How your law firm compensates partners is of course a financial decision, but it’s also a strategic process that needs to consider multiple factors. For example, how your firm chooses to reward partners reflects firm values, shapes behavior, drives growth, and influences long-term success.  

There isn’t a one-size-fits-all solution, so understanding the different compensation models available, their advantages and challenges, and when to use them is essential. 

The right model depends on your firm’s goals, culture, and client mix. In this article, we’ll break down the most common attorney compensation models, explore their pros and cons, and discuss how your firm can use financial data, like revenue and origination tracking, to build a fair, motivating structure. 

We’ll also show how tools like Centerbase’s profitability reporting can help you analyze partner performance in a meaningful way, ensuring your compensation strategy is grounded in actionable insights. 

Main Takeaways 

• Law firms use a variety of models to allocate partner compensation, from equity-based systems to performance-driven formulas. 

• Choosing the right model depends on firm culture, growth goals, and the type of contributions you want to reward. 

• Equity and non-equity distinctions influence not only profit distribution but also governance and long-term investment. 

• Origination and revenue-based formulas can drive individual performance but may create internal competition if not managed carefully. 

• Firms that regularly review compensation using profitability data (like from Centerbase) are better positioned to align rewards with performance. 

How Do Law Firms Share Profits? 

Any compensation model must address the core question of how to divide the firm’s profits. 

Most firms do this with some form of a profit-sharing model, whether they split profits equally, reward individual performance, or take a blended approach. Regardless, the goal of profit-sharing is to drive firm-wide success while rewarding contributions that matter. 

Here’s a quick overview of the most common profit-sharing structures: 

Equity vs. Non-Equity Partners 

Equity partners are firm owners. This means they share both profits and losses, have voting rights, and have long-term financial incentives tied to the firm’s performance. 

On the other hand, non-equity partners hold senior roles but don’t have an ownership stake. Their compensation is typically salary-based, with bonuses tied to metrics like billable hours or client retention. 

Each structure serves a different purpose. Equity roles encourage long-term investment and leadership, while non-equity roles encourage firm support and emerging leadership. 

Origination Credits 

Many firms recognize the value of client development by assigning origination credits, where partners receive a percentage of the revenue from the clients they bring in.  

To illustrate how significant originations can be, the 2024 Compensation Report: Law Firms by Law360 Pulse found that non-equity partners reported a median origination value of $400,000, while equity partners reported a median of $1.3 million.  

It’s clear that origination credits can be powerful incentives, but if they are not managed carefully, they can lead to turf wars or discourage collaboration.  

Revenue-Based Formulas 

Some firms tie compensation directly to hard numbers based on billable hours, collections, or matter revenue. This approach ensures transparency and rewards productivity, but it may undervalue softer contributions like mentorship, internal leadership, or firm culture. 

Discretionary Profit Sharing 

In more traditional setups (often smaller firms), a compensation committee or firm leaders might allocate profit shares based on subjective performance assessments—such as leadership contributions, mentoring junior associates, attending community events, etc.—rather than using data-based formulas.  

This has pluses and minuses. It gives firms flexibility to recognize “soft” yet meaningful contributions. But because these types of contributions are difficult to define and measure, it can lead to perceived favoritism or confusion about how profit sharing is determined, which erodes trust and motivation among partners. 

Common Law Firm Compensation Models 

A well-designed partner compensation model reinforces the values and goals of the firm. A misaligned one can create tension, underperformance, and turnover. In this section, we break down the most common partner compensation models, exploring how they work, their strengths and challenges, and when each model makes the most strategic sense. 

1. The Equity Partner Model 

As we discussed earlier, equity partners are firm owners who share both profits and losses. Their compensation is typically tied to their ownership stake, which reflects their long-term investment and commitment to the firm. 

Advantages: 

• High incentives for performance. Because their earnings are tied to the firm’s profits, equity partners are naturally motivated to contribute to the firm’s success, whether by bringing in clients, mentoring attorneys, or streamlining operations. 

• Alignment of goals. Equity ownership encourages partners to think like business owners and make decisions that support the firm's success rather than individual agendas. 

• Long-term wealth creation. As the firm grows, equity partners benefit directly from the growth, especially if the firm merges or is acquired. 

Challenges: 

• Financial risk. Equity partners often contribute capital to the firm and may receive less predictable compensation tied to profitability, which can vary from year to year. 

• High responsibility. Ownership comes with obligations, including involvement in firm governance, business development and building referrals, and sometimes guaranteeing the firm’s debts. 

• Variable compensation. Especially in lean years, partners’ compensation can dip significantly, which may be a deterrent for attorneys seeking stable income. 

Three Buckets of Equity Partner Compensation 

To ensure fairness and alignment with law firm profitability goals, you can break equity compensation into three categories: 

1. Lawyer Work Compensation is the market-rate pay for the legal work performed. 

2. Business Owner Compensation is the partner’s share of firm profits as an equity stakeholder. 

3. Additional Roles Compensation is the compensation for leadership or management roles (e.g., managing partner, committee chair) that require additional time and responsibility. 

Segmenting compensation this way allows firms to clearly define what they’re rewarding, making it easier to align compensation with the firm’s priorities. 

When It Works: 
This model works best in firms that prioritize long-term commitment, firm stewardship, and collective success. It’s particularly effective when equity partners wear multiple hats and expect to be rewarded beyond billable time for responsibilities like leadership and business development. 

2. The Non-Equity Partner Model 

Non-equity partners hold leadership or senior attorney roles without an ownership stake in the firm. They often earn a fixed salary, with potential bonuses based on individual performance. 

Advantages: 

• Predictable compensation. A salary-based model with performance bonuses provides a stable income while allowing for rewards tied to effort and outcomes. 

• Lower financial risk. These partners don’t invest capital or take on the firm’s liabilities, which can make the role more accessible and appealing to attorneys earlier in their careers. 

• Leadership without ownership. Firms can elevate attorneys into visible leadership roles without diluting equity or complicating ownership structures. 

Challenges: 

• Limited influence and rewards. Non-equity partners typically don’t have voting rights or access to profit-sharing, which can cause frustration, especially for those who contribute significantly to revenue or firm growth. 

• Retention risk. High-performing non-equity partners may leave the firm if they feel undervalued or overlooked for equity roles. 

When It Works: 

The non-equity model is ideal for firms that want to retain and motivate talented senior attorneys without offering them ownership. The model is also an effective transitional stage for attorneys working toward equity or for firms that don't want to expand equity partnerships. 

3. The Lockstep Model 

In the lockstep model, compensation increases over time based on an attorney’s tenure rather than their individual performance. Partners at the same seniority level are generally paid the same, regardless of their billable hours or revenue generated. 

Advantages: 

• Predictability and simplicity. Compensation is easy to administer and understand, reducing disputes and minimizing administrative overhead. 

• Cohesive culture. Since earnings are not tied to personal performance, partners are encouraged to collaborate, share clients, and support one another’s success. 

• Talent development. This model supports mentoring and knowledge sharing across generations of lawyers. 

Challenges: 

• Lack of performance incentives. High performers may feel penalized by this model, while underperformers are basically getting subsidized. This can cause resentment or lead high performers to disengage. 

• Difficulty attracting rainmakers. Top billers and attorneys who attract new clients and revenue streams may be reluctant to join firms where their compensation doesn’t reflect their business development efforts and individual output. 

When It Works: 

This model works best in firms that emphasize long-term client relationships, professional development, and internal cohesion over aggressive business development. It’s often seen in firms with deep institutional clients and a strong culture. 

4. The Performance-Based Compensation Model 

In this structure, compensation is tied to metrics like revenue generated, billable hours, client origination, or other contributions. It’s often used to reward individual achievement and drive firm growth. 

This model aligns closely with current industry trends. According to the 2024 Compensation Report: Law Firms by Law360 Pulse, 30% of equity partners are compensated using a formula-based model, which directly ties their earnings to measurable performance. Another 22% use a hybrid model, and 17% rely on subjective assessments. These findings reflect a shift toward performance-driven structures, especially at smaller and midsize firms where transparency and metrics play a bigger role in partner compensation. 

Advantages: 

• Motivates partners to excel. Clear ties between results and rewards push partners to work harder, innovate, and maximize their contribution. 

• Drives business growth. Performance-based systems encourage rainmaking, client retention, and personal accountability. 

• Transparency. When implemented well, this model provides a data-backed way to determine compensation, which can feel more objective. 

Challenges: 

• Potential for internal competition. Partners may hoard clients or hesitate to collaborate if compensation depends solely on individual output. 

• Overemphasis on billables. Non-billable yet important contributions like mentoring or leadership may go unrecognized. 

• Risk of burnout. Partners may feel pressure to constantly perform at peak levels, leading to stress and reduced job satisfaction over time. 

When It Works: 

A performance-based model is ideal for firms that prioritize aggressive growth and want to reward business development and high productivity. It works best when paired with clear key performance indicators and guardrails to prevent negative cultural side effects. 

5. The Hybrid Model 

A hybrid compensation approach combines elements of several models and typically includes a base salary, discretionary bonuses, performance incentives, and equity considerations. It aims to provide the best of multiple systems. 

Advantages: 

• Customizability. Different roles and contributions can be rewarded in tailored ways, making it easier to retain attorneys who have varying goals or are in different career stages. 

• Balance of collaboration and performance. Firms can use base salaries to promote stability and bonuses to incentivize growth. 

• Future-proofing. The hybrid model can evolve alongside the firm, adjusting as its strategy changes or the firm grows. 

Challenges: 

• Complex to manage. Hybrid compensation models require firms to have robust systems in place that can track multiple inputs like financial performance, firm contributions, and leadership roles, and to recalibrate them regularly.  

• Risk of confusion. Without clear communication, partners may not understand how their compensation is calculated, which can lead to frustration. 

When It Works: 

This model is ideal for mid-sized and larger firms with diverse practice areas and partner profiles. It offers flexibility while ensuring partners are rewarded both for individual achievement and for contributing to firm-wide goals. 

Again, Law360’s 2024 data support this trend. Hybrid compensation models are used by 22% of equity partners and 18% of non-equity partners, especially at midsize and large firms. This flexibility is a major reason hybrid models are gaining traction in firms with evolving priorities and diverse partner contributions. 

6. Profit-Sharing and Revenue-Sharing Models 

Rather than focusing on billables or origination alone, profit- and revenue-sharing models align partners’ compensation with the firm’s profitability or total revenue and overall health. 

Advantages: 

• Encourages shared success. When everyone’s compensation is tied to firm-wide metrics, partners are more likely to work together toward collective goals. 

• Sustainable growth mindset. Partners become more invested in profitability drivers like efficiency, pricing strategy, and cost control—not just top-line revenue. 

