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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!
If you’re like most people, managing your clients’ funds is unfamiliar territory. Most of us don’t have an accounting background, and accounting isn’t a subject that’s included in law school curriculums.
You can’t just tuck your clients’ settlement funds in with the rest of your law firm’s general funds, and you certainly can’t stuff those crisp dollar bills in a pillowcase for safekeeping. To establish trust with your clients and ensure your law firm upholds its ethical responsibilities, you need to learn some accounting principles.
In this guide, we’ll give you a quick overview of the basics of attorney trust accounts and describe how you should manage settlement proceeds and other funds on behalf of a client.
(Note: your state will have its own rules governing how you handle client funds. We encourage you to read those too.)
Simply put, you need to know about your 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 to avoid legal and ethical headaches.
Let’s start by reviewing some common accounting terms that you should know.
There are two main reasons that lawyers should keep their clients’ funds separate from their personal or business operating accounts and from other fiduciary accounts. First, lawyers have a fiduciary responsibility to their clients. Second, it’s essential that the public have confidence in the trustworthiness of the legal profession.
That's where trust accounts come in. Trust accounts are designed to safeguard client and third-party funds from loss. These separate accounts protect clients’ funds from being used to satisfy the firm’s financial obligations and from being seized by the firm’s creditors.
Not all client funds need to go into a trust account. A general rule of thumb is that if funds are for tasks that aren’t yet completed, they should go into the trust account. But if the funds have already been earned, they should go into the firm’s operating account.
Here is a list of common client funds that you should place in a trust account:
It’s equally important to know what funds shouldn’t go into a trust account. By depositing the wrong funds into a trust account, you change the nature of the account, opening it to the risk that it could be raided by firm creditors.
Here is a list of funds to avoid depositing in a client trust account:
IOLTA, which stands for interest on lawyers’ trust accounts, is a type of trust account that raises money for charitable purposes, primarily for providing legal services to indigent people. IOLTA programs came to be in 1981 after Congress passed laws allowing checking accounts to earn interest and after the Supreme Court and state court rules created IOLTA programs.
All 50 states, plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, operate IOLTA programs. The majority of states require lawyers to participate, though two programs are voluntary and four others allow lawyers to opt-out.
When lawyers receive a large sum of money that belongs to a client, such as a settlement payment or advanced fees, they should deposit the money into a trust account, where the funds can earn interest for the client. However, if the amount of money is small or if the lawyer only holds the money for a short time, the costs of collecting interest might outweigh the amount of interest the funds can earn.
However, an IOLTA account allows lawyers to deposit smaller funds from one client into a pooled, or combined, trust account with other short-term client funds. IOLTA trust accounts are typically checking accounts to facilitate fund access.
Because it is unethical for lawyers to benefit financially from funds that belong to their clients, lawyers can't earn interest on these accounts. With IOLTA, the interest that the funds accumulate is passed on to each state’s IOLTA program to fund charitable causes.
The goal of an IOLTA is to offer access to justice for individuals living in poverty without taxing the public or charging lawyers and their clients. The interest generated in IOLTA accounts supports civil legal aid and improvements in the justice system.
More specifically, IOLTA programs use the interest generated to fund free, non-criminal legal assistance for low- and middle-income people. The assistance includes helping provide access to health care, housing, government benefits, employment, and educational services. These services are provided by lawyer volunteers on a pro bono basis and by legal aid attorneys.
IOLTA funding also supports self-help and other educational resources, such as legal information websites and legal assistance hotlines. Other programs supported include alternative dispute resolution programs, public service projects, victim services programs, court-appointed special advocate programs, pro se assistance resources, minority lawyer recruitment initiatives, and law school scholarship programs.
IOLTA programs work with financial institutions to maximize their revenue, requiring banks to pay interest rates comparable to non-IOLTA accounts and negotiating to increase interest rates and lower service charges.
To find the IOLTA program in your jurisdiction, visit the National Association of IOLTA Programs directory.
Trust accounts are governed by state rules of professional conduct. Most of these rules are based on the American Bar Association’s Model Rules of Professional Conduct. Model Rule 1.15, titled “Safekeeping Property,” sets forth lawyers’ obligations with respect to client and third-party property:
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation.
(b) A lawyer may deposit the lawyer's own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.
(c) A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.
(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.
You should always review their state’s rules, which may include additional requirements for managing funds and setting up trust accounts.
If lawyers don’t adhere to the rules in their jurisdiction for trust accounts, they’re likely to be subject to disciplinary action. Depending on the severity of their transgression, they may face anything from a reprimand up to suspension and even disbarment.
