Deep Dive into Key Financial Statements

Welcome to Accountants LawPod, where accounting professionals and law firms converge, hosted by Lynda Artesani, Sarah Prevost, and Steven Libhart.

Welcome back to the podcast, everyone, and it's starting to turn into spring, which means Steve is starting to spring off to his adventures, right, Steve?

I am. I'm leaving in the Airstream tomorrow.

I can't wait, and I'll be working out of the Airstream for the next week, so Which is what's cool about being a cloud accountant, if you want to call it that, right? Because you can work from anywhere.

Cloud, anything. I don't know what you call it.

You have a pretty good setup with your internet too, right? Because you—

I use Starlink. Yeah. So I've got 2 television sets in the Airstream and my computers and everything. And, you know, it's just, it's all hooked up. I love it.

Where are you headed to this year?

Tomorrow's rally is an annual rally that the club has. Um, and it's at the Yogi Bear Jellystone Park.

I love it.

Which is only 40 minutes from my house, so it's not a very big trip to get there and all that sort of stuff.

And Boo Boo too.

And actually, I'm going to be on Boo Boo Lane.

Oh my God, that's awesome.

You got to take a photo of that.

Yeah, I have to pull up the map of this place. It's really cool.

There's like—

Yeah, you need a photo of Boo Boo Lane.

Yeah, yeah, yeah. So do you, out of curiosity, do you use one of your TVs as a second monitor?

I could, I guess.

Yeah, you could.

I guess I could. Yeah. No, I just, I like having a TV in bed and a TV out in the living room.

Oh, yeah. I was just thinking, I'm like, oh, because I've used our massive one in our tiny living room. I'm like, oh, I could see without my glasses.

Of course you have, Sarah.

I should figure out how to cast to that extra TV because it's articulating arms.

It's really easy. Well, it's easy, but it's funny. I have a TV in my bedroom and it never gets turned on. I think it's been turned on once.

See, I was raised where my mom and dad fed us dinner, plopped us down in front of the TV, and then we'd fall asleep. And so I was raised that way. And so I like to have the TV on when I go to sleep, and then I always turn it off, but it just makes me fall asleep at night.

Yeah. Oh, I like quiet.

So I have no idea how we deep dive into key— I know, how are we gonna switch?

Wait, that's my job. We're gonna talk about deep diving, although you got a great voice today on Power Hour. She said I sound better, but I still have a little bit of laryngitis. But we're going to deep dive into key financial statements today. And Sarah, I'm going to toss it to you. What do you think the top key financial statements are? We know what the basic ones are.

Basic ones are obviously our standard income statement, profit and loss, balance sheet, cash flow if people understand it. The cash flow statement is a confusing one for folks. I think Our profession that we, we service to is their accounts receivable report is really critical to them. But we were talking prior to recording and Steve had some really— you had a good take on, on the way that you view it because it depends on the type of client and their interest, which I feel like is sort of what happens with key financial statements. You get a dabble of what Like, I'll call it the salt and pepper. You get your reports monthly, right? And then you decide what you're going to focus on, whether it be marketing or accounts receivable or productivity. And then you start down the road of, of your key metrics that you want to focus in on. So, but Steve, talk to us about the ones that you were just sort of highlighting.

Okay. Um, and also, if we could come back to the cash flow statement and talk about that, because I'd like to get some of your tips and tricks on How you explain it to people. So, well, what I was talking about before we came into the recording today was in our arena, it's, it's, it depends on the size of the client and the type of law they're practicing and, and all of that, how you tailor the reports for them, the financial reports. And I was using an example of one of our larger clients really has embraced KPIs and class accounting reports. And so we break it down by their employees as one group and their computer vendors as another group and You know, we have all these different groups broken down and then we, we create those reports based on those groups every month so they can really hone in on what's going on. And then we also have a report that we create that is year to date, that is all the income and expense categories and percentages to each other.

Hmm.

And that drives it into KPIs. And they're also— I'm so proud of them. They've really started embracing the Clio reports like the realization reports and all that, the AR reports. And so we're having these conversations now about key KPIs that they're interested in and what it means for their company. And I'm just— I love working with these guys because they care about that. So that's cool. But that's on one end of the spectrum. The other end is you might have a solo attorney who's brand new, who doesn't have a clue about their numbers.

