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.
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.
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
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 demotoday!
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.
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.
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.
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.
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.
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.
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.
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.
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.
Forecasting isn’t only for your local weatherman—it’s an essential legal process too. Fortunately, forecasting income and expenses isn’t as complex as predicting where the next hurricane will hit or when the first freeze of the year will occur. But, when you’re juggling all the tasks of running a law firm, the forecasting and budgeting process can seem both challenging and overwhelming.
How do you manage the short term while trying to promote growth in the long term?
What are your startup costs?
How do you project revenue accurately?
Law school courses don’t teach you the practical aspects of running a business, even though they come up every day in real-life practice at a small firm, especially for solo practitioners.
Creating a solid budget and getting your law firm’s finances in order are imperative. This is the only way to stay competitive in the legal market.
The good news is that with the right strategy and management tools, your firm will be off and running. Let’s take a look at these critical processes and what steps you can take to create a budgeting plan.
What is budgeting?
A budget is an estimate of revenue and expenditures for a specific time period. Basically, it’s your law firm’s plan for sustainable financial success, and budgeting is the process of creating that plan.
Budgeting provides your law firm with a measuring stick for periodic review throughout the next year. If your law firm is hitting its goals, maybe it’s time for an office party! If it’s missing your desired milestones, it’s probably time to re-evaluate and adjust. Creating a comprehensive budget is the best way to proactively manage your law firm’s finances.
What do you need to consider before creating a budgeting plan?
A good budget is thoughtful and aligns anticipated revenue and expenses with goals.
What to include in your law firm budget will depend on the size of your firm, how long it’s been in operation, and what practice areas it specializes in. However, there are a few constants for all practices that you should consider when drafting your firm’s budget. Ask yourself these questions.
1. What are your firm’s expenses?
Don’t start your budget planning in a vacuum. Instead, start by thinking about your firm’s mandatory expenses.
· What is required of the legal professionals at your firm?
· What is the cost of bar association dues?
· What do their CLE expenses look like for the year?
· Does your firm maintain malpractice insurance?
· What is the yearly premium?
· What about subscriptions?
Additionally, think about staffing. If firm leadership is planning to add more employees to the firm, you’ll need to know whether your firm will have money to cash flow that addition. You’ll also want to consider the tangibles: the cost of office space, hardware, and legal and accounting software. What about upgrading to new technology? Or the cost of business cards? Note that some of these expenses will be incurred yearly, some monthly, and some only once.
2. What is your firm’s projected profitability?
Once expenses and other overhead costs have been itemized, your next step is to consider profitability (and to do so realistically).
Revenue is the money your firm receives from clients for legal services rendered. When you subtract expenses and overhead costs from revenue, you have net profit (otherwise known as the bottom line).
Think about net profitability in real terms: how many clients will your firm need to service over the next quarter (the next two quarters? the next year?) to bring in the desired level of revenue? Are your firm’s rates high enough to support the practice? What is the required cash flow to keep the lights on? Can improving your invoicing practices improve that cash flow? What about accepting alternative payment methods like credit cards?
Keeping track of your law firm budget can be time-consuming and stressful. Many new law firms will opt for Excel spreadsheets or budgeting templates to get started with tracking planned expenses and revenue. However, when your law firm grows and its workflow increases, keeping track of your law office budget on those tools might prove even more time-consuming and stressful. The right legal reporting software puts a host of budgeting and financial reports at your fingertips, each of which will help your law firm organize your finances, optimize your practice, and help you strengthen client relationships.
When it comes to how often to review your budgeting process, we recommend assessing your budget each month. This regularity will provide your law firm with a good idea of whether you need to make any adjustments. Additionally, your firm should review its budget yearly to adjust for goals, new practice areas, or unforeseen circumstances (like a market crash or, say, a global pandemic).
What are some tips and tricks for budgeting?
While budgeting will look different for each firm, we suggest a couple of tools of the trade to get you started on creating or rethinking your law firm budget.
Think short-, mid-, and long-term
Setting your law firm goals is one of the first steps in creating a workable budget. Goals are a benchmark to help you determine where to put capital and where to cut costs.
We recommend classifying your goals into the following categories: (1) short-term goals that you can reach in the first six months of your fiscal year, (2) mid-term goals that can be reached by the end of your fiscal year, and (3) long-term goals that will take your firm longer than a year to reach. Also make sure that each set of goals is specifically laid out, measurable, and realistic.
Work smarter, not harder
Using the right tools and legal tech can transform a firm’s profitability and law practice management. While it may seem like just another line item expense, technology can actually help keep your costs low through workflow and document automation, which frees up your lawyers and staff to work on billable matters (i.e., tasks that pay).
