New year, new you, same audit.
Every law firm should start 2023 with balanced accounts and a solid paper trail. But getting there can be tough. Closing the books on 2022 takes time and methodical thought. Your law firm can minimize the friction by streamlining its accounting process with the right tech. 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 2023 with open arms. Let’s get started.
Start by getting your ducks in a row (and do it early). 2023 is right around the corner, and completing a comprehensive financial review of your firm’s 2022 successes is important to ensuring that 2023 is more of the same. 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.
Billing and collections are critical to the continuation of your law firm, so we recommend that you do indeed pass go and collect $200 (we also understand that this is easier said than done).
As you know, it’s best practice to collect accounts receivable as soon as possible. You also know that this isn’t always possible with clients and that sometimes creative thinking is necessary to get paid. When it comes to end-of-year accounting and collections, you might have to get extra creative.
Start by double-checking that your law firm’s time entries and billings are up to date. We recommend ensuring that all lawyers and other billing staff have tracked their billable hours through the end of November, with subsequent hours to be monitored at the beginning of December. Run all of your end-of-year reports, including accounts receivable, to get an idea of what’s outstanding and which clients you’ll need to nudge. Use these reporting tools to identify what is worth chasing and what your law firm can write off. As you know, the odds of collection decrease with time and only decrease only further once the year has come to a close.
When it comes to the actual collections, start reaching out now (and certainly before Thanksgiving) to those clients that have been historically slow to pay outstanding balances. Remember to make your end-of-year bills clear and concise, and make it known that you expect to be paid before the conclusion of the year. If needed, try billing every two weeks in the month of December. We also recommend sending reminders to clients regarding their outstanding balance — clients are likely also wrapping up end-of-the-year financials and might even thank you for the reminder. The end of the year might also be the time to begin accepting credit card payments (or other alternatives) or setting up a payment plan for clients who might need another quarter or two to pay your law firm back in full.
By using the right resources and technology advancements, your law firm can streamline its billing and collections process so that your end of year can be jolly and bright and not filled with paperwork.
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:
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 2023 bottom line will thank you.
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.
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 2023 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 2023.
Save yourself headaches by going into your end of year armed with receipts.
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 2022 revenue to 2021 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 2023. 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.
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 2023. 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.
“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.
But maximizing your law firm’s billable hours is good for everyone in your firm. The only question is, how can you achieve this goal? Fortunately, you don’t have to be in a New York law firm to solve this problem). The right legal tech can make sure that no billable time spent on legal services goes uncaptured and that you’re billing clients accurately — whether you’re working for a big law firm or a public interest shop.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Capturing time automatically through system integration will transform time tracking for your firm’s attorneys.
Mobile applications for tracking and entering time, which are available for iOS and Android mobile devices, provide enhanced flexibility for your legal team. Your firm’s lawyers can enter their time from the courthouse or at the opposing counsel’s office. The fewer barriers there are to time entry, the more accurate the timekeeping. The time-tracking features in this type of legal billing tool have also become increasingly invaluable during the pandemic to those who work from home.
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 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.
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.
When evaluating new technology, you should start with thinking more about your firm’s day-to-day operations and how those procedures lend themselves to your requirements.
You’re probably constantly in the process of putting together a requirements list to include certain solutions, but let’s dig a little deeper into the questions you should be asking to ensure you’re getting the features you want from your legal practice management software solution.
Legal software should make timekeeping as easy as possible, so make sure that any software you’re considering has an intuitive interface. Next, you need to think about whether the new system meets your rounding requirements. Some firms bill in quarter-hour increments, while others bill by every one-tenth of an hour. These details need to be communicated and understood prior to diving into the rest of your timekeeping requirements.
Let’s start with the basic questions:
Some systems make you manually enter in everyone’s rates at the start of a new matter, while others let you create and assign those rate tables as you go. With that in mind, additional questions to consider include:
It’s not a secret that no two clients are alike; the same is true for their billing needs. Being able to accommodate clients’ finances doesn’t just help your firm stand out, it also increases the likelihood of you getting paid on time. The key to determining billing requirements is to ask yourself the right initial questions, like:
How you choose to bill your clients, or how they request to be billed, will play a huge role in whether a client wants to retain you from the start. Do not take these considerations lightly as you build out your requirements!
If you don’t care to track the productivity of your allocation in compensation, then you are opening your door to a lot of software options. But, if you do care about details like this, you need to look deeper into how your software options handle flat fee billing.
As your firm grows, the one surefire thing your management will need is reports. Off-the-shelf reports may work for you in the immediate term, but the ability to produce reports on any metric on the fly is invaluable.
For your reporting requirements on billing, you need to address some specific questions:
The more intricate your billing needs get, the more advanced and granular your software needs to be. If you need to generate flat-fee bills and statements, complete trust accounting, and perform trust replenishments, you’ll need to consider additional key accounting details when evaluating legal practice management software.
With billing comes accounting needs. When you’re evaluating a software’s accounting system, the first thing you should ask is if you want integrated accounting or a system that can integrate with QuickBooks.
Fully integrated accounting enables you to be more efficient and prevents the common mistakes that occur as a byproduct of inputting manual entries into multiple systems. If the system is fully integrated, think about whether or not you use cash-based or accrual-based accounting.
When you’re evaluating individual vendors, consider:
Conventional wisdom (and an Al Pacino reference) reminds us that we should ABC: always be closing. For lawyers, the idiom might be better stated as always be collecting.
Billing and collections are critical to the success of any law firm. But timely billing and ensuring that your bills are paid in full and on time can be frustrating and challenging. These challenges are even bigger if your firm doesn’t have a dedicated billing and collections department.
Luckily, there are resources and technology advancements to help your law firm streamline its billing and collections process so that your lawyers can get back to lawyering.