Yeah.

And, you know, they're struggling to build their firm and practice law and figure out what they're doing. And so you kind of have to lead them along with little chunks at a time, I think. Um, because if you bury them with a bunch of reports all at once, they're going to just glaze over and not pay attention and be afraid of it. So—

So your client actually goes into Clio and pulls reports up, or do you send him the Clio reports?

They've, they've been pulling them. They've had their office manager pulling them, and she copied me in on it last week, and I was like, yes!

Like, you saved them preset ones too, or—

Um, I don't know. I just saw 3 reports that she sent through. One was realization, one was AR, and one was—

Wow, that's interesting. I've never had that happen, Sarah. I don't know if we have, or we won't know it.

Oh, I— it's a good question, Linda. I actually had this conversation about utilization and originating with the firm.

Originating is another one. Yeah, yeah, yeah.

And it was an eye-opener, and I showed how you go in and you do the preset, like you're saying, Linda, inside the program. I think the thing that was most alarming is like, understanding as a firm owner how much of an impact you make on that report and the idea of tracking it, which then plays back to what you're saying, Steve. And sometimes that's the thing about solos. You have no idea what you want to track to, just like us in our business. We have no idea what we're going to start off with. We're just building a company. Or, you know, we've been a solo for a while. Why is that important? But then if you see market loss and referral income and All kinds of things. You then you go to your numbers and start wondering why.

Like, but you know, Clio has that great dashboard too. Do you ever direct them to the dashboard to show them like you can see kind of where they're at on the dashboard or?

Yeah. Yeah.

I feel like, don't you feel like, Lynda, I've had a few people just show us that too and say, hey, I go over here and I think they don't know how to understand it because it's the same thing.

In fact, I almost put that in the Power Hour that we just did.

Yeah.

It's the same thing of, yeah, we've had clients call us going, your reports are wrong. I see this on my QuickBooks screen, the widgets in there. You know, the widgets are all set to accrual by default, and we don't really play around with them much. We don't use them because they don't really, uh, most clients, we try to keep them out of QuickBooks. But once in a while we'll get a client and they're like yelling at us that the reports we sent are wrong instead of looking at it that maybe QuickBooks is wrong. They're looking at it, and it's not that it's wrong, it's just not set up to give you the same data. And if you're looking at accrual as opposed to cash basis, it's totally different on a lot of files. So I think sometimes the key part of these key financial statements is to have the person explain it, because I know all 3 of us have had clients that have coaches that ask for a lot of reports, and then they're not understanding why they're getting asked for the reports.

Right.

They don't understand the reports. That's not what they do. It's not a diss on attorneys. Attorneys know what they know, and It's a chance for us to educate them, but also, you don't— like you said, Steve, not overwhelm them. You don't want to tell them— we had a client, I forgot, it was like 23 reports that they were asked for in the coaching program they were in. And I'm like, every month it was a heavy drain on us. And I'm like, why are they asking for this?

What are you doing with them?

And it was a lot of redundancy. So I was like, why? And it was, I don't know, that's what the coach wanted. And it's like, see, you need to ask those questions because It might be just to justify the big high price tag. And I think a lot of times the client doesn't know that they've got a great resource right here that knows just as much. You can call yourself a coach and have no training whatsoever, and you get paid more. And that baffles me. I've seen that conversation kind of float through my council, accountant council, uh, just the, the one that's with, uh, just a bunch of us that were on, on the—

Yeah.

Into a council, and we've had that conversation about call yourself a coach. You can now charge three thousand dollars instead of you know three hundred dollars an hour. It's like how did that happen? But it happens. I think some coaches give a lot of value, but sometimes we see it and we're like wow, what are they getting out of this? They have to bring the reports. Everything's a rush. I mean half the time we don't even have with the clients an opportunity to meet with them to go over their financials. Sometimes we gotta throw it into a you know Zoom a Loom call or Awesome screenshot in our case, because we're— their time is valuable. They're in court, they don't have time, they're looking at it after hours. And at least this way we can help them to understand what they're looking at and help them if you sit down with them with growth and all that. But then if you have a client that's a write-up client, they're kind of on their own because they're not paying for the service to have us help them. But then they'll turn around and spend $3,000 a month on a coach. So it's kind of baffling.