The right legal tech will help your firm simplify nonbillable tasks like client intake, practice management, billing and collections, and time tracking. With more time for billable work, your firm can raise its revenues. And with the right tech that offers a streamlined experience and integrations, your firm will minimize its use of subscription services and administrative time and thus minimize your overhead costs. The result is the perfect recipe for increased profitability.
Keep an eye on trends
We aren’t yet out of uncertain times, and keeping a pulse on what’s to come is important when setting your budget. If your law firm hasn’t yet undergone a full return to the office, your budget may need to include capital for the transition. Or, if your law firm has stayed committed to a hybrid workplace, you might still need to budget for increased tech costs and stipends to employees.
Additionally, many law firms are amplifying their marketing strategies. It’s likely worthwhile to consider how marketing efforts can fit into your budget and increase awareness and thus revenue.
What are the differences between forecasting and budgeting? How do they play into one another?
Budgeting and forecasting are both helpful tools that your law firm can and should use to establish a financial plan. As discussed throughout this article, budgeting is the game plan for where firm management wants to take the firm.
Essentially, your budget is an outline of financial expectations and goals. Forecasting, on the other hand, is interpreting whether that plan is working and whether the firm is moving in the right direction by estimating revenue, costs, and ultimately profit that will be achieved at a future date. Generally, forecasting looks at historical data (like last year’s or last quarter’s profits) and then anticipates future outcomes based on it. It’s like a crystal ball, but only better because it’s filled with cash.
Forecasting helps firm management make needed adjustments in practice areas by hiring in anticipation of a boom and, more generally, helps you develop an informed business plan. You can then take that informed business plan into consideration when developing a budget.
It’s time to start creating your law firm budget
With some critical thinking and the right tools, your firm will be ready for the coming year. Remember that no budget is perfect, but by having one in place and monitoring it regularly, your law firm can forecast big changes and adjust as needed.
“Bills, bills, bills.” They’re top of mind for law firms with associates and partners struggling to hit their billable hours requirements. But most legal professionals dread tracking their time down to the minute. And law school doesn’t prepare you for just how much of the day lawyers spend breaking down their work into six-minute increments.
Your law firm likely bills its clients by the hour. Therefore, you’re probably familiar with the usual roadblocks to hitting billable hours targets. Typical problems throughout the workday include projects that take up non-billable time such as client development, career development and mentoring for younger lawyers, billing and time spent on administrative tasks, and slowdowns associated with outdated software and inefficient processes.
We’ll explain how to make the most of the long hours that your timekeepers bill using technology. But first, let’s talk about what is and isn’t billable.
What are billable hours?
A billable hour is an hour spent serving the client. It includes all the time that attorneys and paralegals spend actually thinking about or working on a matter or case.
Examples of billable time include revising a purchase agreement; drafting an employment agreement or other contract; writing a brief or appeal; strategizing, researching, and corresponding with clients; and attending hearings or meetings. Put simply, it’s time you spend on professional tasks that your law firm can and should charge to its client at a previously agreed-upon rate.
The billable hour has been around for a long time. However, the legal industry has seen a movement toward a range of alternative billing structures. A few examples include flat-rate billing, subscription-based fees, contingency fees, limited scope representation, and sliding scale fees.
Regardless of what structure your law firm implements, the key is making sure that you’re tracking time accurately and getting paid promptly by clients for services you render.
What is the difference between billable and nonbillable hours?
Non-billable hours may be fun in the moment, but not when it comes to billing time. Associates don’t like recording them on their timesheets, and partners generally don’t enjoy seeing them either. But they’re essential work for the lifeblood of your law firm. The key is to minimize the time your associates have to spend on unnecessary non-billable work that doesn’t add value to your firm.
So, what is non-billable time? Non-billable hours are any hours that you can’t bill to a client. This includes time spent on administrative tasks (like billing and collections), wooing new clients and other business development activities, attending continuing legal education (CLE) seminars, participating in ABA and other bar association meetings, and schmoozing at networking events.
Non-billable work is important to your law firm. It keeps it organized, running, and growing. Issues arise, however, when lawyers spend needless amounts of time on administrative tasks that they could automate or delegate. By automating administrative workflows with legal technology, your law firm can decrease the time that its lawyers and paralegals spend on non-billable tasks and improve billing productivity.
How are billable hours typically tracked and calculated?
Billable hours are tracked in different increments depending on your law firm’s preference. The usual suspects are the six-minute increment and the fifteen-minute increment (rounded up or down). Timekeepers must track their time accurately to bill clients properly. Accurate timekeeping also helps law firms set proper pricing strategies and billing metrics.
Most of the time, calculating your billable time is straightforward. You simply multiply the number of billable hours you worked by your hourly rate.
However, calculating the number of billable hours can get complicated if your law firm charges different fees to different clients, if it bills certain practice areas out at higher or lower rates, or if the rate you charge changes later in the fiscal year. All of these changes mean that manual spreadsheets just don’t cut it when it comes to tracking properly and getting paid.