Here’s what you need to know about billing for the legal industry:
We know that one size rarely fits all, but for law firm billing processes, there is standard practice. It usually starts with your firm bringing in a new client after a phone call or email and opening a matter (or opening a new matter for an existing client).
Billable time will be logged throughout the lifecycle of the matter, and, if your lawyers follow billing best practices, they’ll track time daily. Generally, at the end of each month, your law practice will compile the billed time and related expenses for each client into a draft bill, sometimes called a prebill.
The lead attorney or originator of the client will add notes, adjust costs, and revise the prebill as needed. That prebill bill is then approved, finalized, and sent to the client for payment.
The client then pays the bill. To optimize your client service, you can offer different payment options, including check and online payments through bank transfers and credit card payments. The accounting team stays on top of payments by tracking accounts receivable and will send out reminders to clients regarding any late payments, partial payments, or non-payments.
It seems like a simple process, and it can be. But you’re reading this blog post — and we wrote it — because we both know it’s usually not. There are ample opportunities for bottlenecks: delays in opening a new matter, attorneys not logging billable hours in time, reviewing attorneys sitting on approvals, bills being sent out late, and everything in between.
Your firm relies on getting paid and paid quickly to stay afloat. A clean, concise, and consistent billing process is the way to ensure that happens. The cornerstone of the billing process is often the billable hour.
Put simply, billable hours include all the time an attorney spends actually thinking or working on a matter. Billable time is time spent attending to professional tasks that your firm can charge to a client at the previously agreed-upon hourly rate. Generally, billable time includes things like drafting contracts or briefs, strategizing, researching, speaking or emailing with the client, or attending hearings or meetings.
Billable time is distinct from nonbillable time (e.g., time spent on administrative tasks (like billing!) and continued legal education). Billable hours are tracked in different increments depending on the firm’s preference. The key is that they must be tracked accurately to bill a client properly and correctly.
The billable hour is the cornerstone of many law firms’ billing practices. However, there has been a movement toward a range of alternative billing structures.
We get it: tracking billable hours can be a drag. It’s a lament of many legal professionals. Thankfully, there are tried and true alternatives to legal hourly billing. Here are some options for your firm to consider using to bill clients for your legal services.
This fee arrangement charges the client a set price for each matter or case without calculating the time spent on the matter. Flat fees may be preferred by clients who want certainty and consistency in the amount owed.
If you use this arrangement, be mindful of the risk of underestimating the work required for a matter and setting the fee too low. Diligence is key here.
Under a subscription-based fee arrangement, your firm provides clients with representation and advice on an as-needed basis for a set monthly fee. It also means that you’ll have a regular, predictable income.
Generally, this fee arrangement is beneficial for smaller clients who may need regular advice on matters like intellectual property and business law.
Note that a subscription-based fee is not the same as a retainer. A retainer is an advance payment for future legal services.
A contingency fee is paid by a client only if the case is won. This type of arrangement is typically used in torts, such as personal injury matters, as well as in class actions. It serves an important function for individuals who cannot pay out of pocket for representation.
Generally, these arrangements pay the attorney a percentage of the overall award. If you opt for this arrangement, it’s important to consider the risk that you may not be paid for your work.
Under a limited scope arrangement, you and your client would define your firm’s involvement in the case, likely limited in scope, and your services would involve only those tasks. A common example is retaining counsel for guidance in an e-Discovery process.
A sliding scale fee is just that: one that takes into consideration a client’s ability to pay and adjusts the rate accordingly. This fee arrangement may help your firm bring in new clients by making services more affordable.
Offering a payment plan may be key to your firm getting paid. Paying out a lump sum may be difficult for cash flow purposes for clients. By offering weekly or monthly payment plans, you can provide an additional service to clients and build goodwill while also getting paid. It’s key here to have clear, written guidelines on collections and payment methods.
The goal of the billing process is to get paid, and the best way to do that is to send clients bills that are timely, clear, and accurate. Standardization of your billing policies will undoubtedly help with this.
Start by creating a fee agreement template and well-defined guidelines that set forth your billing policies. These guidelines should include things like when in the lifecycle of a matter to send invoices and how detailed descriptions should be.
You should also have a written billing process that includes which attorney reviews the bill, how bills are sent out (e.g., mail or email), and what role the staff or accounting department plays in keeping track of bills.
Standardized invoice review is also essential. An integrated legal practice management software is your best friend here: you’ll speed up the process and minimize human error in compiling bills. Practice management software will also help your firm track payments collected and schedule follow-ups for those accounts that are past due. (It can also help with the collections process.)
A standardized billing practice makes it easier for everyone. Your clients will know what to expect and will be less likely to contest billing, and you’ll be able to keep better track of your expenses.
All invoices should include several key elements. The basics include contact information for both your firm and the client as well as the invoice number for quick referencing. Your law firm’s billing codes should also be included. This way you can keep track, at a high level, of which tasks or expenses you are billing to the client.
Billing descriptions will also help with this but at a more granular level. Getting your descriptions right is imperative: they should provide just the right amount of information and be clear to help avoid any client misunderstandings. For your clients who use LEDES billing, it’s important to draft time entries carefully and accordingly (e.g., avoid block billing and pay attention to the clerical and paralegal-type tasks performed by an attorney).
The invoice should also include the payment method, the total amount due, and the date by which the client should pay the bill.
Having uniform, thoughtful invoices will ensure consistency and help make sure that your firm gets paid for its good work.
For a moment, think about things from your client’s point of view. What would you want and expect from your lawyer?
You’d probably want clarity in billing and consistent billing practice. You can achieve these things by setting expectations early on and having regular, clear communications throughout the client relationship. Standardized billing practices and invoices will help you with this immensely.
If you’re using an hourly fee arrangement, the lawyers at your firm should track and enter their time frequently (and ideally daily). As you know, technology can help with this, and it can also help your lawyers draft templates with descriptions of tasks completed and billed.
