Financial Boot Camp for
Immigration Practitioners
Kirby G. Joseph (DL), Conference Program Chair, Aurora, CO
Steven S. Manekin, CPA, Washington, D.C.
Jenelle K. Conaway, CPA, MBA, Washington, D.C.
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© 2011 American Immigration Lawyers Association
Agenda
•Understanding Financial Jargon
Financial Jargon
Financial Statements
Internal Controls
•How to Create a Budget and Financial Plan
•How to Manage a Lawyer Trust Account Without
Being Ashamed
•Four Things to Know About Income Taxes
•How to Give Yourself a Financial Health Checkup
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Understanding Financial Jargon
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Financial Jargon
•Types of Engagements
Audit – Full assurance
Review – Limited assurance
Compilation – No assurance
•Types of Audit Opinions
Unqualified – Presented fairly
Qualified – Presented fairly with exceptions
Disclaimer – No opinion
Adverse – Not presented fairly
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Financial Jargon
•Types of Financial Reporting
GAAP – Generally Accepted Accounting Principles
•Accrual Basis
OCBOA – Other Comprehensive Basis of
Accounting
•Cash Basis
•Income Tax Basis
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Financial Jargon
•Types of Financial Statements
Balance Sheet
Income Statement
Statement of Shareholders’ Equity
Statement of Cash Flows
Notes to the Financial Statements
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Financial Jargon
•Types of Financial Reports
Trial Balance
General Ledger
•Debits & Credits
Subsidiary Ledger (Account Detail)
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Balance Sheet
•Statement of Financial Position
•At a specific point in time
•Presented in order of Liquidity
•Includes Tangible or Intangible Assets
Tangible – Cash, property & equipment
Intangible – Goodwill, trademarks, patents
•Assets = Liabilities + Shareholders’ Equity
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Balance Sheet
ABC CORPORATION
BALANCE SHEETS
December 31, 2010 and 2009
•Assets – Things that
a company owns that
have value
•Liquidity – How
quickly they can be
converted to cash
•Current <1yr
•Long-Term >1yr
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents
Advances for Clients (Note 2)
Other Current Assets
Total Current Assets
PROPERTY AND EQUIPMENT - AT COST:
Furniture, Fixtures and Equipment
Less: Accumulated Depreciation
Property and Equipment - Net
Total Assets
2010
2009
$ 426,108
15,700
441,808
$ 465,654
7,200
472,854
48,669
34,628
14,041
55,925
38,428
17,497
$ 455,849
$ 490,351
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Balance Sheet
•Liabilities –
Amounts a company
owes to others
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt (Note 5)
Accounts Payable and Accrued Expenses
Due to Related Party (Note 4)
Income Taxes Payable
Total Current Liabilities
LONG-TERM DEBT (Note 5)
•Due Date – How
Total Liabilities
soon the obligation is COMMITMENTS AND CONTINGENCIES (Note 6)
due
STOCKHOLDER'S EQUITY:
Common Stock; $.01 Par Value; 100 Shares
•Current <1yr
Authorized, Issued and Outstanding
Retained Earnings
•Long-Term >1yr
Total Stockholder's Equity
Total Liabilities and Stockholder's Equity
$
8,742
46,346
12,057
32,490
99,635
$
9,959
137,622
38,272
2,238
188,091
35,662
45,621
135,297
233,712
1
320,551
320,552
1
256,638
256,639
$ 455,849
$
490,351
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Income Statement
•Statement of Financial Performance
•For a specific period of time
•Revenue – Total earned
•Expenses – Total spent
•Interest Income (Expense) – Interest earned on
money invested, or interest paid to borrow money
•Income Tax Expense - An estimate of the amount
of income tax that will be paid, or has been paid,
on the reported earnings
•Bottom Line = Net Income or Loss
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Income Statement
ABC CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010 and 2009
2010
Amount
REVENUE
%
%
$ 2,454,569
100.0
$ 3,212,201
100.0
2,355,704
95.7
3,238,921
100.1
98,865
4.3
OPERATING EXPENSES
Income from Operations
INTEREST INCOME
785
Income (Loss) before Income Taxes
99,650
INCOME TAXES (Note 7)
Net Income (Loss)
2009
Amount
(26,720)
-
3,637
4.3
(23,083)
(35,737)
$
63,913
(0.1)
(0.1)
(12,502)
$
(35,585)