• Supports long-term planning. These models help firms avoid short-term thinking, focus on sustainable client service, and take a long view on decision making. 

Challenges: 

• Allocation disputes. Determining each partner’s share can be tricky, especially when contributions are difficult to quantify. 

• Overlooks individual achievements. Partners who bring in major clients or manage heavier workloads may feel undercompensated if the model lacks individual incentives. 

When It Works: 

Profit- and revenue-sharing models work well for firms with a collaborative culture and a balanced mix of contributors. They help firms prioritize collective achievements and minimize internal competition. 

Challenges in Designing an Effective Compensation System 

Even with the right model in place, creating a truly effective partner compensation system is challenging. Here are some of the most common (and costly) challenges law firm leaders face in designing partner compensation. 

Balancing Fairness and Competitiveness 

You need to reward top performers without alienating others. A system that is too rigid may fail to retain high-value contributors, while a system that’s too individualistic can fracture collaboration. Balance is the key. 

Aligning Compensation with Firm Goals 

If your firm values cross-selling between practice groups, does your compensation model reflect that? What about mentoring junior attorneys or investing in succession planning? Too often, firms unintentionally reward behaviors that don’t move the needle. Strategic compensation requires clearly defining what the firm values and then rewarding it. 

You must reward the behaviors that reflect what your firm values most, whether that’s developing clients, mentoring associates, or growing cross-functional teams. 

Managing Complexity 

Multi-partner firms with hybrid models often juggle salary, bonuses, origination, profit shares, and subjective criteria. Without clear guidelines for evaluating contributions and compensating them, complexity can erode partners’ trust in the system. 

Lack of Transparency 

Transparency in how compensation decisions are made is a growing concern in the legal industry. According to the 2024 Law360 Pulse Compensation Report, 53% of attorneys said their firms do not have transparent pay structures, and another 17% said they were only partially transparent. 

This matters because transparency directly affects satisfaction, employee retention, and morale. At firms with fully transparent pay structures, 75% of associates and 50% of non-equity partners said they were satisfied or very satisfied with their compensation. In firms with no transparency, those numbers drop to 31% and 35%, respectively.  

A transparent structure, communicated consistently, ensures attorneys know what’s expected and what compensation is possible. 

Valuing More Than Just Billables 

Mentorship, internal leadership, and firm culture contributions matter, but they’re harder to measure. A robust compensation system should account for these intangibles alongside revenue generation. 

Aligning Compensation with Succession Planning 

To sustain long-term firm growth, compensation structures should encourage senior partners to mentor and elevate rising talent. Clear policies around equity buy-ins, financing options, and eventual retirement or de-equitization help make transitions smoother for individuals and the firm alike. 

Create Data-Driven, Effective Compensation Strategies with Centerbase 

At the end of the day, there’s no one-size-fits-all partner compensation model. The best strategy is the one that reflects your firm’s unique goals, values, and talent mix. 

But here’s the key: your compensation model shouldn’t be static. It needs to evolve with your firm, and it should be rooted in real data. 

That’s where Centerbase’s profitability reporting comes in. Law firm leaders gain the insights they need to: 

• Analyze partner performance across lawyer work, business ownership, and additional roles. 

• Identify which practice areas, clients, or partners are most profitable. 

• Adjust compensation plans to reward cross-selling, mentoring, leadership, and revenue—all based on actual financial outcomes. 

• Make succession planning decisions with clear visibility into each partner’s long-term impact. 

These insights matter more than ever. The 2024 Law360 Pulse Law Firm Compensation Report found wide disparities in both earnings and satisfaction across roles, firm sizes, and compensation structures. Firms that track profitability, origination, and performance in a structured way, not just intuitively, are in a better position to create compensation models that drive engagement and reward meaningful contributions. 

Whether you’re revisiting an outdated system or building a new one from the ground up, Centerbase helps you turn complex data into confident decisions. 

Book a demo today or learn more about Profitability Reporting. 

For law firms, time isn’t just money; it’s your business model. Tracking time accurately is essential for profitability, transparency, and growth, regardless of whether you're a partner at a growing midsize firm or a firm administrator juggling calendars and billing cycles. A billable hours chart can be the foundational tool your team needs to stay consistent and compliant without losing precious hours to memory and manual logging. 

This article breaks down what billable hours charts are, why they matter, and how time-tracking tools can streamline your timekeeping, helping you capture every billable minute without the hassle. 

Main Takeaways of this Article 

• A billable hours chart helps standardize and simplify how attorneys track time. 

• Tracking time in consistent billing increments (like 6 or 15 minutes) reduces errors and disputes. 

• Clear, real-time entries improve productivity, accuracy, and client trust. 

• Legal practice management software can enhance timekeeping with automation, mobile apps, and billing integration. 

• Avoiding common time tracking mistakes can significantly boost revenue and firm efficiency. 

What Is a Billable Hours Chart? 

A billable hours chart is a standardized table that converts minutes worked into decimal-based increments typically used for hourly billing. For example, six minutes equals 0.1 hours, so a 36-minute task would be logged as 0.6 hours. These charts help legal professionals convert work into billable time accurately and consistently. 

Beyond just conversion, billable hours charts improve tracking by enforcing structure across time entries. Most charts include: 

• Time increment tracking (e.g., 0.1 = 6 minutes) 

• Clear categorization of billable vs. non-billable tasks 

• Standardized task descriptions that improve clarity on client invoices. 

Here’s a sample reference chart: 

Time Increment	Minutes
0.1	1 - 6 Minutes
0.2	7 - 12 Minutes
0.3	13 - 18 Minutes
0.4	19 - 24 Minutes
0.5	25 - 30 Minutes
0.6	31 - 36 Minutes
0.7	37 - 42 Minutes
0.8	43 - 48 Minutes
0.9	49 - 54 Minutes
1.0	55 - 60 Minutes

Why Law Firms Need an Attorney Billable Hours Chart 

Proper time tracking isn’t just about collecting hours. It’s also about ensuring accuracy, compliance, and client satisfaction. Here's why these charts are indispensable. 

Ensures Accurate Hourly Billing and Compliance 

Using a standardized billing chart helps attorneys translate time into billable increments with precision, which is essential for complying with firm policies, client agreements, and bar association guidelines. For example, rounding inconsistencies or vague time descriptions can lead to ethical scrutiny or client dissatisfaction. A chart enforces consistency and reduces the risk of miscalculation. 

Tracks Productivity and Performance 

With consistent time entry formats, firm administrators and partners can easily analyze how attorneys spend their time—by case type, client, or task. This insight helps identify inefficiencies (e.g., too much time spent on administrative work) and informs strategic decisions about delegation, hiring, or process improvement. 

Prevents Lost Revenue Due to Underreported Time 

Quick calls, impromptu meetings, and email responses often go unrecorded. A visual and easy-to-use billing chart prompts attorneys to log these micro-tasks, which may seem minor but can result in significant revenue over the course of a year, potentially tens of thousands of dollars per attorney. 

Improves Client Communication 

Charts that include standard task descriptions (e.g., “Drafted demand letter – 0.4 hours”) create transparency on invoices, reducing confusion or disputes. Clients appreciate clarity, and a well-documented record strengthens trust. 

Reduces Billing Disputes 

Accurate and consistent timekeeping gives firms defensible records in the event of a billing dispute. If a client questions an invoice, the firm can refer to structured time entries supported by a uniform billing chart. 

Enhances Productivity 

With a predefined chart, attorneys spend less time figuring out how to log their time and more time focusing on legal work. This streamlining reduces the cognitive load of timekeeping, making it faster and more consistent. 

Best Practices for Tracking Billable Hours Effectively 

Tracking time well is more than filling in timesheets. These strategies can elevate your approach: 

• Establish a Clear Time-Tracking Policy: Set firm-wide standards so every timekeeper logs time consistently. Develop guidelines that define what tasks are billable, expected timekeeping frequency, and the required level of detail. Provide examples to eliminate ambiguity and encourage buy-in. 

• Use a Billable Hours Chart to Categorize Tasks: Break work into clear categories to avoid ambiguity when it’s time to invoice. Make it easy for attorneys to code entries properly by using a standard chart with common task categories (e.g., research, drafting, meetings). This helps when reviewing time by task type for profitability analysis or client reporting. 

• Differentiate Between Billable and Non-Billable Tasks: Avoid overbilling or underbilling by making this distinction explicit. Clearly identifying non-billable work—like internal meetings or training—helps the firm manage productivity and allocate resources more strategically. It also avoids accidental overbilling that could damage client relationships. 

• Use Descriptive and Clear Entries: Avoid vague entries like “worked on case.” Instead, use specific phrasing: “Prepared discovery requests for Jones v. Martinez – 0.5 hours.” This level of clarity strengthens client communication and invoice acceptance. 

• Track Time in Real-Time to Avoid Gaps: Real-time logging helps you capture .1s and .2s that often slip away. Logging time immediately after each task (or using automated timers) captures work more accurately than relying on end-of-day memory. Tools like Centerbase make this easier by prompting time entry based on activity. 

• Minimize Time Leakage: Use automated tools and reminders to avoid forgetting to log quick calls or emails that take place outside traditional work windows. 

• Regularly Review and Adjust Billable Time Entries: Conduct internal audits or have supervisors periodically review timesheets to spot patterns, such as chronic underreporting or inconsistent categorization, and offer feedback or training. 

Common Mistakes in Tracking Billable Hours and How to Avoid Them 

Even the most disciplined firms can fall into bad timekeeping habits. Here’s what to watch out for: 

Inaccurate or Delayed Time Logging 

When attorneys wait to enter time at the end of the day (or worse, the week), they rely on memory rather than precise tracking. Encourage or automate real-time entries to ensure no work is missed. 

Overlooking Small Tasks That Add Up 

Five 3-minute client calls a day equals over five billable hours a month. Minor interactions like “1-minute phone calls” or “2-minute email replies” are often skipped but add up. Using a chart with 6-minute increments (or 10- or 15-minute increments for different billing models) helps capture them. 

Not Differentiating Between Billable and Non-Billable Hours 

This can cause compliance issues and financial misreporting. Blurring billable hours categories distorts profitability reporting and may lead to billing errors. Training and well-designed billing systems can reinforce the distinction. 

Failing to Use Consistent Billing Increments 

Mixing timekeeping formats (e.g., one attorney using 6-minute increments, another using 15-minute increments) leads to confusion and billing disputes. Standardize the format firm-wide and reinforce it with a shared chart. 

Ignoring Reports and Analytics  

Tracking time is just the first step. Analyzing it is what delivers value. Use reporting features in your software to uncover inefficiencies, improve resource planning, and inform pricing strategies. 

How Legal Practice Management Software Helps Law Firms Track Billable Hours 

Modern software transforms how law firms handle timekeeping. Here are some key features and how they help. 