We also recommend getting bills and reminders of payments out quickly. The sticker shock of a larger bill that accumulates over time may lead to misunderstandings. Regular invoices can keep client billing angst low and help your firm’s profitability.
Legal billing software can save your lawyers and firm hours upon hours by automating routine tasks. The right electronic billing software will help your firm generate and approve draft bills by using your firm’s preferred template and including all the information necessary to get paid.
Legal billing software can also send automated reminders to clients when payment is due (and overdue) and can generate financial reports regarding paydays to help you better visualize the big picture and stay up to date on cash flow.
Your clients can access a secure billing portal any time they need to view or pay bills, relieving strain on your law firm. The right legal billing software is also customizable to the unique needs of your firm, its various practice areas and billing rates, and clients, and can take into consideration your fee arrangement.
As you’re considering potential legal billing platforms, it’s important to choose electronic billing software that meets your firm’s needs. This includes steps involved to get onboarded and what data should be imported into your new legal billing software.
Ultimately, the right legal billing software is the one that will help your law firm automate your billing process, be easy to use, and save you time.
Most law firm leaders do not enter the legal industry with an accounting background, but a basic understanding is important to inform decisions about billing processes, the acceptance of payments, and trust accounting.
Simply put, you need to know about your law firm’s financial performance. But, you also need to be able to meet your legal, regulatory, and ethical obligations, such as preparing your federal and state income tax returns and managing your clients’ money. Accounting practices enable you to prepare financial statements, capture expenses, and create budgets and forecasts. The better you understand your law firm’s finances, the easier it will be to make smart decisions for your business and avoid legal and ethical headaches.
A lot goes into navigating the world of law firm accounting. Let’s explore some of those vital components:
The wrong bank could create financial complications for your firm and result in serious legal problems.
When choosing a bank, consider the following:
Law firms typically need a business checking account for the management of general business revenue, a savings account to set aside money for taxes or emergencies, and an IOLTA account for holding client funds in trust.
Some law firms also choose to open a money market account to take advantage of a higher interest-earning rate, as well as a business credit card for strategic practice growth.
For law firms that hold client funds in trust, the IOLTA trust account comes with its own set of detailed accounting rules and risks. Noncompliance can result in severe penalties, so it is important to understand the complexities of trust accounting.
With so many different rules in place, it can be challenging to stay on top of all of them. Even still, some mistakes show up more often than others, with the most common stemming from these IOLTA rules:
As businesses, law firms must stay on top of their federal, state, and local tax obligations. The specifics vary based on the type of practice, but most firms have a responsibility to pay the following types of taxes:
This is not an exhaustive list and firms may have a variety of additional tax obligations. As such, firms need a tax professional in their corner to help them navigate these vital responsibilities. For firms that do not have an accountant on staff, a contracted Certified Public Accountant (CPA) can offer valuable guidance for limiting tax liability.
Legal time tracking is not an easy task, so law firm payroll poses challenges that do not exist within other industries. Firm members may have varied pay structures, which requires a payroll process that offers flexibility.
Payroll accounting includes components such as:
The rise in outsourced legal work adds another layer to payroll duties. Law firms should carefully categorize employees and independent contractors for taxation purposes.
Once the invoices have been sent out, law firms need processes in place to actually receive payments and manage collections. After all, there is nothing to manage if revenue is not going into the firm!
While most firms still accept cash and checks as payments from clients, online payment methods have become more common within the legal environment. This requires having a system in place to accept these payments, and the choice of provider could mean the difference between accounting success and failure.
Invoicing is arguably the most important part of law firm accounting, as it is the mechanism by which firms bill for the legal services they provide. Improper invoicing can have many negative consequences, including unbilled tasks, sporadic billing, and unpaid invoices.
Law firms can choose an independent legal billing system to handle invoicing tasks, but the most streamlined option incorporates legal billing into a legal practice management system. With these platforms, firms benefit from advantages such as simplified approval processes, tracked invoice changes, and the ability to process numerous types of fee arrangements.
Some legal practice management software options include extensive data reporting capabilities so firm leaders can quickly access financial reports with just a few clicks of the mouse.
There’s no doubt that your legal practice management software should include accounting features within the larger platform. In fact, this is one of the most common reasons that law firms choose to implement cloud-based software.
Legal professionals spend time tracking billables and nonbillables. Management spends time reviewing revenue statements, budgets, pricing, and law firm expenses. Billing administrators spend time generating invoices and following up on delinquent accounts. By having legal practice management software that includes both billing and accounting features, you can streamline some of the most time-intensive, manual processes at your law practice. This software also lets management review billing and accounting data within the larger context of other law firm metrics.
Legal practice management software without any billing or accounting features leaves a gaping hole that management usually needs to fill with multiple platforms. This can confuse the data and your employees, and it typically creates more work for everyone. Plus, it usually results in an added expense for the law firm.
As you’ve probably gained from this post, law firm accounting can be challenging. But, it doesn’t have to be another headache on top of the stresses of your law practice.
The first step is to put down the pencil and paper - or even the Excel spreadsheet. If you want to get really serious about your accounting, you need to ditch small business accounting platforms, like QuickBooks that aren’t designed specifically to meet small law firms’ needs.
You need a legal practice management platform that includes full billing and accounting capabilities, making sure that you’re able to track every last penny and satisfy your ethical obligations to your clients. To find a tool that’s able to resolve your biggest accounting challenges and meet your firm’s needs, look for a platform that is equipped with the following accounting features:
Given the number of financial accounts in a law firm’s financial ledger and the potential number of firm clients, it can be daunting to track them all in a standard bookkeeping system. Law firms must track assets, retainers, receivables, revenue, equity, expenses, and much more. A centralized repository that puts all of your bank accounts, operating accounts, and related information at your fingertips in real-time is essential.
