Let’s be honest. A majority of the lawyers did not enroll in learning law with the hope of being exposed to budgets and balance sheets. They wanted to make a case, assist the client, and have a successful practice. However, the fact remains: no lawyer can afford his or her firm to go down the drain when he or she does not keep proper books.
Law firm bookkeeping is not a mere way of keeping track of money in and out. It has to do with ensuring the safety of your practice, keeping to the rules to the letter, and fully understanding the financial situation of the firm.
Why Do Law Firm Accounting Different?
Do you believe that legal accounting is similar to regular business bookkeeping? Think again.
Law firms deal with trust accounts, client retainer and IOLTA regulations. They also handle numerous cases simultaneously and all of them have their own billing plan. There are those clients who pay at an hourly rate, those who pay a flat rate and those that are on a win basis. The bookkeeper needs to note down all the dollars received by each client but should maintain the client money as separate money with the firm money.
Confusion of the trust money and operating money is more than a mistake. It will make you lose your license to practice law.
Law Firm Trust Accounting Mistakes to Avoid
This is the point where the majority of law firms fall short: management of trust accounts.
All state bars possess regulations on how to deal with client funds. Three-way reconciliation will have to be performed: bank balance, book balance, and ledger balance of each client should match. You require comprehensive records of all transactions and you should reconcile such accounts on a monthly basis (and occasionally on a more regular basis).
A lawyer that I interviewed reported that he took 15 hours to correct a trust account issue that had begun with a 200-dollar mistake six months prior. It was 15 billable hours that would have been used wisely to chase a mistake that could have been avoided through proper law firm bookkeeping.
What Good Law Firm Bookkeeping Actually Looks Like
Law firms require more than just basic data entry. Expect the following:
Matter Based Accounting: Each expense and payment is linked to a certain client case rather than a mound of numbers.
Real Time Trust Account Supervision: Conduct trust account scrutiny on a daily basis to identify errors in time to turn them into compliance issues.
Retainer Tracking: Be aware of clients who are outstanding with their money, those who need to be billed, and those who require the transfer of money between trust and operating accounts.
Expense Allocation: If you want to know the profits and be able to file taxes, then you have to categorize firm costs appropriately.
Financial Reporting: Get monthly statements that inform you of the areas of practice that are most profitable or attorneys who are billing the best.
The Technology Gap Killing Law Firm Profits
Timekeeping and billing are both practised on practice-management software in the majority of law firms. That’s great. Only the information should be fed directly into your accounting system.
By manually entering the numbers in the practice software into QuickBooks or any other program, you introduce errors and run up the bills of time. Modern law firm bookkeeping involves integrated systems that transfer data automatically and eliminate errors and provide you with more current financial information.
Red Flags Your Bookkeeping Needs Help
Don’t know whether your system is effective now? Look out as follows:
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You cannot easily determine the amount of real money you possess (excluding the trust fund of clients)
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Month-end closing is a process that lasts weeks and not days
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Your accountant keeps on inquiring or correcting you
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You have had complaints of handling trust accounts in the bar
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You make business decisions on gut feeling rather than facts
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There is a mess up during tax time since records are not organized
The Real Cost of DIY Law Firm Bookkeeping
There are some solo practitioners and small firms that make attempts to keep their own books or provide it to a paralegal. That, in fact, costs you:
Time: The time spent on book keeping is time that can not be billed to the clients. At $250 an hour, it is quick to add up.
Risk of Compliance: Any errors in dealing with trust accounts may translate to disbarment or suspension. Is it that risky to save a few hundred dollars a month?
Growth Limitations: You can not make smart decisions regarding hiring, expanding services or even improving profits without proper data.
Stress: The worry of whether you were correct on your books or the trust accounts are in compliance with the guidelines take a psychological toll.
Finding Bookkeeping Expertise for Your Law Firm
All bookkeepers are not familiar with legal accounting. You require one that knows about IOLTA, three-way reconciliation, and client advance treatment and retainer treatment.
In need of a legal bookkeeper? Firm Balance specializes in law firm bookkeeping. They are 15 years old with certified professionals and knowledgeable in the peculiarities of the law practices. They deal with trust reconciliation to financial reports. Their team is able to concentrate on IOLTA compliance as you concentrate on law.
Making Bookkeeping work in your Firm
Good law firm bookkeeping should not be a headache. It must provide you with sanity, assurance, and obedience.
Original audit: Are trust accounts in order? Do you prepare proper reports within a short time? Are you aware of true profitability of the firm?
Then change what’s needed. It can be traveling to train your bookkeeper to understand legal requirements, investing in technology, or contracting an expert. Invest in getting it right.
Your practice is worth financial systems to your legal work. You will be able to see how well your books will be treated and still you will wonder how you were able to survive without such understandability.