Automated Time Capture 

Some software can automatically log time based on your digital activities, such as drafting documents, sending emails, or attending meetings, eliminating the need to manually recall every action of your workday. 

Manual Timers 

For tasks where precision is critical (e.g., court appearances, legal research), manual timers that can be started and stopped with a click within practice management software are key to ensuring exact billing. 

Integration with Billing Software 

Syncing time with billing ensures no data is lost or misaligned at invoice time. Time entries automatically feed into the firm’s legal billing software, which means no duplicative work, fewer errors, and a faster invoicing process. This integration also improves realization rates by reducing forgotten entries. 

Mobile Accessibility 

Attorneys aren’t always at their desks. With mobile access, they can log time anytime, anywhere—from court, client meetings, or during travel—keeping entries timely and reducing lost hours. 

Customizable Reports 

Use advanced reporting tools within legal technology to review time by case, attorney, or task to boost accuracy and profitability. For example, Centerbase lets firms generate tailored reports to improve forecasting, identify bottlenecks, and optimize staffing, all based on real-time timekeeping data. 

Optimize Your Law Firm’s Billable Hours Tracking with Centerbase 

From missed minutes to unbilled hours, the cost of inefficient time tracking adds up fast. A billable hours chart offers a simple yet powerful way to bring structure and clarity to how attorneys log their time. But to truly scale your firm’s success, technology makes all the difference. 

Centerbase’s automated and manual timekeeping tools, along with smart integrations and mobile functionality, help you: 

• Capture every minute 

• Reduce billing errors 

• Increase realization rates 

Ready to take control of your time and billing? 

• Book a Centerbase demo 

• Learn more about Centerbase’s billing features 

FAQs 

How Many Billable Hours Should Attorneys Track? 

This varies by firm type, seniority, and compensation model. However, most firms expect attorneys to bill between 1,800 and 2,000 hours annually, which averages to about 35-40 billable hours per week. Tracking consistently helps meet these targets. 

How to Maximize Billing as an Attorney? 

To maximize billing, track time in real-time, capture all work-related activities, and use legal time tracking software that automates and reminds you to log time. This reduces time leakage and improves accuracy. 

Why Do Lawyers Bill in 6-Minute Increments? 

Lawyers often bill in 6-minute increments (0.1 hours) to accurately reflect the time spent on short tasks, such as quick emails or calls, while keeping billing consistent and understandable for clients. 

Law firm billing is more than just an administrative function. It's also the engine that drives profitability, sustainability, and client trust. The way a firm bills its clients can impact everything from cash flow to client retention, but it’s not always a straightforward process. Thankfully, organized processes, technology, and automation can help your firm develop a workflow that’s best for your staff and clients. 

So whether you're refining your current billing processes or building a system from the ground up, understanding the ins and outs of law firm billing is essential for your firm’s success. This guide will walk you through the most common billing models, best practices for accurate and efficient billing, and the tools that modern firms are using to get paid faster and with less friction. 

Main Takeaways 

• Law firm billing structures vary by practice type and client needs, with hourly, flat fee, contingency, and retainer-based models being the most common. Each type offers various advantages depending on your practice area and client needs. 

• Billing best practices, including detailed invoicing, automated time-tracking, and flexible payment options, can improve your billing efficiency and cash flow. 

• Setting the right rates requires balancing market benchmarks with overhead costs and client expectations and reviewing your pricing strategy regularly. 

• Legal invoices must meet compliance standards and be professionally presented to foster trust. 

• Technology can transform your firm's billing process by automating time tracking, streamlining pre-bill reviews, and offering online payment options. 

What Is Law Firm Billing? 

Law firm billing is the structured processes and systems used to track, record, and charge clients for legal services rendered and expenses incurred. This includes time tracking, invoicing, payment collection, and ensuring compliance with ethical and regulatory guidelines. Done right, law firm billing goes beyond charging clients to enhance the entire client experience and provide the financial backbone of a law firm. 

Types of Billing Structures Used by Law Firms 

Different types of legal work call for different billing approaches. Law firms choose billing structures based on the nature of the case, the client's needs, and the predictability of the workload. Each structure has its own advantages and is better suited for certain practice areas or matter types. 

Hourly Billing 

Hourly billing is the most traditional and widely used model in the legal industry. Attorneys and staff track their time spent on client matters in increments (typically six-minute intervals) and charge clients based on predetermined hourly rates. This model works well for complex litigation, corporate matters, or cases where the scope of work is difficult to predict in advance. But, it can lead to client concerns about transparency or escalating costs. 

Flat Fees 

Flat fee billing involves charging a predetermined amount for a specific service, regardless of the time it takes to complete. This model is commonly used for routine, predictable legal matters like drafting wills, forming LLCs, or handling uncontested divorces where the work involved is fairly standardized. Flat fee billing enhances pricing predictability for clients and reduces billing disputes. 

Contingency Fees 

Under contingency fee arrangements, clients pay only if the firm wins the case, typically as a percentage of the settlement or judgment amount in personal injury or other litigation cases. This structure aligns the attorney's and the client's interests, making legal services accessible to clients who couldn't otherwise afford representation; however, it also requires firms to bear the financial risk of the case. 

Retainer-Based Billing 

With retainer-based billing, clients make advance payments to secure legal services for ongoing or future work. These funds are typically held in a trust account and drawn against as services are performed. Retainer arrangements offer predictable revenue for firms and are often used for corporate clients or ongoing advisory relationships. 

Best Practices for Law Firm Billing 

Adopting law firm billing best practices increases operational efficiency, fosters client trust and reduces the chance of payment delays or disputes. The following can establish a strong billing practice for your firm. 

Develop Transparent & Detailed Invoices 

Clients expect clear, easy-to-understand invoices that reflect the value of the services provided. Each invoice should include itemized charges with descriptive time entries to ensure clients know exactly what they're paying for. This level of transparency reduces disputes, builds trust, reinforces your firm’s brand, and increases the likelihood of your clients paying promptly. 

Streamline the Billing Workflow 

Automating manual billing processes through software that integrates with timekeeping, matter management, and accounting minimizes manual work and errors. Once you have a standardized workflow with clear responsibilities for time entry, pre-bill review, and invoice distribution, the legal billing software creates a seamless system from time entry to invoice generation to approvals and improves your firm’s cash flow and profitability. 

Optimize Tracking of Billable Hours 

Accurate time tracking is crucial to capture all billable work, maximize revenue, and ensure fair billing. Implement user-friendly digital tools so attorneys can log time in the moment, which avoids delays in time entry, helps capture more billable hours, and improves the accuracy of invoices. Advanced technology solutions with automated time capture can even help attorneys reclaim previously unbilled time spent on emails, calls, and document preparation. 

Ensure Compliance with Legal Billing Guidelines 

Firms must adhere to industry regulations, client-specific billing rules, and jurisdictional requirements to maintain ethical billing practices. Legal billing guidelines, such as Uniform Task-Based Management System (UTBMS) codes and LEDES formats, ensure billing data is consistent and auditable. Audit your billing practices regularly to help identify compliance issues before they become problems with clients or regulatory bodies, because non-compliance can lead to rejected invoices and reputational damage for your firm. 

Offer Flexible Payment Options 

Clients today expect the same payment convenience from their law firm that they receive from other service providers. Offering multiple payment methods including credit card, ACH, and payment plans enhances this convenience for clients and accelerates your collection rate. And offering flexible payment options demonstrates your responsiveness to client needs and supports long-term client relationships. 

How to Set Your Law Firm’s Rates 

Determining the right pricing structure for your legal services is key to maintaining profitability, competitiveness, and transparency. It’s a process that requires balancing market expectations, firm costs, and value delivered to clients. 

Understand Market Benchmarks 

Start with a thorough analysis of what similar firms in your area and practice specialty (or specialties) are charging by reviewing industry surveys and reports and collecting data on your competitors. Benchmarking against local and national data gives you the context needed to help you avoid underpricing or overpricing your services and positions your firm strategically. 

You should also review your firm’s internal data to ensure billing rates are appropriate for different case types, attorneys’ time is being used effectively, and each practice area is as profitable as possible. 

Factor in Firm Overhead Costs 

To set sustainable rates, firms must consider their cost structure, including rent, staff compensation, malpractice insurance, and software subscriptions. Understanding your overhead ensures your rates cover expenses while generating profit. Your billing rates must cover both direct attorney time and the proportional overhead expenses required to operate your firm. 

Determine Hourly vs. Alternative Fee Arrangements 

Evaluate whether to use hourly rates, flat fees, or contingency models based on the predictability and complexity of each matter type. Practice areas with highly variable scope (like complex litigation) may benefit from hourly billing, while routine matters (like estate planning) might be better suited for flat fees.  

Customize Rates for Clients and Matters 

Offering alternative fee arrangements can improve client satisfaction and differentiate your firm from competitors. Tailor your pricing based on the unique attributes of each matter or client. High-volume clients or long-term partnerships may warrant discounted rates, while complex litigation might justify premium pricing. This type of strategic pricing can optimize value for your clients and profitability for your firm. 

Regularly Review and Adjust Rates 

Rates shouldn’t remain static. Monitor inflation, economic trends, and changes in your service delivery model. An annual review allows you to adjust pricing strategically and communicate value to clients. 

Key Legal Invoice Requirements 

Compliant and professional invoices help law firms get paid faster and reduce the risk of client dissatisfaction or audits. Consider the following best practices. 

Essential Invoice Components 

• Client and matter information 

• Service date(s) 

• Timekeeper name and role 

• Description of tasks performed 

• Time spent on each task 

• Hourly rates or agreed-upon fees 

• Subtotals and totals 

• Payment terms and due date 

Compliance with Legal Billing Guidelines 

Clear and consistent billing reduces the likelihood of disputes and ensures smoother payment processing.  

Invoices should meet state bar regulations and client-specific requirements, including the use of approved task codes and formats and detailed activity descriptions. If you’re working with insurance defense or corporate clients, familiarize yourself with their outside counsel guidelines, which may dictate specific formatting, coding systems, and billing practices. 

Standardized Invoice Presentation 

Using a consistent template across all invoices reinforces professionalism and brand identity and reduces confusion for clients. Create a standardized process for preparing and reviewing invoices to ensure all necessary elements are included and properly formatted before delivering them to clients. A uniform format helps clients understand and pay invoices more easily, decreasing administrative back-and-forth. 

Common Legal Billing Challenges 

Legal billing challenges commonly stem from overburdened staff who are pulled in multiple, non-revenue-generating directions. Here’s a look at a few of the most common challenges related to law firm billing. 