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Statement of Shareholders’ Equity
•Shareholders’ Equity – residual interest in the assets
after deducting the liabilities
•Amount owners invested in stock +/- earnings and
losses since inception
ABC CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
For the Years Ended December 31, 2010 and 2009
RETAINED EARNINGS - January 1, 2009
$ 292,223
Net Loss
(35,585)
RETAINED EARNINGS - December 31, 2009
Net Income
$ 256,638
63,913
RETAINED EARNINGS - December 31, 2010
$ 320,551
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Statement of Cash Flows
•Statement of Cash Inflows & Outflows
•For a specific period of time
•Indicates whether a company generated cash
•Operating Activities – reconciled net income to
cash flows generated by general operations
•Investing Activities – cash flows from the
purchase/sales of long-term assets
•Financing Activities – cash flows to/from
investors (banks, shareholders, etc.)
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Statement
of Cash
Flows
ABC CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010 and 2009
2010
OPERATING ACTIVITIES:
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by (Used in) Operating Activities:
Depreciation
Disposition of Fixed Assets
Decrease (Increase) in Assets:
Advanced Client Costs
Other Current Assets
(Decrease) Increase in Liabilities:
Accounts Payable and Accrued Expenses
Due to Related Party
Income Taxes Payable
Net Cash Provided by (Used in) Operating Activities
$
INVESTING ACTIVITIES:
Purchases of Property and Equipment
FINANCING ACTIVITIES;
Payments on Long-Term Debt
Net Increase (Decrease) in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
2009
63,913
$
(35,585)
8,359
(4,903)
7,881
-
(15,700)
7,200
(7,200)
(91,276)
(26,215)
30,252
(28,370)
(8,572)
281,205
12,197
249,926
-
(7,040)
(11,176)
-
(39,546)
242,886
465,654
222,768
CASH AND CASH EQUIVALENTS - END OF YEAR
$
426,108
$
465,654
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Taxes Paid
Non-Cash Exchanged Goods and Services
$
$
3,247
406,400
$
$
7,505
384,460
Notes to Financial Statements
•Include additional information to help the reader
understand the financials
•Explain how a company arrived at the
numbers on the statements
•Describe any significant events, changes, or
commitments
•Examples:
•Significant Accounting Policies
•Income Tax Status
•Retirement Plan Obligations
•Future Lease Payments
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Internal Controls
•Procedures to ensure the integrity of financial and
accounting information
•Detective – Designed to detect errors or irregularities
after they have occurred
•Corrective – Designed to correct errors or
irregularities that have been detected
•Preventative – Designed to keep errors or
irregularities from occurring in the first place
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Internal Controls
•Cash Disbursements & Accounts Payable
•Restrict check signing, electronic payment
authorization, to a few individuals
•Require the review of supporting documentation
prior to check signing
•Require dual signatures on large checks
•Ensure checking accounts and bank statements
are reconciled timely
•Review AP ledger for fictitious vendors
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Internal Controls
•Cash Receipts & Accounts Receivable
•Limit access to cash receipts
•Consider using a lockbox
•Have two individuals involved in opening
mail and logging incoming checks
•Payroll & Employees
•Review payroll records for fictitious employees
•Know your employees and be observant
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Internal Controls
•Internal Controls are limited by:
Judgment
Breakdowns
Management Override
Collusion
•Controls significantly reduce the risk of fraud or
errors, but DO NOT GUARANTEE that fraud or
errors will not occur
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How to Create a Budget and
a Financial Plan
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Budgeting & Financial Planning
•Make the “Road Map”
Based on research and industry standards
•Understand capital requirements & cash flows
General operations
Growth
Asset acquisition
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Budgeting & Financial Planning
•First, consider Capitalization
How to get money in to a business
How will you capitalize?