To calculate your billable hours, we recommend the following best practices.
1. Set hourly rates for billable hours
This requires forethought and analysis of your law firm’s finances (reporting is your best friend here). Questions to ask yourself when setting hourly rates include: What is the seniority level of the attorney being billed out? How specialized are the services being offered? What is the quality of the client relationship? What is the market saying? When determining hourly rates, we recommend that your law firm also consider and account for other expenses such as overhead costs, non-billable tasks associated with the matter, and other employee-related costs like vacation time.
2. Track, record, and add up billable and non-billable hours
You rely on your firm’s attorneys to accurately track and record their time. As discussed in more detail below, tech can help your attorneys both track and maximize their billable hours. We recommend tracking both billable and non-billable time spent on client matters. This will give your firm valuable data and help with project management. It will also help your firm evaluate whether the hourly rate charged is sufficient. When the billing cycle ends (usually monthly), your accounting department will add up all billable time and create an itemized list of services rendered.
3. Multiply billable hours by the hourly rate and add any additional fees or taxes to the invoice
This is the part where your law firm gets paid! But the billing process can become tricky if your firm charges different rates based upon the client, firm practice group, or lawyer seniority. Your firm will need to create a set of rate tables and apply those to different clients or matters.
We highly recommend using tech to ensure that your calculations and billing are correct. There are few things more embarrassing or worrying than a client questioning the accuracy or integrity of a bill.
How can my law firm maximize billable time?
Simplifying the time-tracking process and offering integrations is the best way to maximize billable time. Essentially, it helps your lawyers cut through administrative frustration and gives them more daylight hours to work on actual billable work. Other legal software can also save your lawyers and firm non-billable hours by automating routine tasks, such as billing and collections.
We recommend both encouraging your legal staff to record tasks as they are completed and setting an office-wide policy for when time-entry is past due. We understand how tough simultaneous tracking can be, especially when your attorneys are working on multiple matters for multiple clients and are in and out of the office all day for hearings and client meetings.
Mobile tracking (as discussed below) can help even your firm’s most forgetful attorneys track time throughout the day. Tracking and entering daily is just best practice. It ensures that you’re billing clients completely and accurately.
A firmwide policy for billing descriptions should also be a part of your policy governing time recording. No client wants to see a bill for something vague, like “attended meeting.” Training your lawyers on the front end will save your law firm endless time when revising client bills and invoices.
As you know, technology can help streamline your billing processes, and it can also help your lawyers draft templates with descriptions of tasks completed and billed that they can use for certain clients and matters.
Training lawyers on how to delegate non-billable tasks to support staff is another way to maximize billable time. Your law firm has support staff for a reason. To the extent possible, lawyers at your firm should be spending most of their day working on billable tasks. As we’ll discuss below, technology can help your law firm get there.
How can technology help track billable hours?
Legal tech can upgrade the way your firm’s lawyers track time, and a comprehensive, integrated tracking system is the best way to do it. An organized system will help to ensure that no billable hour goes untracked. What’s even better is that productivity tools remove the tedium out of billing, so your lawyers can spend less time writing descriptions and more time writing briefs.
Consider the following tools and features courtesy of tech.
An integrated system
Capturing time automatically through system integration will transform time tracking for your firm’s attorneys.
Inbox and calendar entries. When you integrate your billing software with Outlook, watch the automatic capture of time spent drafting emails or attending meetings. Eliminating the need to manually enter time saves your attorneys time and ensures their time entries are more accurate. Automatic time capture from the right platform can help law firms bill, on average, an extra 8 hours every month.
Documents and tasks. Integrating your time-tracking system with Word and Excel will also save your lawyers time. Your attorneys and legal staff can enter billable hours in real-time, removing the hurdle of tracking for each matter individually.
Communications, calls, and text messages. With an integrated mobile application, your lawyers will be able to track inbound and outbound calls with clients. These calls are tracked and automatically recorded as billable events, and your firm’s attorneys can also automatically capture text messages as billable events. Automation removes the hurdle of remembrance and gives your lawyer’s more time to focus on getting work done.
If you’ve learned anything from this article, it’s that everyone hates tracking and entering time. Help your firm’s lawyers get to the important stuff by providing convenient, easy-to-use timesheet templates. No one should be using an Excel spreadsheet or handwritten diary (or law practice management, case management, or document management for that matter!).
Timers
Timers are a game-changer. They help your attorneys better track multiple clients and multiple matters. Providing software where your firm’s lawyers can create client-specific templates and prewritten narrative entries for larger matters will save everyone time and headaches.
It’s time to bill better
By getting high-quality legal time management software in place, your lawyers will have more time for actual legal work. Your firm will reap the rewards of enhanced efficiency and optimization. And, not to mention, your lawyers and staff will be happier.