I have a question because— and I think this is more to the audience. Are you working for yourself? Are you working to what the coach is telling you? Because to be honest with you, this came up in a conversation where I— we were— Lynda and I were in a meeting and it was great. And we were asked a few questions and I, my back of my brain, I'm like, who's working for who here?

Yeah.

I own a business because I own a business for my reasons. And, and of course that individual shared that same Like, whoa, those are not things that I want to be doing. I don't want to be questioned in this way. And I feel like that's the dangerous slope here is like you're saying, Linda, here's all your reports. And if you cannot understand the driver behind that, why do we have this coach helping us if we're not— it's an investment. I feel like it's true investment. If you're going to hire a coach, spend the time for the investment.

Mm-hmm.

Like you're doing, Steve.

Yeah.

We're really coaching this firm in their, I don't know, infancy or their middle, wherever they are. And you're saying, look, these are ways that you can track these. They may not be all exactly right. They may not be all perfect, but where are your interests in driving this? And I feel the same way as a business owner with Lynda and I. It's like, what software will work better for us to give us the metrics we're looking for to enhance the quality of life for our turn— our our team and our firm in general.

So, well, I like to take the financial reports, especially with the newbie attorneys, and liken it to cooking school. When you go, when you go to cooking school, they're going to teach you— what are they, what are they going to teach you first? How to use a knife so that you don't cut yourself. And then they're going to teach you how to cut tomatoes, and then they're going to teach you how to cut carrots, and they're just going to work their way up, and pretty soon you're making mayonnaise. And then you're making a soup and then you're making— and it's all these layers that go in and it takes time with attorneys.

Yeah.

Working with attorneys to get those layers in the right place so that they understand.

Yeah.

And you continue to coach them on, we're going to be coming to KPIs one day. So, I want you to think of just a couple. I don't want to know what they are today, but I'm going to come to you at a certain point. and say you're ready for KPIs. And I did that with a client last month. I said, guess what? You're there. They've been in business for a little over a year. They've landed on their chart of accounts finally and their class accounts and all that stuff. And we finally have information that means something. And now they're embracing their KPIs and their reports out of Clio. And I'm, I'm like feeling this major victory because we layered it in.

Yeah, yeah.

You know, we didn't overwhelm them with 30 reports and then they leave. It's just like anything else, right? When you get all this information at you, you— it's hard for the brain to process. So you really need to step them through the journey and finesse the journey. But I think if you're an accountant or a bookkeeper listening to this and you're interested in opening that door because you've got a wealth of knowledge in your head and working with a client, you want to take the small steps. You want to sit with them and what are their goals, understand them at a level that you might not have initially, like have the conversations about that. Sarah and I, we've got some larger clients and we've partnered with another firm so that they can Do that work. But the big catch with us partnering and really working was a big— and it worked out well because of who we picked— is that we're involved in the conversations. We're part of the conversations. In fact, Sarah had to do the homework. So, I mean, those are the conversations because we need to, we need to know what's going on. We can't be sitting siloed over here and don't even know that the client's trying to work through their marketing and they're trying to go through the budget. Because sometimes in a conversation like that, In a coaching session, they may be telling you you need to spend this much money and do these ads and all that. And then we might sit back going, how's that being tracked in as the calls come through?

Yeah.

Who's tracking that so we know where it's working? Because if you're putting big billboards up because you're a PI attorney, and then you're doing big Facebook ads and clients are coming in the door, great. How are they coming in the door? Where are they— where are they coming from? And then even more so important, they came in the door, are they becoming a client? And how much did it cost to bring that client in? And where did that come from? That's all stuff that we do. And if you don't have us in the conversation, how is that ever going to be tracked? It's not. It's not. You're going to look at a total budget spend on advertising and not have the details behind it. And I think that's important when you're looking at the key financial statements. And yes, we're talking balance sheet. I mean, important, right? Balance sheet, super important. Most attorneys don't even know what the heck that is when you bring it up in front of them and say, Look, here's your balance sheet. I blew it out by all dates, sorted it by year, and your balances don't align. What? They don't even know that they're out of balance in trust. So, you start as rudimentary— rudimentarily as there and then go into the profit and loss, which their eyes go right to the bottom of.