Inefficiency and Lost Time 

Manual data entry, redundant workflows, and disconnected systems can easily drain staff time and reduce productivity. Re-entering information across spreadsheets, paper forms, and billing tools is tedious and increases the risk of errors and delays. But integrated software that syncs across systems eliminates double work and can help firms reclaim billable hours. 

Poor Visibility and Communication of Write-Downs 

Unclear billing practices and vague invoices confuse clients and can lead to disputes, prompting firms to issue write-downs to preserve relationships. You can avoid undervaluing your firm’s services by communicating proactively about billing frequency and expectations. The more transparent you are about your billing process, cycles, and itemization, the more you foster client trust and reduce revenue loss. 

Keeping Track of Law Firm Billing Codes 

With the shift toward flat fees and subscription models, proper use of UTBMS billing codes has become essential. These codes standardize invoices, improve clarity for clients, and streamline internal approval processes. Firms that implement structured billing codes reduce confusion and align more efficiently across teams. 

Billing Descriptions 

Generic or vague billing entries can lead to client dissatisfaction and erode trust in your firm’s transparency. Descriptions like “Call: 30 minutes” lack context and fail to convey value. Specific, date-tagged entries that explain the legal work performed enhance clients’ understanding and demonstrate the impact of each service. 

How to Improve the Law Firm Billing Process 

Streamlining your billing processes frees up valuable time for higher-value, billable work while improving cash flow and client satisfaction. Here are practical ways to optimize billing productivity. 

Automate Time Tracking & Invoicing 

Implementing software that automates time tracking and integrates it with invoicing can ensure all billable time is captured and save hours of administrative work each month. Your billing cycles will be faster and contain fewer errors.  

Set Up Recurring Payments & Payment Plans 

Create automated billing arrangements for ongoing client relationships to ensure steady cash flow without requiring manual intervention. Payment plans can also make legal services more accessible to clients while providing predictable revenue for your firm.  

Streamline the Pre-Bill Review Process 

Pre-bill reviews don't need to be manual, time-consuming tasks. Implementing electronic pre-bill reviews with workflow automation tools allows attorneys to review, edit or approve time entries before bills are created. This process eliminates the inefficiencies of paper-based reviews, ensures invoices are accurate, and keeps billing cycles on track. 

Send Payment Reminders 

Having an automated system for sending friendly payment reminders helps ensure clients don’t overlook due dates. Consistent communication about outstanding balances can significantly improve collections, reduce outstanding accounts receivable, and maintain healthy client relationships. 

Accept Credit Card Payments 

Many clients prefer paying online, and accepting credit card payments makes it convenient for them to do so. Modern legal payment processors will automatically account for clients’ online payments in your general ledger.  

Transform Your Law Firm’s Billing Process & Get Paid Faster with Centerbase 

The billing practices we've discussed throughout this article represent significant opportunities for midsize law firms to improve efficiency, cash flow, and client satisfaction. By implementing transparent invoices, streamlining workflows, automating time tracking, and offering flexible payment options, your firm can transform billing from an administrative burden into a strategic advantage. 

Centerbase empowers law firms to streamline their billing operations with powerful features like multi-matter billing, electronic pre-bill approvals, automated time capture, and online payments—all integrated with robust accounting and matter management capabilities. Our platform reduces administrative overhead and helps firms maintain a steady cash flow while delivering a polished, professional client experience. 

Ready to modernize your billing? Book a demo to see how Centerbase can transform your billing process, or learn more about our billing capabilities. 

FAQs 

What's the Most Efficient Law Firm Billing Approach? 

While hourly billing remains common, many firms find that a mix of billing structures (hourly, flat fee, and retainer) allows them to match pricing to matter type and client needs. Efficient billing, regardless of your firm’s fee structure, comes from implementing structured yet flexible processes that include automated time tracking, electronic pre-bill review, transparent and detailed invoices, and flexible payment options. By using legal billing software, firms can reduce administrative work, increase accuracy, and speed up the payment cycle. 

How Much Do Law Firms Bill Per Hour? 

Law firm hourly rates vary significantly based on location, practice area, attorney experience, and firm size. According to Thomson Reuters' research, law firms have seen record-setting growth in billing rates, with worked rates growing by an average of 6.5% in 2024 compared to the previous year. The largest firms (Am Law 100) led with 8.4% rate growth, while midsize firms averaged 5.6%. A Major, Lindsey & Africa survey found that average partner rates at large firms reached $1,114 per hour in 2024, with top firms charging $2,500+ for senior partners. For midsize firms, rates are generally lower but still rising steadily. When setting rates, firms should consider local market conditions, overhead costs, and perceived value rather than simply matching competitors' rates. 

How Can Law Firms Get Paid Faster by Clients? 

To get paid faster, firms should send detailed invoices, automate payment reminders, and offer multiple payment methods. Electronic invoicing with detailed time narratives reduces client questions and disputes. Accepting credit cards and setting up online payments through billing software can significantly shorten the time to payment. And sending invoices within days of work being completed can significantly improve collection speed and overall cash flow. 

For legal professionals, understanding trust accounting is important to build client trust. This area of law firm accounting is a fundamental component of the legal industry because it involves the management of client funds that a law firm holds in trust for its clients and requires strict adherence to ethical and legal obligations.

Trust accounting is not just a procedural necessity; it helps maintain the integrity of the attorney-client relationship. This article discusses the fundamentals of trust accounting, including its purpose, set-up process, types of trust accounts, and the rules for maintaining compliance.

Main Takeaways From This Article:

• Trust accounting is essential for managing client funds ethically and legally to avoid regulatory penalties and reputational damage.
• There are different types of client trust accounts, such as IOLTA, individual client-based, and retainer-based, each serving unique purposes.
• Compliance with trust accounting rules, such as using dedicated accounts for holding client monies and conducting three-way reconciliations, is critical to managing assets in trust accounts and steering clear of legal trouble.
• Implementing specialized trust accounting software like Centerbase can enhance accounting efficiency and ensure accurate fund management.

What Is Trust Accounting?

Trust accounting refers to the management of funds held by a law firm on behalf of its clients. Lawyers receive funds from clients for various purposes, such as retaining legal services, covering court costs, or settling claims. These funds are kept separate from the firm’s operating funds and are only disbursed for their intended purpose. The primary objective of trust accounting is to ensure that client funds are securely held, properly managed with a high degree of transparency, and used only as authorized. 

Types of Client Trust Accounts

Firms use different types of client trust accounts, each serving a distinct purpose. Here are the three commonly used trust accounts:

IOLTA (Interest on Lawyers’ Trust Accounts)

IOLTA accounts are designed to hold client funds that are nominal in amount or expected to be held for a short period. These accounts aggregate funds from multiple clients, and any interest earned on these accounts is directed to local bar foundations or similar organizations that use the funds for legal aid and other public interest initiatives. Attorneys must adhere to specific IOLTA regulations, including reporting requirements.

Individual Client Trust Accounts

These accounts are used to store funds for specific clients when the amounts held are substantial or expected to be held for a longer duration. Individual client trust accounts ensure that interest earned benefits the clients for whom they exist. This type of account provides a clear and direct audit trail for each client's funds.

Retainer-Based Trust Accounts

Retainer-based trust accounts are established when a client pre-pays for legal services. These accounts are used to hold fees collected in advance for services that will be rendered over time. Funds are gradually drawn from this account as legal services are provided, ensuring clients' funds are not used until the services are executed.

The Trust Accounting Process: Key Steps for Law Firms to Stay Compliant

To manage client funds effectively and in line with legal requirements, firms must follow a structured trust accounting process. Here are the key steps that every law firm should take to ensure compliance and proper management of trust accounts:

1. Open a Client Trust Account

The first step in the trust accounting process is to open a dedicated client trust account at a financial institution. This account must be separate from the firm’s operating accounts to clearly delineate funds. 

To comply with the regulatory requirements of the local bar association, firms should ensure that the account adheres to the guidelines set forth.

2. Deposit Client Funds

Once the trust account is established, attorneys deposit the money they receive from their clients. This can be in a pooled account or a dedicated client account. The decision will depend on the amount, the duration it needs to be held for, and client preferences. 

Keeping detailed records of each deposit and the purpose of each deposit is crucial to upholding accountability and transparency at all times. Traditionally, attorneys used ledger cards to track client trust funds, but today it’s recommended to keep track of trust assets with specialized legal accounting software, as that can help minimize human errors.

3. Manage Trust Account Transactions

Managing transactions within the trust account involves tracking disbursements to and from the account. Attorneys must ensure that only authorized transactions occur and that client funds are not used for firm expenses. Accumulating detailed records of all transactions helps maintain compliance.

4. Conduct Trust Account Reporting and Audits

To comply with regulations and ensure financial oversight, firms should routinely audit their trust accounts and prepare thorough reports. Checking the accounts requires three-way reconciliation, which includes comparing client ledger, firm records, and bank balances. 

Law firms should identify any discrepancies promptly. Frequent audits not only ensure compliance but also build client trust.

Trust Accounting Rules

Every firm dealing with trust accounts is required to follow certain guidelines set by the American Bar Association. These guidelines are the requisite dos and don'ts that can help your efforts to build trust with your customers. 

1. Client Funds Must Be Kept in a Separate Account

Trust accounts should not be combined with personal or professional funds. This means you cannot supplement a shortfall in your firm's operating accounts by transferring money from a trust account to help pay employees or the business's overhead. This is because you are obligated to uphold the fiduciary responsibility that you, as an attorney, have to your clients. 

By keeping client funds in a designated trust account, you avoid the risk of unintentionally using these funds for personal or business expenses. This practice ensures that the funds remain readily identifiable and accessible for their intended purpose. 

2. No Use of Client Funds for Firm Expenses

Client funds held in trust are strictly for the client's benefit and must not be used for any firm expenses. Using client funds to cover operational costs, even temporarily, constitutes a serious breach of fiduciary duty and can result in severe disciplinary action. 

Using client funds strictly to pay for the expenses of the cases they're involved with ensures that the funds are kept in reserve for the purposes they were meant for, such as costs of litigation, distribution of settlements, or other costs related to the client. 

3. Maintain Accurate and Detailed Records

Law firms must meticulously document all transactions involving client funds, including deposits, withdrawals, disbursements, and service fees. These records serve several crucial purposes, such as: 

• Providing a transparent account of all financial activities related to client trust accounts
• Upholding compliance with legal and regulatory requirements
• Substantiating the firm’s adherence to ethical standards 

Thorough documentation becomes invaluable during monthly, quarterly, or yearly audits and assessments, as it reflects the firm’s integrity and commitment to responsible fiduciary practices. Law firms should invest in effective accounting tools that can streamline record-keeping and help them keep all entries accurate and up-to-date.

