Preparing Law Firm Books for Year-End: A Step-By-Step Guide

How to prepare your law firm books for year end

It’s that time again!  Holidays, eggnog, sparkles, and fun.  Time to celebrate the end of one year (even if 2020 isn’t exactly worth celebrating) and set ourselves up for success in the next.

It also means tax time, 1099s, and other year-end financial must-dos are right around the corner.  If we set aside just a few minutes to organize our year-end now, we’ll find ourselves much less stressed and overwhelmed when that new year, and those tax deadlines, roll around.  So in this post, we’ve put together a practical, step-by-step guide to setting yourself and your firm up for a win this new year.

Let’s dive right in.  If you’d like more detail on these steps, check out Skepsis Tech’s year-end prep guide.

Step 1. Make time to work ON your firm, not just IN it.

Action item:  Open up your calendar.  Set aside one hour each week between now and January 31 to work on your firm’s financials.  Here are some pro tips from our lead Law Firm Financial Strategist:

  • If you have a lot to do, for example you haven’t done your reconciliations all year, you may need to set aside more time.  But at the very least, get that one hour on there so you’ll be that much farther along than you would have been.
  • Fridays are great for this.  By Friday, we’ve been working hard on legal issues all week, and our brains are giving us diminishing returns.  Turning to something different on a Friday afternoon, when it’s hard to focus on the legal work, gives you something fresh to work on.
  • It’s the holidays.  Give yourself and your firm the most precious gift of all – your time.  Because you deserve it.

Frolic and detour.  What do we mean by working ON your business instead of in it?  Working IN your business means delivering legal services to your clients.  Working ON your business means delivering services to yourself and your firm, whether that’s in the form of hiring and training, marketing, lead development, or – our personal favorite – financial planning.

Step 2. Complete IOLTA 3-Ways

Action item:  Make sure you have your IOLTA 3-Ways completed through November, and that your 3-Way reports are safely stored and backed up.  Pro tips:

  • If you’re not sure what an IOLTA 3-Way is, keep an eye on the Skepsis blog for an upcoming post that will boil it down to easy-to-follow, financial-mumbo-jumbo-free, concrete steps.
  • We do this step before diving into any work required for tax time because, if we don’t satisfy our ethical duties in RPC 1.15A and RPC 1.15B, we could find ourselves without a law firm to file taxes for.

Step 3.  Complete Operating Reconciliations

Action item:  Complete reconciliations of all your operating accounts through November.  This includes any and all checking, savings, credit card, investment, loan, line of credit, and other non-trust bank accounts you may have.   Pro tips:

  • Use real bookkeeping software.  Excel is not bookkeeping software, and by trying to make it work, you will lose far more valuable time than the money you save.  For example, Xero is only $32/month, and if your billable rate is $300/hr, that means you only have to bill an extra .1 hour each month to cover the cost; meanwhile, you’ll be saving far more of your own time than those six minutes, which is a win for both you and your firm.
  • If you haven’t done reconciliations for a while, it can be daunting.  Take it one account and one month at a time.  Or, consider investing in a bookkeeper for a one-time catch-up.
  • If you do think you’d like a bookkeeper’s help, book early.  They fill up QUICK in January!

Step 4.  Prepare Draft 1099s and Request W-9s

Action Item:  Most bookkeeping software has a 1099 area within the software that will help to manage your 1099s for you.  Go there, and set up your 1099 rules.  Now run a 1099 report to see who’s on your list.  Do you have a current W-9 from each of them?  If not, request one now.  Here’s what we’ve learned over the years about 1099s:

  • When you request a W-9 from your vendor, they generally have 30 days to get it back to you.  1099s are due to vendors and the IRS by January 31.  So, if you wait until January 2 to start requesting those W-9s, you’re likely to miss your deadline.
  • Not sure what rules to set up?  This article from the IRS will help you figure out who will need a 1099 so you can deduce what rules your firm might need in there.
  • Use a 3rd-party service, such as, to make sure your 1099s get issued and filed correctly.  These services are inexpensive, not more than a few dollars per 1099, and they save law firms significant time in printing and mailing forms, tracking returned mail, and IRS filings.

