Over the last several years in Law School, I’ve learned that many of my peers are averse to math. In Prof. Anzivino’s Business Bankruptcy class I distinctly remember painful groans as he explained the time value of money and had the class look at a simple amortization table. In Prof Grossman’s Business Strategy course, I had a friend lean over to me and ask, “What the hell is a balance sheet?” Basic accounting and finance concepts seem to be like nails on chalk board for many law school students. Don’t fear numbers; basic accounting and finance skills can help distinguish your resume from other law school graduates and build better relationships with future clients.
Lawyers should have a basic understanding of a balance sheet, income and cash flow statements.
A balance sheet identifies the assets of an organization and how those assets were financed, either through debt [using someone else’s money] or through equity [using the owner’s money]. For those who are interested in doing M&A, a thorough understanding of a balance sheet is critical. For example, the ability to identify and discuss financial reserves [such as, those related to environmental remediation] can help you to identify, understand, and highlight risk for your client. An entity’s balance sheet also provides an understanding of an operation’s well-being: trends in cash, inventory, revenue producing equipment, receivables, payables, debt equity ratio and retained earnings [to name a few]. It’s also important to understand the relationship between these elements; it’s called a balance sheet for a reason.
An income statement [or, “P&L”, for Profit and Loss] reflects the current year’s operating activity: this generally includes revenue [or sales], cost of sales, other operating costs, and tax. Changes in revenue identify an organization’s growth, decline, or the impact of strategic changes [in example, the disposition or closure of a poor performing operating unit]. Generally speaking, revenue growth is a good thing; either sale volume, sale price, or a mix of both factors have increased. In times of revenue growth, a well-run organization is able to manage its cost structure so that costs grow at slower pace than revenue. An income statement can tell an attorney quite a bit about the current operations of an organization, therefore, understanding your clients P&L can help to drive a better dialogue with a client and tailor your work around their unique set of circumstances.
The final financial statement that an attorney should have a basic understanding of is the statement of cash flow. The maxim “Cash is King” is all too true, if an organization is unable to convert its receivables into cash, they will fail. A cash flow statement shows both the sources and uses of cash. The basic financial goal of an organization is to be able to convert revenue into cash as soon as possible, and at the same time, extend payment of their liabilities to creditors as long as contractually possible. Lenders, equity investors, and the market [if a company is public], examine an organizations ability to convert sales into cash not only because it assures them that they will be able to recapture the value of their investment, but also allows an organization to be nimble and make strategic moves quickly. A company that has cash is in a better spot to make an acquisition than a company that does not have cash.
Finally, it’s important to understand that there is a relationship between all these three financial statements. In fact, the statement of cash flow is derived from the balance sheet and income statements. Understanding the relationship between these three financial statements will provide an attorney a much better understanding of their client’s organization. These concepts are useful in multiple legal disciplines: Contracts, M&A, Civil, Trusts and Estates, Criminal Law, Family Law, and Tax, Tort, just to name a few.
I recommend that law students consider take both a basic Accounting and Finance course. Marquette Law students are able to take, and transfer, up to six credits from the School of Business Management. To be clear, only the credit hours transfer over, and your scores in these classes will not count toward your Law School GPA. So, for those of you who fear math, understand the importance of basic accounting and finance principles, but don’t want to hurt the Law School GPA I recommend you consider taking these classes while at Marquette.