Right to the bottom.

Does that match my checkbook? You know, how come if I have this much money here, how come my checkbook doesn't have that much money? Then you got to get into the balance sheet again because you put money on a mortgage or whatever you spent it on, a loan. So yeah, I mean, we've seen it. Sarah and I had our eyes open the other day. We started pulling up some of the loans that some of our clients have and looking at the percentage, and the QuickBooks loan was 32.99%.

Of their—

that's how much— that's their interest that they're paying on that loan.

That's the interest, Steve, on a QuickBooks easy peasy click, click, click, you got the loan. Ouch.

What's fascinating to me too, and going back to what you're saying, Stephen, exactly what you've just hinted on, because we had this conversation, is I want you to walk me through how you charge your clients.

What's the workflow that causes all this?

Yeah, because you know what, what I found out was, hey, you have, let's say, $200,000 sitting on your balance sheet of an asset because you've got all these— let's, for example, let's just do all of your advanced client costs. So all of the costs you're incurring on behalf of the client prior to billing. Well, first I want you to tell me, how do you bill your clients? Because I need to determine, is that a valid asset? Because it's not an asset. It's probably an expense.

This is what they'll tell Sarah. Well, that can't be right. It's like, well, it's here. And then we dig deeper into it and we see there was some tax person's journal entry in there that they threw in and the client doesn't even know it's there. There's a reversal somewhere to pull it out sometimes. And we start to dig into the numbers and we're like, what is They have no clue.

Not a clue.

No clue. They can't answer that question. And then you have to help them. Yeah. Sometimes you just have to like draw the line in the sand and say, okay, going forward, this is what we're going to do. Yeah. This is the past. We have to look at the past as the past. We have to make adjustments. And we've, we've had it where we do a new file for somebody and we're looking at the balances in the old QuickBooks and we're saying, these don't even match the bank. And you thought they did because somebody reconciled into the reconciliation discrepancy account that favors QuickBooks, and it just sits way down there. You don't even really notice it. And that's not a good thing, you know.

And it just goes back to— it's hiring a firm like us, like any of us, having someone in that has— we're business owners, we have the understanding and knowledge. So, you know, excluding us from conversations that are— have, you know, a fractional CFO if you want to hire that, or another coach, that's fine. But those conversations should be had with us in the sense of let's make sure we're understanding what needs to be measured, what needs to be totally— like, we might have to change the way that we're tracking something in the books.

Right.

We found that out recently with something and I was like, well, that's not how I built that COA, that chart of accounts for regular terminology. Basically your Bible to your ledger system, right? And, and the class coding, to your point, Steve, it's—

Yeah, or location tracking. Sorry, we find that the client is working multiple states and we need to track that because that has an effect on the revenue. They're being taxed and some of those things, sometimes they just don't share that with us. So the fact that you clicked on the QuickBooks loan, we need to know that because we don't want to see it where the payment's coming out because it's also hidden in the QuickBooks checking account. Which they make you open when you open up that loan. So that money comes out of that account and it's hidden. It's not like where you expect to see it. It's like hidden and way down on the toolbar on the left.

It's very—

tip to Intuit right now, please fix this because—

Yeah, don't leave it there. It's so crazy to me that when we ever— I, Sarah, I almost fell off my chair when I saw that interest rate. I was like, oh my God, because it didn't make sense when somebody's borrowing $2,000. Why is the percentage of interest like $40 or whatever it was? And I was like, this— and then we started digging because there's no statement. It just shows the breakout of the payment and the principal. And I'm like, look at this. I said, Sarah, I shared the screen. I go, look at this. Look at this. She's like, oh my God, I never knew. I told her, I said, that's like Uncle Nunzio's coming to town with my money. I'm going to chop off your head because that rate is insane.

Well, Steve's going to have a rally. With Airbnb or air—

I just, I was shocked.

I want to change the name of your Airstream every time. He's going to have a rally of all of these people, like, like big display, no high interest rates on this type of—

Uncle Nunzio.

I had to do the tax return for the nonprofit Airstream Club yesterday, and the IRS instructions on the Paperwork Reduction Act after that, 49 pages long.

