Closing the Books (Year-End): The Operational Checklist Every Firm Should Have

The year-end close is more than just a date on the calendar for a law firm's back office—it's a critical operational period. A meticulous approach ensures financial accuracy, tax compliance, and a smooth start to the new year. Following a structured checklist is the best way to manage this complex process.

Here is an essential checklist to guide your firm through a successful year-end close:

1. Financial Review and Reconciliation

The foundation of a good year-end close is a clean set of books. This stage ensures all your financial data is accurate and ready for reporting.

• Review and Post All Transactions: Ensure your bank feed is fully integrated and all transactions (bank and credit card) are reconciled and posted in your accounting system.

• Analyze Accounts Receivable (A/R) and WIP: Review outstanding Work in Progress (WIP) and accounts receivable. Verify what remains unpaid and initiate collection efforts on overdue accounts when possible.

• Clean Up Client Accounts: Address any discrepancies in client accounts and unbilled invoices. Write off old, uncollectible A/R or matters to accurately reflect your firm's value.

• Finalize Financial Reports: Generate and review your final financial reports, including the Balance Sheet (checking for any negative balances), Trial Balance, and Profit and Loss (P&L) statement.

• Evaluate Cash Flow: Evaluate prior and current year cash flow to identify trends. Prepare a year-to-date budget vs. actual comparison for leadership review.

• Charitable Donations: Ensure all charitable donations are correctly allocated and documented.

• Vendor Documentation: Review all expenses for any service provider paid over $600 during the year and ensure you have a current W-9 form on file for each.

• Budget for the Upcoming year:  Have your budget and projections ready so that expenses are not a surprise in the new year.

2. Trust and Retainer Accounting

Compliance with state bar rules is non-negotiable for IOLTA/Trust accounts.

• Reconcile Trust Accounts: Reconcile trust and escrow accounts, confirming that all transfers are accurately recorded. Ensure retainers are managed strictly according to state bar rules.

• Manage Client Expenses: Review all client expenses. Ensure reimbursable expenses are billed back to the client or written off if deemed unrecoverable.

3. Tax Preparation and Compliance

Proactive tax preparation minimizes stress and maximizes deductions.

• Prepare Tax Forms: Prepare for federal and state tax requirements. This includes generating W-2s, 1099-MISC, and 1099-NEC forms. Plan for e-filings and distribution to employees and vendors before deadline dates (typically January 31 and March 31).

• Confirm Estimated Payments: Verify that all quarterly estimated tax payments are current to avoid penalties or unexpected overpayments.

• Owner’s Draw and Expenses: Assess the owner’s draw account and ensure all business/deductible expenses are properly documented and ready for tax filing.

• CPA Consultation: Schedule meetings with your accountant or CPA early for year-end tax planning, projections, and ensuring full IRS compliance.

4. Payroll and Benefits

Accurate reporting for staff is essential for both compliance and morale.

• W-2 Reporting: Prepare comprehensive payroll records for W-2 reporting. This includes accurately calculating end-of-year bonuses, fringe benefits, and confirming the accuracy of all withholdings.

• Staff and Partner Compensation: Review staff utilization and compensation for annual adjustments. Plan distributions and partner bonuses with your CPA to maximize tax efficiency.

5. Operational Clean-Up and Planning

Cleaning up your systems and documenting changes sets the stage for a more efficient year ahead.

• Archive and Deactivate: Close out or archive dormant matters. Audit your system’s user list and deactivate unnecessary accounts for security and cost control.

• Audit Billing Practices: Audit your current billing practices. Update rate cards for the coming year and refine internal workflows for greater efficiency.

• Documentation and Communication: Document lessons learned from the past year. Communicate all financial and procedural changes clearly with the team and leadership to ensure alignment.

6. Insurance and Risk Management

Ensure your firm is protected against potential liabilities as you enter the new year.

• Review Coverage: Review the adequacy and coverage of all business insurance policies, including worker’s compensation, malpractice (E&O), key person, and property insurance.

• Adjust and Renew: Adjust coverage based on changes in business income or new operational risks. Confirm that all professional licenses and permits are renewed as needed to maintain compliance.

Completing this comprehensive year-end checklist can be a time-consuming burden, pulling your team away from core legal work.

We understand the unique complexities of law firm finance and operations. Our dedicated Legal Back Office team provides expert support for all these year-end tasks, including:

• Full Reconciliation and Financial Reporting

• Trust and IOLTA Compliance and Audit Preparation

• Vendor Management and 1099 Preparation

• Operational Clean-Up and Billing Audits

Let us manage the details of your year-end close so you can focus on your clients.

Ready to streamline your year-end and ensure full compliance? Reach out to us today to learn how our services can make your close stress-free and accurate.