4. Conduct Regular Three-Way Reconciliations

Three-way reconciliation is a critical practice in effective trust account management. By comparing the law firm's internal accounting records, the client ledger, and the bank statements for the trust account, attorneys can identify and rectify discrepancies promptly and ensure that all client funds are accurately accounted for. 

Regular reconciliations serve as a strong preventive measure against potential fraud or mismanagement and are vital for cultivating a culture of accountability in the firm, which reinforces the importance of ethical handling of client funds. 

5. Earned Fees Must Be Transferred Promptly

Law firms should have clear and accessible policies for prompt processing and transfer of earned legal fees from trust accounts to operating accounts. This is imperative for maintaining the integrity of the attorney-client relationship and ensuring compliance with ethical standards. 

Delays in transferring earned fees can create confusion regarding the status of client funds and may even suggest impropriety in the management of those funds. 

6. No Overdrawing of Client Trust Accounts

Overdrawing a client's trust account is a serious violation of trust accounting rules. It demonstrates a lack of diligence to maintain accurate records and can result in disciplinary action. 

To prevent this, firms must diligently monitor account balances and keep detailed records. Regular reconciliations of account records and the careful management of funds are keys to ensuring you do not overdraw client trust accounts and that client funds are available when needed.

7. Obtain Proper Client Authorization for Disbursements

All disbursements from the trust account must be authorized by the client. Obtaining written authorization before making any disbursement is crucial for compliance. This documentation serves as evidence of the client's consent and protects the firm from potential disputes. 

Proper authorization ensures that client funds are disbursed only for their intended purpose and following the client's wishes.

8. Trust Account Interest Rules Must Be Followed

Law firms that manage client funds through an IOLTA must understand the trust account interest rules. These rules dictate how interest earned on client funds should be managed and distributed to organizations that run legal aid programs and other public interest initiatives. 

Attorneys must be knowledgeable about their state’s specific regulations regarding interest accrual on trust accounts, as well as how to report and remit any earned interest appropriately. Not understanding how to handle interest can lead to penalties and may damage client trust and the firm’s reputation.

9. Follow State Bar or Regulatory Authority Guidelines

Law firms must adhere to the guidelines established by their state bar associations or regulatory authorities concerning trust accounting. These guidelines provide detailed instructions on trust account creation, management, record-keeping, and reporting requirements. 

Each state may have unique requirements that attorneys should be aware of and follow meticulously. By familiarizing themselves with these requirements, firms can ensure they remain compliant and avoid potential sanctions, including fines or disciplinary action. Law firms must stay informed of any changes to these regulations to ensure their trust accounting practices are always compliant.

Boost Firm Efficiency With Trust Accounting Software

Maintaining meticulous trust accounting records and upholding regulatory standards is a complex process. However, leveraging specialized trust accounting software can greatly streamline these tasks, reduce errors, and enhance the overall efficiency of this key legal function. 

Centerbase's accounting and online banking tools provide a comprehensive solution to simplify trust account management. These tools offer automated reconciliation, which eliminates the manual work involved in comparing bank statements, client ledgers, and trust account balances. 

The comprehensive suite of reporting tools enables law firms to quickly generate detailed reports, simplifying audits and demonstrating compliance with regulatory requirements. The secure data management features protect sensitive client financial information, reassuring clients that the firm meets data privacy regulations. Using Centerbase means law firms can dedicate more time and effort to providing legal services than to administrative chores. Ready to see the software in action? Get a free demo today!

Your law firm's accounting department helps the business stay on the right side of the law, when it comes to both internal operations and external relationships. Because legal work involves high stakes, accuracy is of the utmost importance in handling finances. Since law firms work with sensitive information, any misstep can have major consequences.

This article outlines essential accounting practices for law firms, emphasizing compliance with trust accounting rules and strategies for improving financial efficiency. By implementing these best practices, law firms can streamline operations, reduce errors, and enhance financial transparency.

Main Takeaways From This Article:

• Compliance with trust accounting rules is paramount in legal practice, necessitating strict attention to detail.
• Automating processes with specialized legal accounting software can enhance financial efficiency and accuracy.
• Real-time reporting and regular reconciliations help law firms maintain financial transparency and prevent errors.
• Effective training and internal controls are essential to prevent fraud and manage legal finances successfully.
• Centerbase’s Accounting and Online Banking tools provide robust solutions for managing law firm accounting needs.

Law Firm Accounting: The Basics

As a business owner or a key decision-maker in a law firm, having a foundational understanding of accounting is essential. You may not be expected to have in-depth expertise in accounting, but grasping the basics can enhance revenue projections and future evaluations. 

Let’s review some basic accounting terms that you should be familiar with: 

• Income/Revenue - Cash collected for services rendered. This metric is the most regarded way to track growth simply because it is the easiest to track and report on. (Please note that this is true on a cash basis)
• Expenses - Cash spent for business operations. The highest expense most firms incur is for wages.
• Profit and Loss (P&L) - Financial statement representing the cash earned minus the cash spent during a set period of time. 
• Profit Margin: The percentage of revenue remaining after deducting all expenses, indicating profitability.
• Balance Sheet - Financial statement representing the Assets, Liabilities, and Equity of a company as of a specific date, not over a period of time. 
• Ledger - A detailed listing of individual (accounting) transactions. The general ledger feeds into the Profit and Loss statement and Balance Sheet.
• IOLTA - Interest on Lawyer Trust Accounts. This account is where lawyers hold client funds that do not currently belong to them.

Other Law Firm Accounting Tasks to Note

Beyond basic accounting, law firms have specific financial responsibilities to ensure compliance and operational efficiency.

Trust Accounting

For law firms that hold client funds in trust, the IOLTA account comes with its own set of detailed accounting rules and tasks. Noncompliance can result in severe penalties, so it is important to understand the complexities of trust accounting.

Tax Obligations

Law firms must diligently manage their federal, state, and local tax obligations. The specifics of the obligations vary based on the type of practice, but most firms have a responsibility to pay income taxes on profits, payroll taxes, and self-employment taxes for individual attorneys. Although this list is not exhaustive, it underscores the need for law firms to consult tax professionals for tax compliance.

Utilizing a Certified Public Accountant (CPA) can be beneficial, particularly for firms without an in-house accountant. A CPA can provide essential guidance on fulfilling tax obligations while minimizing tax liabilities and assist with financial tasks, including forecasting, reporting, payroll processing, and trust accounting.

Payroll

Calculating legal time is complex, making law firm payroll especially challenging. This requires a specialized, flexible payroll process due to varied pay structures. With the growth of outsourced legal work, accurate categorization of employees and independent contractors is critical, as misclassification may result in fines and legal ramifications. Key components of legal payroll accounting include:

• Federal, state, and local payroll requirements
• Employee withholdings
• Reporting and depositing payroll taxes
• Disability and worker’s compensation insurance
• Employee benefits

Invoicing

Invoicing is a critical component of law firm accounting, serving as the primary method for billing clients for legal services. Mistakes in invoicing can lead to unbilled tasks, irregular billing, and unpaid invoices, which can adversely impact a firm's financial health. 

To ensure efficiency, consider integrating invoicing within a legal practice management system. These platforms offer streamlined approval processes, track invoice modifications, and accommodate various fee arrangements. Some of these legal practice management systems provide robust data reporting tools, enabling firm leaders to generate comprehensive financial reports with minimal effort.

Payment Processing and Collections

Once invoices are dispatched, law firms should have processes in place to receive payments and manage collections, as revenue is key to firm sustainability. Although traditional payments like cash and checks are still used, electronic methods are becoming the standard, so a reliable system for processing payments is a must. Selecting a reliable payment provider is crucial, as it can greatly influence the firm’s accounting efficiency. 

Law firms should opt for lawyer-friendly payment processors that adhere to the specific regulations attorneys must follow. These processors allow transaction fees to be covered by the firm's operating account rather than the trust account, minimizing the risk of violating IOLTA accounting rules and ensuring compliance.

Best Practices for Law Firm Accounting

To optimize efficiency and compliance, firms should consider the following best practices:

Choose an Accounting Method: Accrual vs. Cash Basis Accounting

Deciding between cash and accrual accounting can impact a firm's financial transparency and tax obligations. The cash basis is suitable for smaller firms with simpler transactions, and it records income and expenses only when money changes hands. 

The accrual method, favored by larger practices with more complex financial activities, captures financial events when they occur, regardless of payment timing. To ensure compliance and strategic planning, consistently use the chosen method to ensure precise financial records.

Open Business Bank Accounts for the Firm

Accurately managing financial accounts is critical to ensure compliance, protect client funds, and maintain the financial health of law firms. Three types of accounts that are indispensable are:

• Business Checking Account: This account is fundamental for managing the firm's day-to-day financial operations. It facilitates paying bills, receiving payments, and maintaining liquidity for immediate expenses.
• Business Savings Account: A savings account is useful for setting aside funds for future needs or unexpected expenses, providing a buffer and an opportunity to earn interest on surplus cash.
• IOLTA Account: Interest on Lawyers Trust Accounts (IOLTA) is used to manage client funds separate from the firm's finances, which is crucial for maintaining compliance with trust accounting rules.

Separate Operating and Trust Accounts

A fundamental principle in legal accounting is maintaining separate operating and trust accounts. This separation prevents firm funds from mixing with client funds, protects client monies, and helps firm staff readily identify them. 

Keeping these accounts separate also simplifies audits and reconciliations, which helps reduce the risk of financial discrepancies and regulatory violations.

Regular Reconciliations to Prevent Errors

Conducting reconciliations regularly helps maintain the integrity and accuracy of a firm's financial records. By consistently comparing internal records with external statements, you can identify and fix discrepancies. This practice minimizes the risk of errors and enhances financial transparency. 

Most importantly, reconciliations ensure that your firm remains compliant with regulatory standards in the legal profession. Establishing a routine for monthly or quarterly reconciliations, depending on your firm's transaction volume, can greatly improve your firm's financial health.

Implement Dedicated Legal Accounting Software

Leveraging dedicated legal accounting software is a strategic move for law firms seeking to enhance accuracy and efficiency in their financial management. This specialized software is designed to handle the complexities of legal accounting, from trust management to client billing, ensuring compliance with regulatory standards. 

Automating routine processes and providing real-time financial insights empowers law firms to focus on delivering exceptional client service while maintaining robust financial oversight.

Automate Invoicing and Payment Processing

Using automation for invoicing and payment processing helps reduce administrative workload, minimize human error, and ensure timely billing and payment cycles. 

By leveraging advanced tools like Centerbase, firms can generate invoices promptly, track outstanding payments efficiently, and facilitate seamless transactions for clients. This aids in maintaining cash flow and also enhances client satisfaction by delivering clear, accurate, and professional billing information. 