•Personal check
● Bank financing
How much will you need?
•Depends on type of business, billing and
collection policies, etc.
Why capitalize?
•2-3x monthly expenses
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Budgeting & Financial Planning
•Then, Budget Income
How much money do you expect to make?
Educated guess
Hours x Rates
•Market rates x anticipated hours billed
Flat Fee
•Market rates – how many can be completed
in a month?
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Budgeting & Financial Planning
•Finally, Budget Expenses
How much money do you expect to spend?
Fixed Costs
•Rent
•Payroll
● Equipment
●
lease payments
Insurance
Variable Costs
•Supplies ● Utilities
•Travel
● Marketing
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Budgeting & Financial Planning
•Prepare the budget on a Yearly and Monthly basis
•Present your budget in the form of a financial
statement
•Monitor variances to stay on track
•The budget is a “living document”
Revise and make changes as necessary
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Budgeting & Financial Planning
ABC CORPORATION
2011 BUDGET
REVENUES:
Fee Income
Late Charge Income
Other Income
Total Revenues
EXPENSES:
Personnel:
Salaries
Payroll Taxes
Insurance
Office:
Office Supplies
Postage
Rent
Repairs & Maint
Utilities
2011 Budget
2011 YTD Budget
% of
YTD Actual Budget
$ 3,250,000
12,000
75,000
3,337,000
$ 1,846,000 57%
5,184 43%
50,850 68%
1,902,034
$ (1,404,000)
(6,816)
(24,150)
(1,434,966)
539,292
111,833
67,954
719,079
334,361 62%
69,336 62%
33,977 50%
437,675
(204,931)
(42,497)
(33,977)
(281,405)
44,941
9,319
5,663
59,923
39,323 88%
8,154 88%
5,663 100%
53,141
(15,450)
(7,378)
(30,390)
(4,622)
(15,390)
(73,229)
2,429
1,308
5,065
741
2,969
12,512
1,589
2,145
5,065
2,592
2,930
14,321
29,151
15,698
60,779
8,888
35,624
150,140
13,701
8,320
30,390
4,266
20,234
76,911
47%
53%
50%
48%
57%
Variance
2011 Monthly Budget
% of
June Budget
June Actual Budget
$
270,833
1,000
6,250
278,083
$
261,896 97%
330 33%
6,563 105%
268,788
65%
164%
100%
350%
99%
Variance
$
(8,938)
(670)
313
(9,295)
(5,618)
(1,165)
(6,783)
(841)
837
1,852
(39)
1,810
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How to Manage a Lawyer Trust
Account Without Being Ashamed
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How to Manage a Lawyer Trust
Account Without Being Ashamed
• One of the most important items for lawyers to
understand and keep track of!
• Could lose your license if not handled properly
• Must practice defensively, develop your systems
• Must set up your accounting system to reflect all
account transactions
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How to Manage a Lawyer Trust
Account Without Being Ashamed
•
You must set up the following accounts in your general
ledger:
 Cash Trust Account
 Trust Liability Account
•
The cash trust and trust liability accounts must balance to
each other
 The only difference should be the original deposit to start
the cash account
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How to Manage a Lawyer Trust
Account without being Ashamed
• Must reconcile your trust cash account monthly
• Must maintain a detailed listing of the client’s
money you are holding
• NEVER commingle funds—NEVER use this
money, it is the clients money!
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Four Things to Know about
Income Taxes
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Four Things to Know about Income Taxes
• The tax system is too complicated to pick just four
things to know about taxes but let’s give it a try.
