How unbilled hours at month-end distort a law firm's Profit and Loss report

A partner at a four-attorney litigation firm we work with sat down on October 3 to review September’s Profit and Loss report (P&L). Revenue for September: $87,000. All four attorneys had carried active hourly caseloads for the full month, and September had felt like a productive stretch.

The partner knew something was off. Dockets were full. Attorneys had logged more hours than a typical month. The revenue number looked light by $30,000 or $40,000.

When we pulled the time and billing system, we found 120 hours of completed hourly work that had not been invoiced by September 30. At an average billing rate of $325 per hour, that was $39,000 that never appeared on the September P&L. Nothing was wrong with the billing. Invoices went out in the first week of October. But the P&L was missing $39,000 of work that happened in September.

What work-in-progress means for an hourly practice

Work in progress (WIP) is completed hourly time that has been recorded in the time and billing system but not yet converted to a client invoice. Attorneys work it. Paralegals record it. The firm’s system tracks every minute. But until the billing partner approves the pre-bill and the invoice goes to the client, none of it appears as revenue in the books.

On a strict invoiced basis, that is defensible bookkeeping. No invoice, no revenue. The problem is the mismatch between the work a firm actually performs in a given month and the revenue the P&L reports for that month.

Four reasons WIP accumulates at month-end

Billing cycle timing. Most firms run monthly billing cycles, not weekly. An attorney who completes 30 hours of work in the last two weeks of September will have those hours sitting in WIP until October’s billing run. Normal timing. But the P&L shows zero revenue from those hours until October.

Pre-bill approval delays. Before an invoice goes to the client, the billing partner reviews and approves the pre-bill. At a firm with multiple active matters, that approval sometimes slips from the last day of the month into the first week of the next. Work done in September, reviewed and invoiced in October, becomes October revenue.

Billing narrative completion. Attorneys frequently finalize time entries and write billing narratives after the underlying work is complete. Work happens on a Wednesday; the memo line gets written on Friday. The firm ends the month with a block of completed hours whose time entries are still being cleaned up.

Mixed matter types. Firms that handle both hourly and contingency matters sometimes track all unbilled time together in one WIP report. Hourly WIP that should be accrued gets mixed with contingency time that should not, and neither category gets accurately separated at month-end.

What the books showed in this case

Here is how September looked once each attorney’s unbilled hours were mapped.

The $87,000 on the P&L and the $126,000 of actual earned revenue are a $39,000 gap. For a firm assessing attorney productivity, overhead ratios, or monthly trends, working from the $87,000 figure produces the wrong answer on every question.

Why the gap matters

Partners make overhead decisions on wrong figures. If September looks like an $87,000 month and October shows $126,000 because October invoices include September’s late billings, the revenue trend reflects billing timing, not actual business output. A partner using those figures to decide whether to hire a new associate, renegotiate a lease, or adjust attorney draws is solving the wrong problem.

Overhead ratios give false readings. If the firm’s monthly overhead is $60,000 and revenue appears as $87,000, the overhead ratio is 69 percent. Against actual earned revenue of $126,000, it is 48 percent. Those two numbers describe very different firms. One looks like it is barely covering costs. The other looks healthy. Both descriptions come from the same month.

Year-end write-downs create P&L distortions. Firms that do not accrue WIP during the year and then write off disputed or uncollectable time at year-end record that write-down as an expense. It makes December look worse than the year actually warranted and inflates apparent losses in the final period.

What clean WIP accounting looks like

For law firm clients we work with on accrual-basis books, WIP is accrued at month-end using a reversing journal entry. The time and billing system exports total unbilled hours and their dollar value at each billing rate. We post that amount to a WIP asset account on the balance sheet and the corresponding fee revenue account on the P&L. When invoices go out the following month, the WIP entry reverses and the actual invoice takes its place.

The net effect: every month’s P&L reflects work actually performed that month, not invoices sent. Revenue is smoother, overhead ratios are reliable, and partners can make staffing and compensation decisions on numbers that reflect the firm’s real output.

Best practices for law firm billing accuracy

Five practices that keep WIP visible and accurate month to month:

• Run a WIP summary report from the time and billing system at the last business day of every month. Record the total as a reversing journal entry dated the last day of the month.
• Separate WIP by billing type. Hourly WIP accrues to fee income. Contingency time does not. Mixing the two overstates revenue on open contingency matters.
• Set a pre-bill approval deadline two to three business days before each month-end. Work completed in September should be invoiced in September, not carried into October’s billing run.
• Review WIP aging at least quarterly. Time entries over 90 days old that have not been invoiced are either collection risks or write-offs. Identifying them early changes the outcome.
• Reconcile WIP accruals to actual invoices each quarter. The cumulative WIP accrued over three months should tie to the invoices issued for that same period once billing clears.

Three questions worth asking

If you are not sure how WIP is being handled today, three questions to ask whoever manages the firm’s books:

1. Does the monthly P&L include a WIP accrual, or does it only reflect invoices actually sent to clients?
2. Can you pull a WIP aging report from the time and billing system showing unbilled hours by attorney as of the last day of last month?
3. When November shows higher revenue than October, is that because the firm was more productive, or because October’s invoices went out late?

If those answers are uncertain, the books are likely reporting invoice timing rather than earned revenue. A rough WIP accrual run once a quarter, even manually from the time and billing report, would give partners a more reliable basis for the decisions they make about the firm.

If you want a second set of eyes on the numbers, send a recent month’s P&L alongside the WIP export from your time and billing system. We will tell you whether the revenue on the P&L reflects your firm’s actual output.