Ensure Compliance With Trust Accounting Rules

Strict adherence to trust accounting rules is non-negotiable for law firms. This includes meticulous record-keeping, accurate transaction tracking, and regular audits to maintain compliance with ethical and regulatory standards. Compliance prevents severe penalties and protects the firm's reputation.

Monitor Financial Performance With Real-Time Reporting

Real-time financial reporting provides immediate insights into the financial health of law firms. This enables firm leaders to identify trends, address potential issues, and optimize financial performance. Access to up-to-date financial data is essential for strategic planning and data-backed decision-making.

Train Your Team on Legal Accounting Best Practices

Ensuring that staff are knowledgeable about legal accounting practices is crucial for smooth operations. Provide training on accounting software, compliance requirements, and best practices to cultivate a culture of accountability and reduce the likelihood of errors. 

How to Choose the Right Bank

When selecting a bank, law firms must consider key factors to align with their specific needs and objectives. It is essential to confirm that the bank is approved to handle client trust and IOLTA accounts in compliance with state guidelines and regulations. They must also evaluate the security measures and fraud protections in place to safeguard both firm and client funds. Being mindful of any associated fees and limitations, such as ATM fees, minimum balance requirements, and transfer charges, is also important, as they can influence financial management. 

Typically, a firm requires a business checking account for general revenue, a savings account for tax or emergency funds, and an IOLTA account to manage client funds trustingly. Some firms may opt for a money market account for higher interest-earning and consider a business credit card to support strategic growth.

Top Legal Accounting Mistakes to Avoid

Maintaining financial stability and compliance requires vigilance and precision. Avoiding these common mistakes is critical to optimize your firm's financial health. Here are a few legal accounting mistakes to avoid:

Failing to Track Billable vs. Non-Billable Hours Accurately

Inaccurate time tracking leads to lost revenue and skewed profitability assessments. Precise differentiation between billable and non-billable hours is essential for accurate client billing and internal performance evaluations.

Not Budgeting for Irregular Cash Flow in Contingency Cases

Contingency fee cases can lead to unpredictable cash flow. For example, if a law firm only makes money when its clients win a settlement, the firm may experience financial strain during periods when fewer cases are settled. Without proper budgeting, firms may face financial strain during periods of low-case settlements.

Mixing Personal and Business Expenses

Try to avoid mixing business and personal finances. It's poor accounting practice and can lead to many issues, including legal problems and tax complications. Keeping your business and personal accounts separate is a must-do.

Failing to Establish Internal Financial Controls to Prevent Fraud

Weak internal controls greatly increase the risk of fraud and financial mismanagement by failing to secure and monitor financial transactions. Without safeguards and proper oversight, firms become vulnerable to unauthorized activities, discrepancies, and inefficiencies that can undermine financial integrity and organizational trust.

Overlooking Write-Offs and Uncollected Fees

Ignoring uncollectible fees and necessary write-offs distorts financial statements and negatively impacts a firm's profitability. Law firms must review and write off uncollectible fees and expenses regularly.

Ignoring Compliance Changes in Legal Accounting Regulations

Staying ahead of changes in legal accounting regulations can be a challenge, but failure to do so can result in penalties and non-compliance. Staying updated requires continuous education and the flexibility to adapt your accounting practices to fit any new rules or requirements.

Automate Accounting and Ensure Firm Compliance With Centerbase

Automating accounting processes is essential for law firms to enhance efficiency and ensure compliance with regulatory standards. By streamlining financial operations, firms can reduce errors, save time, and focus on serving their clients effectively. 

Centerbase's integrated accounting and online banking tools are designed to streamline financial operations and maintain compliance within your law firm. By automating trust accounting, enabling real-time account reconciliation, and providing comprehensive financial reporting, Centerbase empowers firms to manage their finances efficiently and confidently, reducing the risk of errors and ensuring adherence to regulatory requirements.

Get a Free Demo!

FAQs

Should Law Firms Hire Legal Accountants?

Yes, legal accountants can provide invaluable insights and expertise in navigating the specific financial complexities faced by legal practices.

What Is the Difference Between Legal Accounting and Legal Bookkeeping?

Legal accounting involves comprehensive financial practices, including compliance and reporting, while legal bookkeeping focuses primarily on recording financial transactions.

Why Is Accurate Law Firm Accounting Important?

Maintaining accurate law firm accounting is crucial to safeguard client funds, ensure compliance with trust account regulations, and support financial transparency. Accurate records also help in strategic decision-making and identifying growth opportunities for the firm.

Do Small Firms Need Law Firm Accounting Software?

Yes! Even small firms can benefit from legal accounting software. It can automate and simplify financial operations to ensure compliance and staff efficiency.

What Are the Consequences of Violating Legal Accounting Rules?

Violating legal accounting rules can result in severe penalties, including financial sanctions, loss of professional licenses, damaged client trust, and legal actions against the firm or individual.

New year, new you, same audit.

Every law firm should start the year with balanced accounts and a solid paper trail. But getting there can be tough. Closing the books on the prior year takes time and methodical thought. Your law firm can minimize the friction by streamlining its accounting process with the right technology. Getting started early doesn’t hurt, either.

Your law firm’s year-end closing process comes together through reconciling bank accounts, adjusting entries, and preparing financial statements for analysis. This article will guide you through the steps necessary for a sound end-of-year bookkeeping process. With this guidance, your law firm will welcome each new year with open arms. Let’s get started.

What are good ways to prepare for end-of-year audits?

Start by getting your ducks in a row (and do it early). The new year always comes more quickly than we think it will, and completing a comprehensive financial review of your firm’s successes is important to ensuring you can achieve more of the same—or better—the next year. Take the time now to review your records, get into contact with clients with outstanding balances, and budget properly. If you get started now, we bet you can still squeeze in some holiday cheer.

The following three steps can help you get your law firm’s finances in order for the end of the year.

1. Account and collect now

Billing and collections are critical to the continuation of your law firm, so we recommend that you do indeed pass go and collect $200 (we also understand that this is easier said than done).

As you know, it’s best practice to collect accounts receivable as soon as possible. You also know that this isn’t always possible with clients and that sometimes creative thinking is necessary to get paid. When it comes to end-of-year accounting and collections, you might have to get extra creative.

Start by double-checking that your law firm’s time entries and billings are up to date. We recommend ensuring that all lawyers and other billing staff have tracked their billable hours through the end of November, with subsequent hours to be monitored at the beginning of December. Run all of your end-of-year reports, including accounts receivable, to get an idea of what’s outstanding and which clients you’ll need to nudge. Use these reporting tools to identify what is worth chasing and what your law firm can write off. As you know, the odds of collection decrease with time and only decrease only further once the year has come to a close.

When it comes to the actual collections, start reaching out now (and certainly before Thanksgiving) to those clients that have been historically slow to pay outstanding balances. Remember to make your end-of-year bills clear and concise, and make it known that you expect to be paid before the conclusion of the year. If needed, try billing every two weeks in the month of December. We also recommend sending reminders to clients regarding their outstanding balance — clients are likely also wrapping up end-of-the-year financials and might even thank you for the reminder. The end of the year might also be the time to begin accepting credit card payments (or other alternatives) or setting up a payment plan for clients who might need another quarter or two to pay your law firm back in full.

By using the right resources and technology advancements, your law firm can streamline its billing and collections process so that your end of year can be jolly and bright and not filled with paperwork.

2. Review your financials and plan for the future

The past is the best indicator of what’s to come in the future. By taking stock of your most recent fiscal year, your law firm will be able to best prepare for the coming one. Once all revenue, expenses, and data are finalized and entered, your law firm should run the following financial statements:

• Prior year profit and loss statement for comparison with current year profit and loss statement
• Accounts receivable statement to review outstanding balances per month
• Cash flow statement to analyze cash flow changes by month (and to have cold, hard facts on how to improve cash flow)
• Opening and ending operating account balances to review account balances year-to-year, quarter-to-quarter, and month-to-month
• The annual budget for comparison with actual financials and any other statements necessary for end-of-year tax purposes

The end of the year also presents a good opportunity for your law firm to review its practices related to legal billing and firm accounting. Your firm can run helpful reports related to time tracking and billing to ensure that all firm members have been recording tasks in a timely and comprehensive manner. This data can also reveal any delays in the process of converting tracked time into client invoices (and then into income).

By reviewing and auditing your law firm’s yearly finances, you’ll be able to set intelligent goals for the year to come. You’ll also know when to be conservative and when to reach. Your bottom line will thank you.

3. Perform reconciliations

After your law firm records all revenue and expenses, it should perform bank reconciliations to ensure that all financial records line up with bank statements. Any discrepancies need to be reviewed and investigated thoroughly. Best practices here are to reconcile monthly and as soon as bank statements arrive. Otherwise, your law firm will need to contend with 12 months of bank statements in a short period, making it more challenging to identify errors.

Additionally, many jurisdictions require law firms to reconcile client trust accounts on a monthly (or at least quarterly) basis. This does not, however, negate your law firm’s duty to complete year-end trust account and retainer reviews. An annual review is useful for double-checking reconciliations done throughout the year to ensure that no mistakes or miscalculations were missed. The ledger sheet for each client’s trust account should line up completely with the corresponding bank statements. Get on top of this now, and it’ll make a difference in your end-of-year audit and day-to-day operations.

What proactive actions can you take to prepare for an audit?

We get it — you’re trying to minimize the pain of your end-of-year audit. The best way to go about doing so is to track regularly and prepare all year long. That means your law firm should be checking its receipts monthly.

Regular expense tracking must be a part of your law firm’s year-end closing process. By following accounting standards and making sure your law firm’s balances actually balance, and by tidying up any issues along the way, your law firm won’t come into the audit with a buildup of problems. Be sure to account for money going out of the firm and to track revenue coming in. Without this vital information, your law firm will lack an accurate picture of its financial well-being. Don’t go into the next year believing that your law firm is on more financially solid ground than it actually is. Accurate and regular review will help your law firm avoid common problems like inadequate cash flow and the inability to cover firm overhead.

Tech can make being proactive easier. The most successful law firms integrate their accounting processes with a cloud-based practice management software platform that helps them improve their firm’s efficiency, leading to easier end-of-year audits. When your firm chooses the right technology, you help your lawyers reduce the time that they’d otherwise spend on administrative tasks (think timekeeping, invoicing, and collecting overdue invoices). You’ll also be able to more accurately (and quickly) project your firm’s finances and study your historical and projected cash flow so you can plan more accurately and set realistic goals for next year.

Save yourself headaches by going into your end of year armed with receipts.

How does an audit prepare you to enter the new year?

Auditing is key to success. It will provide you with a bird’s-eye view of your law firm, giving your firm’s management and administrators the tools they need to either shake things up or maintain the status quo. By conducting a proper audit, you’ll have important data to move through the new year.

