, WIP/deferred items, and liabilities kept current
- Weekly snapshot of AR and collections activity
- Notes on the 3–5 drivers that moved performance (not a novel)
If the numbers can’t answer “what changed and why,” you don’t have clarity—you have data.
law firm bookkeeping and tax planning: how to connect them without chaos
Your tax plan is only as good as your bookkeeping structure and monthly close cadence. If the books are late, tax planning becomes reactive. If the books are messy, tax planning becomes guesswork.
The clean way to connect them:
- Bookkeeping closes the month and produces reliable year-to-date profit.
- Tax planning uses that year-to-date profit and the forward hiring/spend plan to project outcomes.
- CFO strategy turns the projection into decisions: distributions, hiring timing, reinvestment priorities, and cash protection.
If you want this installed as an operating rhythm instead of a one-time “cleanup,” this is exactly what we build through our outsourced CFO leadership—clean books, proactive planning, and decision guardrails.
Tax note: This is general education, not tax advice. Your CPA should confirm strategies, elections, and filing implications for your specific firm.
How do law firms avoid tax surprises?
You avoid tax surprises by closing monthly, projecting quarterly, and reserving cash intentionally—before the year ends. Most “surprises” happen because partners treat taxes as a spring event, not a year-round variable.
A practical quarterly rhythm looks like this:
- Close books through the most recent month (reconciled, not “rough”)
- Project full-year profit using the current run-rate and planned changes
- Update estimated tax expectations and reserve cash accordingly
- Decide early on timing moves (bonuses, distributions, investments) while you still have levers
If you need an authoritative baseline on estimated taxes, the IRS overview is a solid reference: Estimated taxes
trust accounting for law firms: what partners must get right
Trust accounting must be separated, consistent, and visible. It’s not a “bookkeeping preference.” It’s part of operating responsibly.
The operational goal is straightforward:
- Client funds stay in trust.
- Firm funds stay in operating.
- Transfers are documented and matched to the underlying matter and authorization.
From a CFO lens, trust clarity protects the firm from two predictable problems:
- Decision errors (“we have cash” when the cash isn’t actually yours to use)
- Stress errors (rushing distributions or spending because the balance looks high)
If you want calm decisions, you need clean separation and a simple reporting view that shows operating cash and trust balances clearly.
What reports should law firm partners review monthly?
Partners should review a small set of decision-grade reports monthly, not a binder of accounting output. The right package answers three questions: Are we profitable? Are we collecting? Are we protected on cash?
Here’s a clean monthly package that works:
- P&L with clear revenue and cost structure
- Balance sheet with AR and any trust-related visibility where appropriate
- AR aging summary with actions and owners
- WIP aging summary (if you bill time-based work)
- Cash summary and runway estimate
- Forecast versus actual (what assumptions were wrong and why)
If the firm reviews these consistently, you stop discovering problems after they’ve already hit partner draws.
cash flow forecasting for law firms: the weekly cadence that prevents panic
A 13-week cash forecast is the simplest tool that prevents “we’re fine” turning into “why are we tight?” It forces the firm to look at cash timing, not just profitability.
A workable 13-week forecast includes:
Cash inflows
- Expected collections by week (based on AR reality, not hope)
- Retainer/recurring receipts (if applicable)
- New matter cash only when engagement terms and timing are real
Cash outflows
- Payroll, benefits, and contractor payments
- Rent, insurance, and recurring overhead
- Technology and vendor payments
- Taxes and debt obligations (if any)
- Planned partner distributions
Two rules make it useful:
- Update weekly on the same day
- Track variance (forecast vs actual) so the model improves over time
This is where CFO strategy matters: it turns forecasting into thresholds for hiring, distributions, and spend.
How should law firms categorize expenses for tax planning?
Categorize expenses in a way that is both accurate and decision-useful: it should reflect how the firm actually operates. If categories are too broad, you can’t plan. If they’re too detailed, no one maintains them.