Every lawyer knows that closely managing client trust accounts is an integral part of ethical (and legal) law firm billing. Billing and accounting software must be able to effectively manage lawyer trust accounts that hold clients’ funds before they are earned. This includes tracking interest-bearing accounts (IOLTA) and three-way reconciliation with the asset sheet, trust asset account, and trust liability account.
Legal accounting and billing software must be able to accurately track billable hours and support LEDES e-billing practices. It’s even better if the software has features to automatically detect timekeepers’ billable hours, such as the ability to capture time for appointments or communications sent through the same platform.
Some law offices use flexible fee arrangements, depending on the client or type of case. To be effective, the accounting software should recognize various fee arrangements like fixed fees, contingent fees, and subscription-based payments.
Generating invoices and collecting payments is one of the most time-consuming parts of legal billing. Software that can automate the billing process by automating and sending invoices to clients, facilitate edits and changes to bills directly within the system, and collect credit card payments through a secure system will cut down on the time that administrative staff spends on billing.
It’s important for billing and accounting software to synthesize data and generate reports that give law firm management insights into the efficacy of billing procedures. These reports may include billable and nonbillable hours per timekeeper, client, or case as well as measures of attorney profitability.
Law firm billing and accounting are important because they tie directly to the financial success of the business. Legal practice management software must be able to track metrics related to big-picture finances like expenses, overhead, and cash flow so that management can pinpoint areas of success and opportunities for improvement.
Perhaps the most important feature of legal billing software is that it can be customized to support your unique business goals. For example, a legal billing solution might offer add-ons like billing templates, an app, a customizable dashboard to track relevant billing and accounting metrics, or the ability to create one-of-a-kind financial reports.
Features like these can make the difference between an inefficient accounting process that’s prone to errors and bookkeeping and accounting systems that run like clockwork, enabling you to meet your ethical obligations and client trust account reporting requirements.
Mastering law firm accounting is no easy feat. However, the right legal accounting software can help you streamline these critical accounting functions.
If you keep the above components in mind and put them into practice, you’ll be well on your way to navigating your firm’s finances successfully and without penalty.
Innovations in legal practice management software have changed the way that law firms do business. Technology is an incredible tool for law firms looking to streamline workflows and increase productivity, but how do you know which one to choose? While some software is fully integrated, others can only perform one function, like billing and accounting, client management, tracking metrics, or generating reports.
Sometimes the options can feel overwhelming, and many law firms find that their workflows end up fragmented across multiple platforms.
This fragmentation defeats the purpose of using practice management software, which is to make your life easier by managing all areas of your law practice. Law firms that use multiple platforms to manage distinct parts of their business end up creating more work for employees. For example, lawyers may be required to enter data multiple times in different systems, so you fail to reap the full benefits of the technology.
While QuickBooks is a popular option for managing legal accounting and timekeeping, it isn’t the most efficient option for exactly that reason: it doesn’t always play nice with other technology designed specifically to address the needs of the legal industry.
There’s no point in using legal accounting and billing software if it makes your work harder. It needs to have enough features to streamline your workflows and simplify your workload. You don’t need to invest in software that only functions as a glorified clock that tracks time.
Fortunately, legal accounting and billing platforms have a variety of features that can help your law firm manage finances, even for small law firms that may grow and change significantly over time. Sometimes this means that the software includes features you never knew you needed or those you thought you could live without until you tried it.
Given the number of financial accounts in a law firm’s financial ledger and the potential number of firm clients, it can be daunting to track them all in a standard bookkeeping system. Law firms must track assets, retainers, receivables, revenue, equity, expenses, and much more. A centralized repository that puts all of your bank accounts, operating accounts, and related information at your fingertips in real-time is essential.
Every lawyer knows that closely managing client trust accounts is an integral part of ethical (and legal) law firm billing. Billing and accounting software must be able to effectively manage lawyer trust accounts that hold clients’ funds before they are earned. This includes tracking interest-bearing accounts (IOLTA) and three-way reconciliation with the asset sheet, trust asset account, and trust liability account.
Legal accounting and billing software must be able to accurately track billable hours and support LEDES e-billing practices. It’s even better if the software has features to automatically detect timekeepers’ billable hours, such as the ability to capture time for appointments or communications sent through the same platform.
Some law offices use flexible fee arrangements, depending on the client or type of case. To be effective, the accounting software should recognize various fee arrangements like fixed fees, contingent fees, and subscription-based payments.
Generating invoices and collecting payments is one of the most time-consuming parts of legal billing. Software that can generate and send automatic invoices to clients, facilitate edits and changes to bills directly within the system, and collect credit card payments through a secure system will cut down on the time that administrative staff spends on billing.
It’s important for billing and accounting software to synthesize data and generate reports that give law firm management insights into the efficacy of billing procedures. These reports may include billable and nonbillable hours per timekeeper, client, or case as well as measures of attorney profitability.
Law firm billing and accounting are important because they tie directly to the financial success of the business. Legal practice management software must be able to track metrics related to big-picture finances like expenses, overhead, and cash flow so that management can pinpoint areas of success and opportunities for improvement.
Perhaps the most important feature of legal billing software is that it can be customized to support your unique business goals. For example, a legal billing solution might offer add-ons like billing templates, a customizable dashboard to track relevant billing and accounting metrics, or the ability to create one-of-a-kind financial reports.
There’s no doubt that your legal practice management software should include billing and accounting features within the larger platform. In fact, this is one of the most common reasons that law firms choose to implement cloud-based software.
Law firm employees spend time tracking billables and nonbillables. Management spends time reviewing revenue statements, budgets, and law firm expenses. Billing administrators spend time generating invoices and following up on delinquent accounts. By having legal practice management software that includes billing and accounting features, you can streamline some of the most time-intensive, manual processes at your law practice. This software also lets management review billing and accounting data within the larger context of other law firm metrics.
