In fact, a large number of firms have no written agreement that clearly sets forth the profit-dividing scheme among the partners. Generally, profit definition and ultimate allocation develop over a number of years based on practice, rather than well-reasoned analysis and negotiation. Clearly, a system of profit allocation based on full accrual financial statements represents a more equitable allocation method. But most firms simply go with what has worked in the past until the problem becomes a large issue. An unfortunate and sometimes fatal problem that often develops from an informal allocation method is the inaccurate determination of the level of distributions.
Many firms strip out all available cash, leaving insufficient capital and liquidity.
This makes the firm susceptible to cash-flow shortages, as well as harming the firm s profile to financing institutions. This drives an arbitrary and inaccurate profile of the firm s overall economic condition and may cause it to be undercapitalized. Too many firms with profitable clients and skilled attorneys have dissolved because they were undercapitalized with debt obligations that could not survive a down economic cycle. Many firms and partners focus only on the monthly draws. Often, partners do not understand financial statements or the budgeting process.