Doesn't that sound so governmenty?

Like, oh my gosh.

Yeah, yeah.

But I, I do feel—

nightmare.

Yeah, I, I do. I totally— I think going back to what you were saying, Steve, is, is the layers. Just like you said, you start— the preciseness is learning how to cut with the knife and figure out what are the key important pieces, and then getting into the To deep dive into these metrics in this key financial aspect. And Lynda, you're saying, like, understand your reports. Don't feel overwhelmed. If we're going to send you reports and we do a meeting, and maybe that's just a call to action internally, it's like, what we're sending out to our clients are just checking in, getting a, hey, did you notice this? I changed the way I send a certain report. profit and loss right now because I realized in planning the owner's salaries out for these 2 partners was like, oh, we're at a deficit. They look at a month and they're looking at their bank balance to Lynda's point and they're like, oh, okay. And I'm looking at the historical and when I got the, oh, we're actually making that much. Oh my gosh. I'm like, oh my gosh, I'm so excited for you. But yet I realized, oh, you're not planning your salaries correctly as an S corp.

No. That's the thing. They didn't check and pay the estimated taxes, and that can be a big ouch at the end of the year.

Yeah.

So I think too, when you're working with attorneys and you're talking about key financial statements, and if you just start— if you're working with them as a new bookkeeper or seasoned one, you're working with lawyers, you're just starting out, they're highly intelligent people. That's one of the checkboxes they checked off for me when I was looking to niche in the, in the, in the area, that lawyers were very intelligent.

Yeah.

And they care.

And they care. And they care.

They don't really know this stuff. They're not taught it in school. So it's— you don't want to overwhelm them, but they want to be educated in it. They want to understand their stuff. And that's a big opening of the door for us to step into that place to explain it to them. And you want to do it in a way that— I mean, I don't know how to stand in front of a judge and try a case.

No way.

I could never do that. So you want them to know that, like, this is what I've learned over all these years of doing this work. And I see all these— you know, Sarah and I I see all these files, and we see what works and what doesn't work. And let them know that, that you're— you've got their back and that you're here to explain things so they understand. And if they do have a coach, take that opportunity to sit with them and let them understand their financials. They're going to be so pleased with you for that, because when they sit with their coach and the coach starts asking them questions, they're going to have the answers. And they love to have the answers. As you know, with attorneys, they love having the answers. So I find that just— we used to like just write like a little blurb, like, if we— this is what we're seeing, because usually it's a big hurry to get those, those, uh, reports out for the, for the coach. And just write a little, this is what I see, and a little overview for them. They're going to love that because when they sit with the coach, they're going to say, well, this is the reason why this happened. Oh, this was 2 bills that landed in 1 month that it should have been, you know, they'll have the answers for that because that's basically all the coach does is it looks at the records. They look at the records over the month, over month, and If 2 bills ended up getting posted because they ended up in one month or got paid because a lawyer paid it, paid it April 1st and April 30th, and it's sitting in April's books doubled up, but then there'll be nothing in May. They have an answer for it. And I think that's important too, because that's one of the places that it's a great opportunity. Make sure you're getting paid for it though. You got to get paid for that kind of work. It's extra. It's not just head down, don't talk to the client kind of work. This is work you should be paid for.

I like that. And, you know, one of the two things— one is the biggest reward after all these layers are in place and they take time to put in place and you've got their attention. The biggest reward is when they come back to you and say, oh, I just noticed this on my books.

Yeah.

That's so cool. Number 2, for bookkeepers and accountants that are putting these things together, I like to always recommend stop and look at the results of what you just did.

Look before you send.

Look before you send. But throughout the month, it doesn't hurt to take just 5 minutes and look at month to date what you've done on the reports, because it can, you know, when you're at the end of the month and you're reconciling everything and you're, you're trying to get it all put together and get it out to the clients, that's when things can kind of slip through the cracks. And it makes so much more sense to me to just stop and like take a look, even if it's 4 minutes, it doesn't matter. Just look at it and see what the results of your work are, and you're going to find things. You're human.