Legal practice management software without any billing or accounting features leaves a gaping hole that management usually needs to fill with multiple platforms. This can confuse the data and your employees, and it typically creates more work for everyone. Plus, it usually results in an added expense for the law firm.
QuickBooks is billing and accounting software from Intuit. It’s primarily marketed toward small businesses, including small and mid-sized law firms.
Intuit has developed two different versions of its subscription-based software package: QuickBooks Online and QuickBooks Desktop. Depending on the subscription and version of QuickBooks that you choose, it may include features like automated invoicing, expense tracking for mileage and receipts, payment collection, and payroll tax management.
QuickBooks wasn’t designed to be accounting and billing software purely for law firms. Because of this, it must be integrated with other cloud-based legal management platforms. This means paying for more subscriptions and integrating multiple systems just to manage what should be run-of-the-mill billing workflows.
There’s no reason to use QuickBooks for law firms when you can have legal practice management software that streamlines more than just billing and accounting processes.
Law-focused software does more than just track finances. It also lets you integrate your billing and finance data into a larger system. This means you can use the platform for billing processes and better understand your data as it relates to other parts of the business. You’ll get a leg up in increasing productivity and your bottom line when you have one system that can do it all.
Legal practice management software is a better choice for law firms than QuickBooks for many reasons, but the principal reason is that it’s designed for lawyers. That means you won’t need to worry about facilitating integrations with other legal platforms or pay extra money for multiple subscriptions. It also means that there are features specifically designed for law practices, like supporting alternative fee arrangements and pricing models. Instead of generating an invoice that is designed for any type of business, you can create a custom invoice and incorporate legal-specific best practices, like LEDES coding and an attorney-review process, that increase efficiency.
With legal practice management software that includes billing within the larger system, your data is also stored conveniently in one place. This cuts down on the need to double enter data or cross-reference information in multiple platforms. It also makes comprehensive financial reporting easier since one system can pull data from different areas to make useful reports that go beyond the basics of billing and accounting.
While QuickBooks has a dashboard feature, it’s limited to billing and accounting metrics. It isn’t as comprehensive as the dashboards included in fully integrated systems that can track billing as it relates to other areas of the business. This means that you can make more progress on achieving your key performance indicators, even if they aren’t purely related to financials. For example, it might be helpful for law firms to track what attorneys regularly have clients who aren’t paying their bills or the amount of time that timekeepers spend on particular clients or matters.
At the end of the day, legal practice management software is superior to QuickBooks because it’s full-service technology with heightened functionality. It doesn’t fragment your processes and create more confusion. Instead, it streamlines workflows and incorporates billing and law firm accounting data to give unparalleled insights into your law firm’s overall health.
Lawyers live and die by billable hours. If you don’t meet expectations for billable time, you won’t generate revenue and grow as a firm. If you go overboard, you risk losing clients.
Since billing is arguably the most important administrative process in the legal profession, it’s a great place to start when you’re looking for ways to increase your firm’s productivity and profitability. In this blog, we’ll discuss some steps you can take to improve your firm’s productivity and accelerate client payables.
The standard billing process in the legal industry usually looks something like this:
This process might get the job done, but it’s not very efficient. In fact, it leaves an opportunity for law firms to target the billing workflow as a way to increase their productivity and realization rate.
A clear billing policy gets everyone on the same page when it comes to billing at the law firm. Without a clear policy, timekeepers may have inconsistent and ineffective billing practices that contribute to lost profits. A clear policy cuts down on billing errors and streamlines the process to increase billing productivity across the board.
It’s no secret that lawyers tend to work more nonbillable hours than billable hours per day. That’s because, between court appearances and client meetings, many lawyers are spending time on tedious administrative tasks. By automating administrative workflows with legal technology, law firms can decrease the time that lawyers and paralegals spent on nonbillable tasks and improve billing productivity.
eBilling software streamlines billing workflows to help law firms generate bills faster and get paid sooner.
That’s because admins won’t need to print multiple pre-bills and spend precious time sending drafts back and forth. Instead, lawyers can edit the bill directly in the system after being automatically notified that a pre-bill has been generated. Everyone on the billing team can review it contemporaneously and quickly send it up the approval chain without printing a single document, sending an email, or picking up the phone. Once the bill is approved, the billing team is notified, and the bill is immediately sent to the client or uploaded into the client portal.
eBilling software also makes it easy for clients to pay their bills online, so there’s no lag time. They support different types of billing arrangements like split billing, consolidated billing, and project billing and can be customized to allow partial payments or custom amounts. eBilling software can also send automated reminders to clients with delinquent accounts or payments coming due so that an administrator doesn’t need to waste time following up. The optimal eBilling system will have built-in integrations with other practice management systems, making it easier for lawyers to understand their law practice at a glance and simplifying tasks for small firms that don’t have a large administrative team that oversees all of these processes.
The client experience is directly tied to billing productivity because happy clients pay their bills and give referrals. Dissatisfied clients are more likely to balk at invoices and request adjustments that affect your realization rate. That’s why it’s important to make new clients feel confident that your work is worth the cost.
Law firms with a great intake process are well-positioned to cut down on billing disputes. The client relationship starts the moment a client contacts your office, so firms that set expectations related to billing from the beginning ensure that clients aren’t blindsided by the price tag and avoid debates over billing rates. Not only is this a great way to increase billing productivity and realization rates, but it also keeps clients coming back for more.
You’ll need to delve into the analytics to make sure the billing process stays on track and actually increases the law firm’s bottom line. The best way for law firm management to understand the raw data is to use legal reporting software to generate reports about the various workflows related to billing. These reports can provide key metrics that help managing partners understand the bigger picture.