An audit will help your law firm compare this year's revenue to last year's revenue. Is your firm swimming in dough? Was Q3 tougher this year than last? Are you overspending on legal subscriptions? By comparing yearly revenue, your law firm will be able to make intelligent, data-driven decisions for the upcoming year. You’ll also be able to determine and make adjustments on spending more broadly. Maybe your law firm is tight on cash at the beginning of the year but flush by the end. By reviewing smaller yearly trends, your firm can better account for when it can afford to spend and when it needs to be pennywise.

Your yearly audit can also inform billing and collection practices. Maybe your clients need more regular reminders. Maybe your clients are all paying on time. Maybe it’s even time to fire a client for regularly missing payments. By taking stock of these trends, your firm will be able to focus its efforts on paying clients.

Now’s the time to get your law firm ready for an audit

By getting your law firm’s end-of-year finances in order, your firm will be primed for growth and ready for change. Data collected in connection with your end-of-year audit will help guide your firm through the next year. With the right practice management software, your firm will be able to do it all. This includes enjoying the holidays and decking the halls with bounds of billables.

As tax season approaches, law firms face a familiar set of challenges — organizing records, compiling deductions, and ensuring compliance with complex tax rules. Whether your firm maintains meticulous records year-round or tackles tax prep closer to the deadline, understanding the latest regulations for the 2024 tax year is essential for smooth filing.

This guide highlights key deductions, important deadlines, and strategies to help law firms successfully navigate tax season.

Understanding 2024 Tax Responsibilities for Law Firms

Before preparing your law firm's taxes, you must understand your firm's responsibilities based on its business structure, as different entity types have different tax requirements. You'll also need to account for different employee and contractor classifications.

• Partnerships and LLPs: These pass-through entities file informational returns (Form 1065), but profits flow through to partners, who report their share of the partnership's income on their personal tax returns.
• S-Corps: Like partnerships, S-Corporations pass income through to shareholders, who report it on personal returns. S-Corps file Form 1120-S.
• C-Corps: C-Corporations are taxed at the corporate level (21% federal corporate tax rate) and file Form 1120.
• Sole Proprietorships: Solo attorneys operating under their own names file Schedule C along with their personal tax returns.

You must also classify your firm's workers correctly. Employees require W-2 forms, while independent contractors must receive 1099-NEC forms.

With this foundational understanding of your firm's tax responsibilities, you're ready to start preparing your taxes.

Step 1: Know your deadlines

For calendar year firms, 2024 tax deadlines are:

• W-2s and 1099-NECs to recipients: January 31, 2025
• Partnership and S-Corp returns: March 17, 2025
• Individual, C-Corp, and sole proprietorship returns: April 15, 2025
• Extended deadlines (if needed):
  • Partnerships and S-Corps: September 15, 2025
  • Individuals and C-Corps: October 15, 2025

Step 2: Organize your law firm's records

The next step is organization. If you've maintained accurate financial records throughout the year, this step should be straightforward. But other firms may have to put in extra work to get their records in order. Documents like previous tax returns, payroll records, expense receipts, income statements, and balance sheets need to be compiled and organized into a system before being handed over to your firm's accountant. Disorganized and incomplete files can lead to filing errors, so organized accounting operations followed throughout the year are essential.

Step 3: Maximize tax deductions for law firms

At the bare minimum, business expenses must be both ordinary and necessary for a legal practice in order to be claimed. Let’s take a look at some of the most commonly used law firm deductions, along with precautions to consider before claiming them as business expenses.

Credit card transaction fees

An increasing number of law firms accept credit card payments from clients, and many credit card processing companies charge firms a per transaction or monthly flat fee in exchange for transferring those payments. The IRS has determined that the fees associated with these transactions may be deducted as businesses expenses.

Office expenses

The rules around deducting office expenses can be somewhat confusing, so it’s important to consult a tax professional before filing. However, some of the most common tax deductions related to law office expenses include:

• Interest costs for rent or mortgage on the law office building or buildings
• Home office deductions for law firms that are conducting business remotely
• Office furniture and equipment may be deductible as first-year expenses, regular depreciation, or as safe harbor.
• Normal office supplies may be deducted in full during the year of purchase, based on the premise that the firm only purchases what is reasonably expected for usage within the year.
• Office maintenance, as well as some repairs

Marketing and advertising costs

Most law firm marketing expenses can be deducted, including website costs and print advertisements. For firms that include networking within their marketing strategies, a percentage of meal and entertainment expenses may also be deductible as long as the event was primarily related to firm business.

Continuing legal education (CLE)

Legal professionals can typically deduct education expenses that are deemed necessary to the profession.

Under some circumstances, legal conferences may also be eligible deductions if they are targeted towards improving the law practice in some way. It’s best to notify the firm accountant about all educational expenses so they can determine which are appropriate deductions.

Professional Dues

Dues paid by law firms to professional associations on behalf of firm members may also be deductible as business expenses. This includes bar fees, trade association dues, and chamber of commerce fees. Public service organizations may also qualify as long as their main purpose is the provision of community services.

Insurance

Law firms may also be able to deduct a variety of insurance premiums. As stated by the IRS, this includes malpractice insurance covering personal liability for professional negligence. Premiums for property insurance to cover damage and liability for incidents inside the physical law office may also be fully deductible.

Legal research and subscriptions

In order to stay on top of legal industry trends and changes to the law, firms need to purchase a variety of resources for members to utilize. Online research platforms, legal publications, and industry memberships are deductible if they’re purchased by for the firm and used to support your legal work. There may be caveats based on subscription length and terms, so it’s always best to consult an accountant for clarity.

Travel expenses

Travel on behalf of a law firm may also be tax-deductible. That includes travel that occurs outside of a regular radius to handle a specific case or research a particular matter. Travel cost deductions may also include air travel and hotel accommodations to conferences or out-of-state meetings, as long as they are substantially related to the business of practicing law.

Step 4: Review eligibility for Qualified Business Income (QBI) deduction

Firms operating as partnerships, LLCs, or S-Corps may be eligible for a 20% deduction on qualified business income. This valuable deduction is still available for 2024 — but it begins to phase out for high-income firms, especially professional service firms like law firms.

• Phase-out begins at $191,950 (single) or $383,900 (married filing jointly).
• Above these thresholds, law firms must calculate eligibility based on wages paid and depreciable assets.

Step 5: Prepare for the future

While your immediate focus is 2024, law firm leaders should be aware that many provisions from the Tax Cuts and Jobs Act (TCJA) — including the 199A pass-through deduction and bonus depreciation — are set to expire after 2025 unless Congress acts.

This makes 2024 and 2025 critical years for tax planning — particularly for firms considering large purchases, restructures, or succession planning.

The takeaway

The most important components of tax preparation for law firms are deadlines, organization, deductions, and documentation. By staying organized and proactive, your firm can reduce tax liability, avoid penalties, and ensure compliance — all while freeing up valuable time to focus on clients. The information outlined in this guide is purely informational and should not be used as advice. Law firms should consult a qualified tax professional who understands the legal industry to successfully prepare and file taxes.

Learn how Centerbase sets you up for success during tax season and beyond with streamlined accounting and banking software.

Every service-based business wants to get paid faster, and law firms are no different. Imagine getting paid 20 percent faster, for example. What kind of a difference would that make to your law firm’s cash flow, profitability, and ability to invest in growth?  

One of the best ways to ensure an efficient billing and payment cycle is to make it easy for clients to pay — and that requires having a modern legal billing solution with embedded payments processing in place.  

This allows your clients to pay directly from within their digital invoice and gives them options for payment types, such as credit and debit card payments, automated clearing house (ACH) and eChecks.  

Payments-related challenges law firms face today 

The ability to get paid on time requires efficient processes and software to support them —  timekeeping for billable hours, effective billing templates, accurate billing cycles, and the list goes on.  

But even if you have processes and systems in place, be aware of common bottlenecks that can slow down legal billing processes and negatively affect your clients’ on-time payment rates — and your firm’s profitability. 

1. Inefficient pre-billing process 

Your law practice’s monthly billing process likely begins with compiling billed time and related expenses for each client into a pre-bill. If your attorneys have tracked their time diligently, this part of the process should be smooth.  

Reviewing, revising and finalizing the pre-bills is where slowdowns occur. A lead attorney must review the pre-bill, add notes, and adjust costs as needed before the bill can be finalized and sent to the client.  

If you have electronic pre-bill functionality in your legal billing solution, you can speed up this process by automatically moving pre-bills through the approval chain. 

Jennifer Landrum, office manager at Griffith, Jay & Michel, LLP, estimates it used to take her about two weeks to complete her firm’s billing cycle. Using the pre-bill feature within Centerbase, she now saves a minimum of three days each month on billing alone. 

2. Complicated, multi-step billing processes 

Hopefully, your law firm’s billing software automates many of the routine billing and payment functions, such as calculating billing interest and tax, applying existing client funds to bills, and sending overdue bill reminders. If you conduct these manually, however, you’re missing out on significant efficiencies. 

Electronic legal billing and payments software can make your billing process more efficient by generating draft bills, taking your firm’s fee structure into account, and customizing the billing and payment process to your firm’s needs. 

Jane Corser, firm administrator at Latham, Luna, Eden & Beaudine, LLP, says that when her firm switched to the Centerbase platform, her billing cycle improved from 10 days to just three days. 

3. Lack of flexible and easy payment options for clients 

To get paid faster, use immediacy to your law firm’s advantage. The sooner a client receives an invoice after services are rendered, the sooner they’ll pay their bill because the services are fresh in their mind.  

Even if you send invoices soon after providing services, however, the likelihood of clients paying their bill on time drops significantly if you don’t make it easy for them to do so. 

For example, offering flexible payment options that meet clients' needs, such as billing arrangements, printed or digital bills, online payments and multi-payor functionality, increases on-time payments. And including a "Pay Now" link within digital bills and statements makes paying even easier.

How payments challenges are being solved in the legal industry 

When it comes to law firms’ billing and payments processes, efficiency and flexibility are key. The best way to achieve both is to have a legal billing solution with an embedded payments feature. Embedded payments can: 

• Streamline billing and payment workflows. Attorneys and firm admins save time by not toggling between various systems for billing and payment processing.  

• Handle payments and reconciliations in the same system. You no longer have to use your general ledger and bank statements to balance your books. Payment and deposit records are created automatically, and funds are automatically applied to the client's bill.

• Reduce errors and save time. Payment processing that’s embedded in your legal practice management software means tracking billable time, invoicing, and receiving payment takes place in one system. 

• Fund separate accounts. Not every payment processing system will allow for this, but funding trust and operating accounts separately helps attorneys remain compliant with IOLTA rules. 