A clean approach:
- Separate direct delivery costs from overhead
- Separate owner/partner items cleanly (comp, distributions, benefits where applicable)
- Keep professional fees, marketing, technology, occupancy, and payroll structured consistently
- Track one-time items explicitly so they don’t distort the run-rate
If you want an authoritative starting point on recordkeeping expectations for small businesses, IRS guidance on records is a helpful anchor: IRS recordkeeping
What KPIs should a law firm CFO track?
Track KPIs that explain margin, cash timing, and capacity. You don’t need 40 metrics. You need the ones that drive decisions in the next 30–90 days.
Here’s a practical KPI set I like for law firms:
| KPI | What it tells you | Decision it drives | Cadence |
|---|---|---|---|
| Billing realization | Are write-downs eroding revenue? | Pricing rules, scope control | Monthly |
| Collection realization | Are invoices turning into cash? | Terms, collections process | Monthly |
| WIP aging | Is work sitting unbilled? | Billing cadence enforcement | Weekly/Monthly |
| AR days + aging | Is cash trapped? | Collections ownership + escalation | Weekly |
| Labor % of revenue | Is comp scaling responsibly? | Hiring and bonus timing | Monthly |
| Overhead per attorney | Is overhead creeping? | Vendor discipline, role design | Monthly |
| Cash runway | How much time you have | Distribution and spend guardrails | Weekly |
| Forecast accuracy | Are plans getting better? | Confidence to scale | Monthly |
If your leadership meetings don’t reference these, you’re not managing the firm—you’re reviewing it.
Quick-Start Checklist
If you want bookkeeping, tax planning, and CFO strategy working together within 30 days, do this in order:
- Confirm operating cash and any client/trust funds are clearly separated and reported.
- Reconcile bank and credit accounts monthly (no skipped months).
- Clean up your revenue and cost structure so delivery costs and overhead are distinct.
- Build a weekly AR cadence with owners and next actions for past-due balances.
- Create a 13-week cash forecast and update it weekly for four straight weeks.
- Publish a monthly partner package: P&L, balance sheet, AR/WIP aging, cash summary, KPI page.
- Add a quarterly tax planning checkpoint using year-to-date actuals and the forward plan.
Consistency is the win. Not perfection.
Case Study: Example from our work with a legal business
Virtual Counsel had strong demand, but expenses were growing faster than revenue, which threatened profitability and long-term stability. Bennett started with a deep financial review to identify the root cause of slipping profitability and to pinpoint the highest-leverage fixes.
They then implemented a structured, tailored asset-based tax plan aligned to the business’s profile and stayed involved with ongoing CFO-level support so growth stayed sustainable. In the case study, Virtual Counsel reported 94% revenue growth in 2022, a 401% profit increase, and a $87,966 tax liability legally converted into a refund.
The law firm lesson is the same: when books, tax planning, and CFO accountability operate together, growth stops feeling like a cash gamble.
When to hire a fractional CFO for law firms
Hire fractional CFO / outsourced CFO leadership when the firm has outgrown “the books are closed” and needs decision-grade visibility. The test isn’t complexity. The test is whether your decisions have consequences you can’t afford to guess on.
Here are the cues I trust:
- Partner distributions feel reactive because cash timing is unpredictable.
- You can’t clearly explain profit by practice area or by timekeeper level.
- AR and WIP aging persist because there’s no weekly accountability rhythm.
- Hiring decisions happen due to stress, not thresholds.
- Taxes feel like a surprise number you learn after the year ends.
If that’s where you are, this is exactly what our outsourced CFO leadership is designed to fix: install cadence, create thresholds, and turn finance into decisions.
The Bottom Line
- Build law firm bookkeeping that cleanly supports profitability and cash timing visibility.
- Separate operating funds from client/trust funds and keep reporting clear.
- Close monthly on schedule so quarterly tax planning uses real data.
- Run a weekly AR and cash cadence so collections and distributions aren’t emotional.
- Use CFO thresholds for hiring, partner distributions, and reinvestment decisions.
Book a CFO consult with Bennett Financials if you want a clean partner package, a weekly cash forecast, and a quarterly tax planning cadence that makes decisions easier.
