The End of Financial Year (EOFY) is almost here and with it the last opportunity to clean up certain balances and sign-off on compliance issues. It also presents the chance to reflect on what is working correctly within a legal practice, and what may require critical attention.
Accrual-based taxpayers may have included the debt as income in this or a prior year. If the debt has truly become uncollectable, it may qualify as an expense and additionally any GST paid may be refundable. Section 25.35 of the Income Tax Assessment Act 1997 specifies certain conditions that must be fulfilled in order to claim the expense of a bad debt write off.
· The debt must have already been included as assessable income
· For a loan, you must have lent the money and that must be your primary business activity
· The debt must be genuinely uncollectable, not merely doubtful
· The amount must have been outstanding for 12 months or longer
Taxation Ruling TR 92/18 brings further clarity to certain other circumstances
· If only part of the debt is deemed bad, it may be partially written off
· The simple passage of time is not sufficient – genuine attempts at recovery must be demonstrated
Be careful not to treat the write off of bad debt as an end-of-period adjustment that will be written back on 1 July. Such occurrence will draw the keen interest of an auditor.
Work In Progress
WIP and the people who record it are the greatest asset a legal practice has. Careful budgeting and monitoring of WIP targets is essential in ensuring a future revenue stream – and thus profit. Authors should be capable of recording a minimum of five chargeable hours per day, or the equivalent in dollar terms for fixed-fee billers. The careful review of time budgets should highlight authors who have too many files, are overburdened with administrative tasks, spend too much time on non-chargeable research or simply aren’t meeting budget.
Of critical importance however is the need to avoid written off WIP. A failure to invoice WIP results in lost revenue and the best time to convert WIP to paid fees is at the critical point of a matter – whether settlement, successful litigation or other milestone. If write offs start to increase year-on-year billing policies may need to be strengthened. Have fee estimates undergone a comparison to actual recoveries? If estimates are continually out, profitability is threatened.
Inevitably there will be a need to write off some WIP. This is best done monthly however certainly no later than the EOFY. A failure to write off unbillable WIP will result in a misleading inflation of the asset on the balance sheet.
Disbursements and other costs
Similar to WIP, any unrecoverable disbursements should be written off as an expense prior to the end of the financial year. Such write offs should be looked at critically – there is general no good reason to write off a disbursement that should have been funded by a client by placing funds in the trust account to cover. This may be the opportunity to tighten credit policies and ensure matters are correctly funded prior to commencement.
For firms using cash accounting, there may be a desire to slow down collection efforts in the latter part of the financial year to gain a tax advantage, however as the year end approaches so does the critical point at which collection efforts must increase. While a dedicated credit collector may be required, the best individual to make direct contact with a slow payer is the lawyer who handled the matter. The person who delivered a client’s successful result is the best person to ask that client why they have not yet paid, or if the service was not to their satisfaction.
General Accounting Tips
Business have a multitude of compliance requirements immediately before and at the EOFY:
Estimate the tax liability and determine if pre-paying expenses in order to reduce same should be undertaken:
Reconcile pay roll and ensure all superannuation contributions have been made
Review annual leave and other employee entitlements to ensure liabilities are growing excessively large. The value of leave liabilities increases in line with remuneration of employees, therefore it is in the business’ interest that employee’s take regular leave
Update asset depreciation schedules and remove any fully-depreciated items of plant
Ensure the firm is across any compliance changes for the coming year, or is in a position to take advantage of incentives such as increased thresholds for asset write-offs
The EOFY of course signifies the coming of the new FY – now is the time to plan and implement the new budget. Will the client base accept an increase in hourly rates commensurate with inflation and increased overhead? Does the practice have a profit target in mind and the ability to project how many recovered and paid hours of work will be required to achieve it? Has an allowance been made for fee earners to spend time on unrecoverable personal development, the attainment of specialist accreditation or a retreat that will ultimately increase the marketability of their services?
The budget is just one aspect of the business plan. In larger practices admin support may be spread across multiple timekeepers and matter managers. If support is stretched too thin, productivity suffers. Firms need to ensure they have adequate support personnel. Many people work better in a collaborative environment. For smaller firms, the lack of headcount can make it harder to induce a collegiate environment. Ensuring staff can attend external events or take part in professional groups may help. If internal meetings are starting to feel old or simply a burden, try daily stand-up meetings or otherwise look for fresh options for collaboration.
The EOFY is an opportunity to reflect on the year’s performance, tidy up some balances and also commence planning for the coming year.