What law firms should look for in a payment solution 

When researching legal billing and payments solutions for your law firm, consider these features to help you select the right solution: 

• Embedded payments feature. While many legal billing solutions offer integrations with payment solutions, having a fully embedded payment feature is even better. This eliminates a connection point with your legal billing solution, and your team can efficiently manage all billing and payments processes in one platform. 

• Positive client experience. A friction-free payments process for your clients means a better experience for them, and faster receipt of payment for your firm. Make sure the system offers modern online payment options, flexible payment arrangements for one-time payments or recurring payments, and a client portal where you can communicate with clients about invoices.  

• Automated workflows. Save your firm time with a payments system that automatically creates payment and deposit records and generates client receipts. 

• Security and compliance. Ensure the payments capability is fully secure and compliant with all banking rules and regulations, including legal trust accounting rules. 

• No additional charge or monthly subscription fee. If you have a standalone payments solution that integrates with your billing system, you’re probably paying a separate monthly fee on top of your billing system costs. Conversely, an embedded payments feature within your legal billing solution likely has no additional charge. 

Manage the Business of Your Firm with Ease 

Embedding payments into your billing solution makes it easy for clients to do business with you and allows you to manage the business of your firm with automation and simplicity. Learn how you can accomplish this with Centerbase Payments, powered by Stripe and embedded in the Centerbase platform. Benefits you can expect include:

• Get paid up to 20% faster and increase cash flow up to 100%
• Offer your clients the modern and friction-free payment options they desire
• Efficiently, accurately, and automatically account for all payment activities

As the year’s end approaches, it’s time for law firms to close their books and start end-of-year audits. This annual task ensures that accounts are balanced and sets the stage for a financially sound start to the new year. However, this process can be stressful if your law firm doesn’t follow accounting best practices.

Here’s a step-by-step guide that will help your law firm sail through the audit process. (You can also download our handy end-of-year accounting checklist for law firms here.)

Step 1: Organize your financial records

Review and organize all financial records, including invoices, receipts, bank statements, and expense reports. Ensure that all transactions are accurately recorded and categorized throughout the year to maintain a real-time overview of your firm’s financial health.

Step 2: Tell timekeepers to enter their time

Check whether billable hours are up to date. Nudge your attorneys and other timekeepers to get their time in regularly as you head into the holidays. Automated time capture can make it easier for your timekeepers to stay on top of their billables.

Step 3: Update all client billing records

Run your accounts receivable reports to understand what amounts are outstanding. These reports can help you determine what amounts to chase down and what to write off.

Develop a comprehensive list of clients with unpaid invoices, including their name, matter number, amount owed, and date overdue. Prioritize invoices for action, starting with the most recent unpaid ones. The odds of collection decrease with time, especially when you’re trying to collect over the holidays. Start reaching out before Thanksgiving to clients who have been historically slow to pay outstanding balances.

We recommend starting the collection process by sending reminders to clients regarding their outstanding balances. If you aren’t already, accept online payments to make it easier for clients to pay you in just a few clicks.

For aged invoices, consider offering clients the opportunity to settle a portion of the debt in exchange for forgiveness of the remaining balance. You may also want to set up a payment plan for clients who might need another quarter or two to pay your law firm back in full.

Step 4: Review expenses

Review all expenses your firm incurred throughout the year. Verify that these expenses are accurately recorded, categorized, and supported by proper documentation. If you have any outstanding debts with vendors or contractors, settle them before you close your books.

Step 5: Update your fixed asset records

Update records of your firm’s fixed assets. These long-term assets have a usage life of longer than a fiscal year. Some examples of fixed assets are new laptop computers, software, and office furniture.

Run depreciation calculations for these assets using your accounting software. You may be able to write off this depreciation as a tax deduction.

Step 6: Verify your payroll tax

Review and verify all payroll tax withholdings and payments. Make sure you accurately report these taxes to federal and state authorities.

Step 7: Check your employee records

Verify and update employee and contractor records for W-2s and 1099s. Confirm that all necessary information is accurate.

Step 8: Study your financials

After you have finalized and entered all of your revenue, expenses, and data into your financial systems, run the following financial statements:

• Prior year profit and loss statement for comparison with current year profit and loss statement
• Accounts receivable statement to review outstanding balances per month
• Cash flow statement to analyze cash flow changes by month
• Opening and ending operating account balances to review account balances year-to-year, quarter-to-quarter, and month-to-month
• The annual budget for comparison with actual financials and any other statements necessary for end-of-year tax purposes

Step 9: Reconcile bank and trust accounts

After you record all revenue and expenses, perform bank reconciliations to ensure that all financial records line up with bank statements. Investigate any discrepancies thoroughly.

A best practice is to reconcile your statements monthly and as soon as bank statements arrive. Otherwise, your law firm will need to contend with 12 months of bank statements in a short period, making it more challenging to identify errors.

Additionally, many jurisdictions require law firms to reconcile client trust accounts at least quarterly, if not monthly. You should still complete year-end trust account and retainer reviews. Your annual review is an opportunity to double-check reconciliations done throughout the year and correct any mistakes. The ledger sheet for each client’s trust account should line up completely with the corresponding bank statements.

Also review client retainer balances to determine which retainers need to be replenished. Ensure that all earned funds have been appropriately transferred into operating accounts from retainers held in trust.

Step 10: Close your books and plan for the future

After you have finalized and studied your year-end financials, close your books. You may want to set a lock date to prevent future changes plus a password to limit access.

The next step is to review and adjust your billing and accounting practices based on what you learned. For example, your data will show whether you need to adjust your time tracking and billing practices to ensure that all timekeepers record their tasks and send out bills on time.

Every day is the right day to get your law firm’s books in order

The best way to prepare for the end-of-year audit is to stay on top of your firm’s accounting all year long. By following these best practices, your firm won’t build up problems over the year.

Stay tuned for our next blog, where we’ll explore how law firms can financially prepare for the new year. In the meantime, contact us to learn how we can help you close the books on this year.

Written by Robin Neill

Law firms, like any other business, need to have a firm grip on their finances to thrive and grow. Yet many law firms struggle with budgeting and other tasks that help their firm run like a well-oiled machine.  

In this article, the first in our new series on budgeting for law firms, we’ll explore the challenges that law firms face when it comes to their finances and the benefits of a law firm budget. 

Why do law firms struggle with budgeting? 

Budgeting has never been a favorite task of legal professionals. After all, attorneys don’t typically go to law school to earn a business degree. They’re trained to understand the intricacies of the law, not the detailed aspects of business planning.  

However, the business side of law is just as important as legal practice. The problem is, law schools don’t offer courses that teach business skills, such as how to manage law firm finances. This knowledge gap can hinder attorneys’ ability to feel confident about business financial decisions. 

Moreover, most attorneys don’t want to focus on the numbers. They want to practice law and provide legal counsel to their clients. There’s no extra time in the billable day to crunch the data and generate budgets. This can overshadow the importance of understanding a law firm’s financial health and lead to neglecting the practical business aspects of running a firm. 

Finally, many attorneys think they can set their firm’s budget once and forget it. Attorneys may struggle to balance client demands with long-term strategic planning for the firm. Law firms must recognize that budgeting is not a one-time event but rather an ongoing process that requires regular monitoring and adjustment. 

Fortunately, there’s a growing understanding within the legal industry that law firms are, at their core, businesses. While the law is the foundation of the work, the business side is equally critical for long-term firm sustainability and growth. 

Why budgeting matters for law firm success 

Why is budgeting so important for law firms? The answer lies in its direct impact on the firm’s financial sustainability. Here are three key reasons why law firms should prioritize budgeting. 

• Getting financial clarity: Budgets enable law firms to track revenue, expenses, and cash flow meticulously. They allow for a systematic evaluation of income and expenses, identifying areas for improvement. With this granular insight, law firm leaders can make informed decisions across all areas of their practice. 
• Increasing overall profit: Law firm budgets aren’t just about managing expenses; they also serve as a blueprint for increasing profitability. By setting revenue goals and monitoring progress toward them, law firms can focus on opportunities for growth. Budgets provide a roadmap for expanding client portfolios, adjusting billing rates, and diversifying practice areas.  

• Evaluating matter and client profitability: Not all clients and cases are equally profitable. Budgeting enables law firms to make decisions based on which clients and practice areas contribute most to their bottom line. Armed with this knowledge, firms can tailor their marketing efforts, pricing strategies, and resource allocation to focus on the most lucrative opportunities.  
• Managing expenses: When law firms understand their expenses, they are more likely to identify areas where costs can be trimmed without compromising quality, leading to improved profit margins and a healthier bottom line. 
• Allocating resources: Budgeting empowers law firms to monitor areas where they may be overspending or where they can reallocate resources more efficiently. This newfound control can help prevent financial crises, reduce waste, and ensure financial stability in the short and long term. 
• Making strategic decisions: Budgets help firms evaluate the financial feasibility of expanding into new practice areas, opening additional offices, and hiring more staff. Budgets also help firms assess the risks and rewards associated with major investments, such as technology upgrades or marketing campaigns. Having a budget ensures that decisions are based on financial considerations rather than gut feelings or ad hoc responses to market trends.  
• Ongoing financial planning: Budgeting isn’t just an annual exercise; it’s a dynamic process that supports ongoing financial planning. Regularly reviewing and adjusting budgets in response to changing circumstances, such as economic downturns or unexpected expenses, ensures that law firms remain adaptable and resilient. It also facilitates long-term financial planning, including retirement planning for partners, succession planning, and capital investment strategies. 

• Building accountability: When each department or team has a budget to adhere to, it encourages responsible spending and resource management. It also fosters transparency as financial information is readily available for partners and staff.  

Where can law firms get help to improve their budgeting? 

Law firms don’t have to go it alone, muddling through the budgeting process. a variety of resources that can help. 

First, consider whether you need to bring in an outside expert, such as an accountant or financial manager. You need access to an expert who understands the intricacies and challenges specific to law firm budgeting.  

Podcasts and online resources can provide insights into financial management best practices. Attorneys may also seek advice from local or state bar associations, which may offer salary surveys and other useful financial data. 

Additionally, attorneys should embrace collaboration. The legal profession is filled with experts who love to share their experiences and provide feedback. Asking for referrals and engaging in dialogues with peers can lead to fresh perspectives and better financial management. 

And, of course, legal technology is a game-changer for financial management in law firms. Implementing a robust system that tracks expenditures and provides meaningful financial reports is essential. These tools should offer insights into cash flow, expenses, profitability and more. 

Budgeting leads to a stronger law firm bottom line 

Budgeting isn’t just about numbers; it’s about building a strong foundation for the future of a law firm. When attorneys recognize the importance of budgeting and seek the right expertise and tools, they can  positively transform their firm’s financial practices. 

Sign up for a free demo to learn more about how Centerbase can help you take the pain out of the budgeting process.