Best Practice: Profit is up - why is partner compensation down?

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. We are a 7 attorney firm in Evansville, Indiana - four partners and three associates. I am one of the partners in the firm. Each month we are provided with a profit and loss statement, a billable hours report, fees received reports broken down by lawyer, and accounts receivable reports by lawyer. In 2014 our fee collections are up significantly over 2013 - our expenses are lower – profit is up - yet the money is not there for partner draws and we are having to draw less than we did in 2013? What do you think is happening?

A. A couple of reports that are missing from your list - a balance sheet and a statement of cash flows. Even if you are on cash-based accounting not all cash disbursements flow through the profit and loss statement which is the report that reports profit/loss. For example, the following types of cash disbursements flow through the balance sheet and are not considered expenses:

• Client advances - in law firms that capitalize them as an asset.
• Repayment of debt, credit lines, etc.
• Purchase of furniture and equipment when booked as a capital asset.
• Payment of payroll and other accrued taxes.
• Partner draws and distributions.
• Payment of accrued pension liabilities.

So while the profit and loss statement may be showing a higher level of profit there could have been other uses of cash that are not reflected on the profit and loss statement. Take a look at the balance sheet and the statement of cash flows reports.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.