Collection reports help law firms identify delinquent accounts and observe patterns related to nonpayment. For example, a specific attorney may have several clients who aren’t paying their bills, which could be a sign of poor client relationships or a lack of detail in their descriptors. This data and other key performance indicators help law firm management address why a client isn’t paying and track whether automated billing reminders are having an impact.
Lawyer productivity reports are a great way to identify the timekeepers billing the most hours and those billing the least. These reports let law firms specifically track billing productivity and provide an opportunity to target less productive lawyers and turn their nonbillables into billable hours. A firm’s productivity reports can be run monthly, yearly, or at a custom interval of your choice.
High-revenue client reports help law firms identify which clients consistently bring in money for the firm. These reports help law firms understand what clients bring the most value to the office and those that detract from it. With this data in hand, law firms can work to keep clients that are directly tied to billing productivity and law firm profitability and cut loose the others.
Every law firm operates differently, so custom reports are a great way to grab data that is directly related to your billing workflow and might not be captured in a standard report. With custom reports, law firms have the freedom to innovate their own billing process and track exactly what is most significant for them.
Of course, there are many more reports that can keep your billing processes on track. Check out our Legal Analytics and Reporting Guide for more information on how specific reports can be helpful to your firm and when to run them.
To get paid regularly, you have to bill regularly. Billing your clients according to a schedule (usually monthly) helps to consistently bring in revenue. Clients will pay you more frequently and are less likely to dispute their bills.
That’s because sporadic billing signals that your firm is disorganized. Clients are more likely to think that a disorganized lawyer made an error on the bill. Not only that, but clients will likely also remember certain line items on the bill (like that 30-minute conversation you had a few weeks ago) in the short term, but as time passes, they might forget about it and raise a dispute.
Irregular billing is simply asking for a client to dispute charges, which affects your realization rate and how quickly you get paid.
Allowing clients to use a credit card to pay and allowing them to pay their bills in installments are great ways to get paid faster, even if it’s not in full. Lawyers are expensive, and many clients are making financial sacrifices to hire one. They might not have enough money for the full bill every month. By allowing clients to use credit and payment plans, you’ll be more likely to collect your fees and garner favor with your clients.
eBilling software identifies delinquent accounts and sends automated reminders to encourage clients to pay overdue bills. These reminders gently nudge clients (or not so gently, depending on how late it is) to make a payment they may have forgotten about. This software also cuts out the need for admins and lawyers to spend time hassling clients about payments so that they can focus on higher-value work instead.
Insurance defense firms have it harder than most law firms in other practice areas when it comes to billable hours and realization rates.
That’s because insurance defense firms are usually hired by an insurance company to represent the insured according to the terms of the policy. Sometimes the insurance company and the insured have the same interests, but usually, they don’t—especially if the behavior in question might fall under the policy.
When insurance companies scrutinize a firm’s billing processes, it puts stress on the billing department and can result in a low realization rate that seriously affects your bottom line. That’s why insurance defense firms need to work harder (and smarter) to make sure they are paid in full on time.
Every law firm should be generating itemized bills that specifically describe the basis for each charge, but this is particularly important for insurance defense firms. That’s because insurance companies are notorious for arguing that line items are ambiguous. Billing software that supports LEDES billing makes it easier for individual lawyers to describe their time and standardizes codes for each task so that insurance companies can’t argue ambiguity.
It’s common for insurance defense firms to have multiple attorneys assigned to the same case. Usually, they are working together but in slightly different roles. It’s particularly important for co-counsel to have consistent and accurate time entry practices so that there are no discrepancies. Otherwise, insurance companies might use the inconsistencies in timekeeping as a basis to negotiate their retainer or fee.
A clear billing policy and automation with legal technology standardizes the billing process and removes human error so there are fewer errors in timekeeping.
It’s pretty common for insurance defense firms to provide legal services for multiple clients all tied to the same matter. Split-billing is an easy way for law firms to divide and send bills to multiple different clients without adding additional work for the staff. Insurance defense firms should also explore other fee arrangements and pricing schedules, like project-based, subscription, and contingency fees, to make the billing process easier and cut down on the need to waste time arguing with insurance companies.
Billing isn’t rocket science. But it’s not why you went to law school. And, while it ensures you get paid, it’s not value-added work that improves your profitability. Law firms that use technology to simplify the billing process are better able to track their receivables, improve their lawyers’ productivity, and raise their bottom line.
When it comes to tax season, there are generally three types of law firms. Those that maintain meticulous accounting records all year long; those that leave tax prep to the last possible minute; and those that fall somewhere between the two. For law firm leaders and administrators who find their practices at less than their desired level of preparedness, this time of year can be extremely stressful. But, there are some steps that law firms can take to help alleviate that stress for a more seamless approach to tax season.
First, it’s important to know all relevant dates, deadlines, and filing requirements. For instance, firms that operate on a fiscal year that differs from the calendar year may have different tax return due dates. Also, limited partnerships have different filing responsibilities than limited liability partnerships. These may seem like small distinctions, but they are extremely important for ensuring compliance.
The next step is organization. For firms that have maintained accurate financial records throughout the year, this will likely not be a huge problem. But other firms may have to put in a little work to get everything in order. Records like previous tax returns, expense receipts, income statements, and balance sheets need to be compiled and organized into a system before being handed over to the firm accountant. Disorganized and incomplete files can lead to inaccurate filings with unnecessary tax liability.
The final preceding step involves recognizing the firm’s responsibility as a business entity and as an employer. For instance, what tax obligations come along with operating as an S-Corp law firm? Which employees require W-2 forms and which are actually independent contractors requiring 1099- Misc. forms? By what date does the firm have to provide these forms to firm members? There is a lot to think about, but it is all necessary as law firms plan for tax season.
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 a list of the most commonly used law firm deductions, along with some precautions to consider before claiming them as business expenses:
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.