• Understand the tax attributes for each type of
entity
 C-Corp
 LLC/LLP
 General Partnership
 S-Corp
 Sole Proprietor
 Single Member LLC
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Four Things to Know about Income Taxes
•
•
Understand what constitutes income and expenses and
when each can be recognized as such
Understand what the IRS is looking for if they audit
you
 Bank accounts – tying in deposits to income
reported
 Review escrow/trust accounts for potential income
at the end of the year
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Four Things to Know about Income Taxes
•
Close review of meals and entertainment
 Make certain to document
•
•
•
•
Look for personal expenses paid for by the business
Review bonuses – salary or dividends
Advanced client costs
Cash payments, non-cash sources of income –
bartering, etc.
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Four Things to Know about Income Taxes
• Lastly, understanding the retirement plan options
available to the tax payer. The contributions to
those plans are tax deductible. Some of the options
are as follows:
 401(k) Plans
 Profit Sharing Plans
 SEP Plans
 IRAs
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How to Give Yourself a Financial
Health Checkup
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Financial Health Checkup
•Objective:
To identify emerging trends and relationships
and their underlying causes, in order to make
better informed business decisions
•Tools:
Ratios
Benchmarking
RULES approach
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Financial Health Checkup
•Ratios can provide insight into the strength and
earnings capacity of the business
•Liquidity – Measures the company’s ability to pay
off obligations in the short term
•Activity – Measures how effectively the company
uses the assets employed
•Profitability – Measures the degree of success
over a specified period of time
•Coverage – Measures the degree of protection for
long-term creditors
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Financial Health Checkup
Liquidity Ratios
Current Ratio = Current Assets
Current Liabilities
Indicates if a firm has enough short term assets to
cover its short-term liabilities
2:1 (or 2) indicates that for every $1 of current
liabilities, there are $2 of current assets to back it up
Want Current Ratio > 1
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Financial Health Checkup
Activity Ratios
AR Turnover = Net Sales
Average AR
Measures a firm’s effectiveness in extending credit
and collecting debts
4:1 (or 4) indicates that the company’s accounts
receivable turned over 4 times during the period
High ratio = Efficient extension of credit and
collection of AR. Low ratio = Poor collection of AR.
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Financial Health Checkup
Profitability Ratios
Profit Margin = Net Income
Net Sales
Measures the percentage of profit from each dollar of
sales (8% indicates that for every $1 in sales, 8 cents
was profit)
Earnings per Share =
Net Income
# of Shares Outstanding
Measures how much money shareholders would
receive per share if the company distributed all of its
earnings
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Financial Health Checkup
Coverage (Leverage) Ratios
Debt to Equity = Total Liabilities
Total Shareholders’ Equity
Indicates the proportion at which the firm acquires
debt compared to its owners’ investment in the
company
3:1 (or 3) indicates that for every $1 of Shareholder
Investment, there are $3 of Outside Debt
(i.e., the company is taking on debt at three times the
rate that its owners are investing in the company)
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Financial Health Checkup
•Benchmarking provides a firm with a point of
reference (similar firms in the industry or practice
area) with which to compare its performance
The Survey of Law Firm Economics
•Consider the following statistics:
Annual Billable Hours
Average Billing Rates
Personnel Ratios (Associates to Partners, etc.)
Expenses per Partner
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Financial Health Checkup
•The RULES Approach can help you understand
the factors that affect law firm profitability
•Realization
•Utilization
•Leverage
•Expense Control
•Speed of Billing & Collections
•Monitor these elements and look for ways to
improve profitability
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Financial Health Checkup
•Realization =
Collection =
Value of $ Collected
Value of $ Billed
Billing =
Value of Time Billed
Value of Time Worked
Overall =
Value of $ Collected
Value of Time Worked
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Financial Health Checkup
•Utilization
•Are you using your employees effectively?
•Proper staffing
•Leverage
•Using debt to increase potential return
•Are you properly leveraged?
•A company increases its leverage because it
can invest in business operations
without increasing its equity
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Financial Health Checkup
•Expense Control
•Decreasing expenses (overhead) wherever
possible
•Decreasing expenses increases the bottom line,
but is not the most efficient way to increase
profitability
•Speed of Billing & Collections
•AR Turnover
•Improve Time, Billing and Collections
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Questions & Answers
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