And use the management reports if you're using QuickBooks. It makes your reports look so much prettier. I know it's just a silly thing, but it does make your reports look better. We like to use that and then we'll make our 3-way and we actually, we have Mac, so it's really simple. You go into preview and just slide and drag that in so that the reporting looks really beautiful when you, you're giving them a product that says presented by the proper trust. It looks so much more professional than just kind of throwing the—

Xero has that too. Yeah, we were just looking at that. They have some other, but there are some, I mean, play around. But Steve, you, you, I want to ask you and Lynda a question. Do you find it exciting when you're looking at those reports and you're looking at month to date, year to date, and you see the progress or you see the red flag?

Yeah.

I mean, okay. I mean, it, to me, it's like, I, I'll write a private note and say, I just looked at these financials and I'm so proud, or I'm looking at these financials and I probably, it's probably feeling pretty scary right now. I'm looking at your bank balance because obviously bank balance is number one in their minds.

Yeah.

Um, and like you said, Lynda, highlight what we're seeing. Um, and, and that might lead to the conversation of, hey, you know, we, we can offer a little bit more in, in maybe a light coaching style, a light touch if you're not comfortable. If you are comfortable, obviously you're senior tenured. I mean, you have a pricing model for it, go for it. People don't know what they need until you start, like, the layer of peeling it back and offering it. And I feel like, Steve, your customer success story is a big accolade to you about that. I think it's pretty awesome.

And he gets so excited. You see how cute he is? Excited. That is—

He gets excited about it.

Which is what you want in your bookkeeper or accountant, right? You want excitement there. They love what they do.

Just like, oh, don't, don't just sit back and grind these numbers out and just, just rush through your day and put it together and then go away and never communicate with the client. Oh my gosh, there's so much.

That's why I'm not—

you might pick up fraud in a file. You might see that something's going on in that office. That's our job. If we see something seems out of place, start to ask the questions to find out if something was going on at the office. I mean, that's— it's not always Visible to us. But if you start to see changes in the numbers, something's up. You want to alert the client. And I think that's a very important part of what we are— we're being paid to do.

Well, I'm a huge proponent of—

I don't—

I'm not a big— I've never been about package pricing. I prefer custom tailored pricing to your needs. I don't need to sell you things that you don't need, right? I need to figure out what's in your file. Understand you as a person, you as a business, what brought you to your journey, what is it that you're looking for. And that's what we do. I mean, that's how we tailor our services. And, um, and then you get excited and you add on and you do more things. And yeah, it's, it's like a collection of great friends that you have, even though they're— you're not friends, you're professionals. But it is, and it's rewarding, uh, to serve very much.

When we have a client That's doing from here to here in businesses, we get just as excited.

Isn't that the coolest thing?

It's really fun.

Yeah.

And to help guide them through that, you know, that— because that's a challenge if you start to see it go, especially if you see it go way up. It's like, okay, we need to— like you're saying, fabulous, but we need to find out what just happened.

Yeah.

And how can we temper this so that you're not going down as fast as you went up?

You know what else is— I have conversations with with all the different clients too, and I say, in your niche of law, what are you seeing going on in the economy right now? What's happening over here? And what's happening— you know what? Yeah, have conversations with everybody. You're gathering all this information, and you can say, this is what I've learned out here. Yeah, this is what's happening with attorneys right now in, in our part of the country, or whatever, you know.

Yeah, so reports are, are The key deep dive into key financial reports are beyond just your standard metric. I mean, sometimes you're getting reports just to serve a loan, a need for something else, right? But there are other— tax return. But there are other things to your point, Steve, and we get excited about it. So just know we're kind of cheerleading back here behind the scenes, whether we talk to you every month or not.

Exactly.

That was a good conversation. Thank you.

Yeah, definitely. Thank you.

Yeah.

If you liked this episode, we'd love your support. Like, share, and leave us a review to help more listeners discover the show. And don't forget to subscribe on YouTube or wherever you get your favorite podcasts so you never miss an episode. Got a question or a topic you'd love us to cover? Reach out anytime at info@accountantslawpod.com or send us a message through our website at accountantslawpod.com. Sign up for our weekly Accountants Law Lab Mastermind sessions at accountantslawlab.com and connect with accounting Good conversation.

So I hope everybody enjoyed it, and we'll see you all next week.

Bye-bye.

Take care, everybody. Bye-bye.