In addition, fees that law firms incur while using their own business credit cards may also be deductible, including finances charges, annual fees, monthly fees, and late fees. There is a caveat though - the fees must be actually paid or incurred by the practice. Fees stemming from a firm member’s use of the firm’s business credit card for personal expenses may not be deductible.
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:
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.
Legal professionals can typically deduct education expenses that are deemed “ordinary and necessary” to the profession. As stated in IRS publication 535: “For example, an attorney can deduct the cost of attending classes that are required by the state bar association to maintain his or her license to practice law.”
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.
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.
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.
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. While most firms have moved to virtual library options, many still maintain a collection of physical books. For those firms, the depreciating value of these books may be deductible, much like any piece of office equipment.
There is a caveat to this deduction though. The only tax-deductible items are those that can be utilized for longer than a year. That leaves out periodicals and resources purchased on a monthly or annual basis, as well as those with yearly volume additions. There may be other deductions available for those resources though, so it’s always best to consult an accountant for clarity.
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.
The most important components of tax preparation are deadlines, organization, and documentation. With an awareness of potential tax deductions and guidance from a skilled accountant, law firms can successfully navigate tax season.
This is the time of year when we set—and, for some of us, quickly break—our New Year’s resolutions. But some resolutions are more important than others.
As we enter our third year of living with the coronavirus, facing continuous uncertainty and unpredictable market fluctuations, the resolutions that prioritize our well-being are vital. Financial well-being is an important piece of that puzzle and one, thankfully, that we, and our law firms, can plan for.
Try as they might, law firms aren’t immune to market changes. If anything, firms must adapt more quickly and more efficiently than businesses in other industries. While pivoting fast is typically not a hallmark of the legal industry, law firms must be able to anticipate market conditions, how these conditions might impact the law, and what their clients can do to best prepare and protect themselves. Lawyers need to turn all of this introspection and planning inward for themselves.
To continue to serve your clients most effectively, your firm must be operating efficiently. You must have a consistent cash flow that allows you to continue marketing campaigns, acquire clients, and hire new lawyers to do the work.
The key to this is a comprehensive financial strategy. Here’s how you should get started building yours:
Start with informed planning. Though the way the pandemic will continue to affect our lives may change, the financial information you have gathered over the last couple of years, along with the lessons you’ve learned, will be vital in preparing for what’s to come.
We know that COVID is here to stay, so your law firm must adapt to thrive and grow. Think both short-term and long-term and keep a careful eye on law firm funding. Get in the habit now of monitoring your cash flow and capital every week. This is one resolution that must stick.
Improving your firm’s short-term finances starts, like all great projects, with a spreadsheet. The hard numbers are most important here. What is your law firm’s cash flow? Cash on hand? Available lines of credit? What expenses do you have? Have you paid yourself and your team, and if so, how much?
If you’ve kept close track of these metrics over the last few years, begin analyzing these figures to discern short-term patterns. If you haven’t, there’s no time like the present to start!
The first figure to check out is your cash reserves. You should have enough in your account to cover a month of expenses, but it’s best if you can cover three or more months’ worth of expenses.
To infuse your firm with cash, consider whether there is a way to accelerate your collections process. If possible, shift away from contingency fees so you earn more of your fee upfront. If not, consider how you can take steps to reduce collections and receivables.
Additionally, make sure that you’ve paid yourself and your people. With the pandemic, the last thing you need is for your staff to worry that you aren’t able to cover their salaries. Give them peace of mind, if possible, that their job is secure and stable.
Pay close attention to the story that the numbers tell and evaluate the figures realistically and regularly. We recommend having a firm grasp on what these metrics are on a weekly, monthly, quarterly, and yearly basis. Learn just how often you should be tracking what with our reporting guide. You won’t be able to realize the big payday that you anticipate in Q4 if your firm runs out of capital in Q2.
Adjust your budget as needed and work toward building reserves. If the past two years have taught us anything, it’s that we need a rainy day fund. Building those reserves and continuing to cover monthly operating expenses will likely require revisiting your budget and jettisoning unnecessary expenses, such as printing costs. It might also require re-evaluating and improving your current billing and collections methods.
Also, don’t forget that you’re not a nonprofit. Clients expect good work, and you should be paid for that good work. Accurate and timely billing, availability of pre-bill approvals, and transparency of the process benefit all parties. Improved technology around billing and collections can reduce possible friction with clients and, in turn, give you more time to focus on case strategy. Considering your law firm’s short-term finances is invaluable in continuing its day-to-day operations, acquiring new business, and preparing for long-term expansion.
The key to your long-term financial strategy is simply to have one! Start thinking and documenting your plan now—you can always adjust it as you go along to account for changes in the market.
Here are some important questions to ask yourself when creating your firm’s long-term plan:
“Neither a borrower nor a lender be”: if you operate your law firm like this line from Hamlet, you’re not running your law firm like a business. Like your short-term and long-term goals, your law firm’s need for funding will be specific to your firm. The way you access that funding will also vary.
Some ways that you may be able to finance your firm’s growth include loans from private lenders, financial institutions, or government lenders, like the Small Business Administration or private equity. Some lenders will help you with litigation funding, which will cover any costs you incur while you’re defending a client. Others will help you cover your day-to-day operations or marketing costs. As with any transaction, you should conduct your due diligence and ask around for referrals from your financial advisor and other firms that you trust.
You may also be able to tap into your personal savings or loans from friends and family to start or maintain your practice. Other options include financing your firm through credit cards or lines of credit. Keep in mind that accumulating credit card debt is inherently risky and that you and your firm should carefully consider these risks.
Revenue-based financing once your firm is up and running is a great option. With this option, you pledge a percentage of your future revenue in exchange for an investment of cash.