Step 5. Spring Cleaning

Action item: Review your account balances to make sure they’re accurate.  It’s not spring, but every year every firm ends up with “straggler transactions” – that is, transactions living somewhere they shouldn’t.  A quick review of your balances can help eliminate back-and-forth from your CPA at tax time.  Skepsis’ pro tips:

  • If you’re using QuickBooks, these often hide in the Undeposited Funds account.
  • Other accounts include Suspense, Opening Balance Equity, Adjustments, and Ask My CPA.  These are typically temporary accounts that ought to zero out by year-end.
  • Accounts Payable and Accounts Receivable are also common culprits here.  Make sure their balance reflects the actual amount due to and from the firm.

Step 6.  Remove Stale Transactions

Action Item: In your bookkeeping software, do a search for transactions that meet both of the following criteria: (1) not reconciled; and (2) on any date through the end of November.  Typically, at least a few transactions will show up, and you’ll need to figure out why these didn’t reconcile and fix them.  Some common things to look out for:

  • Checks you mailed out but that haven’t been cashed.  Contact the recipient and ask them to cash it; or, if they’ve lost it, stop payment on the lost check and issue a new one.
  • Some unreconciled transactions are actually duplicates of a reconciled transaction, so you can just delete that unreconciled duplicate.
  • Some transactions just occurred in the last few weeks, and you expect them to clear soon, so we’ll just leave those on the books.

Step 5. Review Draft Financial Statements.

Action item: Prepare a YTD (year-to-date) profit and loss statement and balance sheet.  Sit down and give the numbers a hard look – what’s surprising?  Pro tips:

  • A profit and loss statement is also referred to as a P&L, or an income statement.
  • When you see a number that surprises you, dig into the individual transactions.  Are they all categorized correctly?  Did you just spend more than you expected, so you’ll need to adjust your expectations for your spending in the coming year?
  • Prepare financial statements that show at least 3-6 months of data, with a YTD total at the end.  This will help you identify outliers that should be double-checked.  For example, maybe your typical spend on rent is $1000/month.  You see that in July, you spent $5,000.  Did you incur significant extra rent costs that you can better manage in the upcoming year, or is something categorized incorrectly?

Step 6.  Kick Back and Enjoy the Holidays

Action item: Did you really do each and every action item above?  Or did you just read about them?  I’ve tried reading about doing things before, and sadly (and much to my surprise sometimes), reading about them doesn’t actually get them done.  So, if there’s any step you haven’t completed above, go back and actually do it.  It may take time, but your firm is worth the time and attention.  Your clients are also worth it, because preparing now means you won’t have to blow them off in January because you’re buried in a mad scramble to close out 2020.  Once all the steps are done, here’s what our team at Skepsis recommends:

  • Make candied orange peels.  This is one of our favorite seasonal activities.  The candy is amazing, and the simple syrup byproduct is even better.  Here’s one recipe we love.
  • Book a day off.  It can be tough to get away from your business.  Once you’ve made the investment, get out your calendar, and mark yourself as OOO (that is, out of office) the entire day.  You’ve earned it.
  • Make a 2021 plan.  Now is the time to set yourself up for success in 2021.  What are your financial goals for the upcoming year?  What are your goals for number of hours worked next year?  How’s that different from last year?  Then, plot your course from A to B.

If you’d like more information about any of the steps above or other year-end matters, don’t hesitate to book a free discovery call with Skepsis Tech.  We’re passionate about helping attorneys improve their work/life balance while still reaching their financial goals.  2020 may have been nothing like any of us expected, but all it takes is a little planning and some simple steps to finish 2020 strong, and set yourself up for success in 20201.

Posted in Uncategorized.