Over the last 20 years I’ve worked with many law firms and advised managing partners in varying areas of finance and strategy. One similarity I’ve noted across most of my experiences is that the attorneys don’t have formal accounting and finance training. But then again, why would they? Even when relying on others, firm leaders cannot delegate financial responsibilities entirely. Not only are there non-delegable compliance requirements, especially around trust accounting, but as an owner/manager of the firm, these individuals are accountable to all stakeholders to ensure the firm remains healthy.

Following are six questions that managing partners, executive committees and the like should ask themselves to ensure they can get the most from their team to help successfully run the business.

1. What is the strategy? This doesn’t have to be an intricate plan. In fact, your strategy should be simple and easy to articulate. If not, you should aim to refine it as you go. When aligning your finance and accounting team members to this strategy there are a few components to consider. These should play a crucial role in guiding the actions and priorities of the entire finance and accounting department.

• Revenue approach – Setting billing rates, fee structures and pricing.

• Expense optimization – Spending approaches on items such as overhead and staffing structures, technology and infrastructure costs.

• Investments – Identifying and analyzing opportunities such as contingency matters, new practices, M&A and similar endeavors.

• Cash management and capitalization policy – Setting partner capital requirements, required cash reserves, working capital levels and owner distribution policies.

• Debt management – Determining how the firm will finance investments and operations with outside funds

• Risk management – Insurance levels, case selection and acceptable policies and procedures for legal delivery.

• Partner compensation structures – Designing, implementing, and maintaining a healthy system that motivates and rewards partners for their profitable contributions to the firm.

2. What does success look like? Once your goals and strategy have been formed, next is to get it down on paper, or better yet in excel where it can be better used as an asset to the firm in accomplishing its priorities. In fact, seeing and getting this on paper often leads to modifying or changing the initial strategy, leading to an iterative process to refine the firm’s master plan. We use this to set annual budgets, but it’s really much more than that. It’s a roadmap to success and an integral step of executing on a well thought-out strategy.

3. How do you know how you are doing? The next question a managing partner needs to ask themselves is, who will keep tabs on this? Is there a finance leader serving as the eyes and ears of the firm? It’s imperative to staff an individual or a team that can help identify and monitor key performance indicators and think critically about how the business is doing or could be doing against its master plan. In addition to cash flow and forecasting, they need to understand the firm’s strategic plan, ensure it is adequately represented in the firm’s budgets and operating plans, and actively monitor the performance of those plans. Should things go off track a managing partner should expect someone from the finance team to ring the bell and work with firm leaders to navigate any challenges or make necessary adjustments.

4. How do you learn even more about your business? Even in highly successful environments law firms need to continually analyze the business and identify areas for improvement. Sometimes these areas are clear but other times it takes years to pinpoint root problems and the solutions that would be most valuable. It’s important to have capabilities and mechanisms to dig deep into your business and find answers to the questions you may not even know exist. For instance, most firms look at billable hours reports but can they dig deeper? Which clients are attorneys working on, what are their blended rates on those clients, are they profitable? There are tools that can help even the smallest of firms gain insights into their operations that they never thought were possible. Whether it be by exploring information by practice areas, lines of business or other categories, analyzing information differently can help shed light on details that you can’t get from an hours report or a profit and loss statement. A strong finance team should include an individual that leads these efforts to ensure the firm is incorporating the data and insights into its strategy.

5. Who’s managing the day-to-day? Someone needs to manage the day-to-day accounting tasks and ensure the timeliness, integrity and accuracy of the information. It’s an arduous but necessary task as it entails understanding, overseeing and maintaining internal control over all the various functions of the department, including but not limited to:

• General ledger
• Accounts payable
• Accounts receivable
• Collections
• Cash application
• Client cost/advanced expense tracking
• Trust accounting
• Billing functions, including e-billing
• And sometimes payroll

The firm also needs to stay in good standing with countless agencies, including state bars, insurance providers, local, state and federal tax authorities, as well as any banking or financing bodies. This alone can sometimes feel like (and in some cases it needs to be) a full-time role in the wake of changing delivery methodologies, evolving interstate business and tax requirements, enhanced accounting regulations, and many other requirements. Finance and accounting teams need to make sure filings are correct and submitted on time while working with outside advisors to coordinate the completion of critical submissions to insurance providers, banks and government agencies.

6. Do I need a controller or a CFO? This is the million-dollar question for all law firms. If money were no object, the answer would be easy but, in most environments, it comes down to finding the best fit given a set amount of resources. Answering and prioritizing the previous questions will help lead you to the individual with the best skillset for your environment. Remember that a CFO will typically focus more on the financial strategy and analysis functions of a law firm and have a primary handle on executive (partner) relations. This entails monitoring strategy and the resulting profits, analyzing the business and contributing insights to the firm’s governing body. This also entails a heavy contribution to maintaining and applying the terms of the firm’s partner compensation plan. On the other hand, a controller will tend to focus more on accounting operations, compliance and the day-to-day functions of a firm. Their main priority is to produce reliable and accurate information that supports the management team and contributes to sound strategic decisions.

Controllers and CFOs in any business can have varying ranges of functions depending on their company or industry. For law firms there is also no clear dividing line. In fact, the spread of responsibilities only gets wider, especially outside of the AmLaw 200. Smaller-sized firms usually do not have the scale to justify devoting the same resources to these functions as do the larger firms. This means they will generally need to choose what to prioritize and require individuals with a broad range of skillsets. The key for law firms choosing how to invest their dollars depends greatly on the firm’s goals. If growth and expansion has been your firm’s focus, you will likely prioritize a CFO to assist with developing and overseeing the financial strategy. Or if your firm is not expecting significant complexities in the near to mid-term, then you may place more value on accounting operations skills to keep the house in order. It’s rare that you would find somebody who would be an expert at everything and your expectations and the criteria on which you measure this individual should also take that into account.

Prioritizing your firm’s needs and aligning them to the skillsets of those you choose to lead the department is the key to getting the most out of your finance and accounting team.