We also recommend researching whether your firm qualifies for various loans such as those targeted specifically to small businesses or to provide financial relief due to the ongoing pandemic. No matter which method of funding you choose, ensuring your firm has adequate capital is important to continuing your operations, paying yourself and others, and achieving your long-term growth.
Keeping accurate, comprehensive records is key to running your firm smoothly and achieving any long-term goals. Well-organized law firm accounting records are a must, including a detailed budget and financial statements. Keep track of capital in and out and stay on top of your income statement.
The optimal practice is the most consistent practice, and technology can be your best friend here. There are important insights to be obtained by reviewing your budget: Which cases are the most profitable? Which drain the most resources? Where is money being spent but not made? Pay close attention and adjust regularly as needed.
Capital is important in continuing to run and grow your law firm. This requires regular and timely payment from clients, which can be difficult to stay on top of when you’re also busy handling the day-to-day demands and operations of your firm.
Here are a few tips:
Increasing profitability doesn’t hinge on billing. Firms must create long-term client relationships through excellent work, and it’s easier to do excellent work when you’ve minimized administrative friction and improved accessibility to your firm’s information.
Technology can truly transform your law firm’s operations. From billing and case management to integrated platforms for one-stop access for your clients, tech can help you run your law firm smoothly and allow you to focus on your long-term growth. Choosing the right technology makes it easy to invest intelligently in your law firm — smart tech investments should be a yearlong resolution too.
Every law firm should start 2022 with accurately balanced accounting that is ready for all that the new year will bring. However, doing so requires the complete closure of books from the 2021 fiscal year.
While this annual process is typically easier for firms that have consistently updated their books monthly, those that wait until year’s end can still complete this important task successfully. This year-end closing process comes together through reconciling bank accounts, adjusting entries, and preparing financial statements for analysis.
The following are some annual bookkeeping processes to help your law firm set the foundation for financial success in the coming year. Like what you’re reading? We’ve also prepared a handy checklist for you to follow to ensure your books are up to date as 2022 approaches.
Settling invoices and outstanding client accounts will make it much easier for your firm in the coming year by bringing all income up to date before the year’s end. If any invoices for completed work are yet to be issued, you should create and send them immediately.
Outstanding invoice payments also require prompt follow-up. An abundance of unpaid invoices can result in decreased revenue and law firm cash flow, impacting a firm’s ability to meet its financial obligations at the start of 2022. Firm administrators should run an accounts receivable report for an up-to-date listing of all unpaid bills.
The firm can then take the following steps to settle the accounts that firms deem collectible:
For any seriously past due accounts that cannot be settled, firm leaders must decide whether or not they are ultimately collectible. The likelihood of collection decreases significantly over time, so for accounts that will likely never be paid, it may be appropriate to write them off by December 31st.
Expense tracking must be a part of the year-end closing process. It is equally as important to account for money going out of the firm as it is to track revenue coming into the firm. Without this information, attorneys and firm administrators lack a true picture of the practice’s financial well-being. Don’t go into 2022 believing that your firm is more financially viable than it actually is, which could potentially lead to problems like inadequate cash flow and the inability to cover firm overhead.
For firms that do not track expenses monthly, it is useful to conduct an audit of all 2021 expense records to ensure that every cost is included in the year-end closeout. This not only helps with financial analysis and budgeting for the new year but also benefits the firm’s accountant as they work to identify expenses that may be tax-deductible.
If possible, aim to settle all outstanding debts before closing out the yearly books. This includes all vendors that provide services or equipment to your firm, as well any contractors that the firm has outsourced duties to throughout the year. By settling these debts, firms benefit from a fresh start for the new financial year without residual expenses.
After all revenue and expenses are recorded, law firms should perform bank reconciliations to ensure that all financial records line up with bank statements. Any discrepancies need to be reviewed and investigated.
The best practice for this task is to reconcile monthly as soon as bank statements arrive. Otherwise, firms must contend with 12 months of bank statements in a short period of time, making it more challenging to identify errors.
Most jurisdictions require law firms to reconcile client trust accounts on a monthly, or at least quarterly, basis. However, this does not negate the duty of completing 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.
In addition to trust accounting, firms should also review client retainer balances to determine which retainers need to be replenished. Firms should also ensure that all earned funds have been appropriately transferred into operating accounts from retainers held in trust.
Another task for closing the 2021 books is ensuring accurate and updated records of fixed assets. These are long-term assets with a usage life of more than a fiscal year that law firms use in the delivery of services.
Some examples of fixed assets that your firm may have acquired in 2021 include:
If your law firm purchased any type of fixed asset over the past year, its financial details should be recorded, and its yearly depreciable value should be reviewed by an accountant or accounting software. Calculated depreciations can potentially be written off as tax deductions.
Law firms withhold payroll taxes from employees’ earnings to pay taxes required by the state and federal governments. The amounts deducted and sent to the government vary depending on the employee’s salary and wages. As a business, it is your law firm’s responsibility to manage these taxes and ensure that accurate amounts are sent. A year-end closeout should include a review of payroll taxes to make sure that these tax liabilities accurately match your firm’s quarterly payroll returns.
Year-end is also an opportune time for processing 2021 employee W-2s and contractor 1099s, so it’s important that firms ensure accurate records for all members. Firm administrators should verify employee and contractor information and make any necessary changes.
When all revenue, expenses, and data are finalized and entered, firms should run the following financial statements:
The annual closeout also presents a good opportunity to review some firm practices related to legal billing and firm accounting. Firms can run 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.
When all year-end financials have been analyzed and finalized, law firms can securely close their books. This is more than a theoretical step, it is an actual process.
For instance, some financial experts advise setting a lock date to prevent any additional changes or edits to the closed books. Firm leaders may assign a password for admin and accountants’ access to ensure and maintain data integrity.
Once the books have been closed, pat yourself on the back (you’ve earned it) and get ready for 2022!