So, let’s take a closer look at how law firms can meet their ethical responsibilities for trust accounts.
When you receive funds from a client or on behalf of a client, and this money is an advance payment for services, costs, or fees or is a settlement payment, you must take great care to handle this money in accordance with your ethical and fiduciary duties. What follows is a brief summary of some of these duties:
To satisfy this duty, a lawyer must deposit client funds into a trust account that is clearly identified and labeled with the client’s name or as an IOLTA account.
Be especially careful when setting up an IOLTA account. It’s very likely that you'll need to choose a financial institution that your state bar has approved before you can set up an IOLTA account. The bar may have specific registration requirements that you must follow. You may need to register the account with your state’s nonprofit that administers civil legal services. You’ll also need to obtain the nonprofit’s taxpayer identification number.
Here are some suggestions that may help you avoid depositing funds into the wrong account.
You must avoid commingling your firm’s operating funds with client funds. Depending on the number of funds that you are holding for your clients, you will need to proceed in one of two ways with the allocation of funds:
When you include client funds in an IOLTA account, you have an ethical responsibility to manage each client’s funds separately. To do so, you will need to set up a ledger for each client. You can set up a ledger in a legal practice management platform, or you can use Excel or accounting software like QuickBooks.
For each client, you must maintain a separate ledger of all funds received and deposited and all funds paid or distributed out of the account. You must also show the balance of funds in the trust account.
Note that there is one exception to the rule against commingling client and firm funds: you are permitted to keep a reserve of firm funds in your trust account to cover bank and credit card fees, so long as you maintain proper records.
Every time you receive or disburse funds from a client’s trust account, you must notify your client. That means you must contact your client whenever you deposit money or withdraw money to cover incurred expenses or pay for fees that you’ve earned. You must give the client a statement of the services you rendered or the expenses you paid on their behalf. This statement must also show the amount you are withdrawing from the account to cover these costs.
In some states, you may be required to notify your clients of the amount they owe before you take the money out of the trust account. This advance notice is required to allow the client to dispute the fee or expense. If you don’t comply with this rule, you might face a claim that you engaged in the misappropriation of client funds.
Here are some tips that will help you avoid fee disputes:
Clients have the right to ask for details about their funds. When this occurs, you must provide a report that shows how you have used their money in a timely manner. This is why it’s so important to maintain accurate records of client funds at all times, so you have an accurate audit trail showing all client-related fund activity.
This report, called a client trust ledger, shows all deposits and withdrawals from each client’s trust account in chronological order. Note that no account should ever have a negative balance, which would indicate that you’re disbursing money that you have not received.
Additionally, every month, you should reconcile your transaction records against your client trust accounts. Most jurisdictions require lawyers to reconcile their accounts on a set schedule, whether monthly, bimonthly, or at the time of audit.
Law firms have a unique way of reconciling their accounts: three-way reconciliation. This process checks your law firm’s books against the trust account balance and all individual client ledger balances. The sum of all of the individual client ledgers must match the balance in your books and the account balance.
To perform a three-way reconciliation, take these steps:
Three-way reconciliation offers yet another safeguard to protect client funds. It ensures that all money entrusted to your firm is correctly kept and isn’t being paid to cover another client’s charges, firm expenses, or bank fees. It’s important to conduct this activity frequently because if the bank has made an error, then you only have a short period to request a correction. It also ensures that if you have made an error, you correct it quickly to minimize the risk of harm to your client.
Here are some tips to reduce the risks in the account reconciliation process:
Handling trust accounts is challenging, especially when you have so many other responsibilities. But, lawyers are ultimately held accountable for all of their client funds in trust accounts. That’s why it’s so important to regularly review your accounts for compliance and take steps to avoid the most common trust account mistakes:
Lawyers should not mix their operating funds and client funds in any account. But while this principle sounds simple, it’s hard to implement.
Say, for example, that your client sends a check to cover both legal fees and costs. You’re being paid a flat fee for services, and the costs will cover the court fees when you file the client’s personal injury lawsuit. It may be tempting to deposit all of the fees in your operating account, because the bulk of the check is covering your fees, and write a check from one account to the other. However, that would be impermissibly commingling fees.
Because the check covers costs that have not yet been incurred, you should deposit the check into the trust account to hold those fees for your client. Then you should write a check payable to your operating account for the fees. It’s important to take all earned fees out of the trust account to pay for client invoices to avoid commingling.
It always takes some time for checks to clear. That’s why it’s important to get notice that a deposit has cleared before you write a check against funds in your trust account; otherwise, you’ll have a negative balance, which will show up when you reconcile your accounts and be a red flag that you aren’t following appropriate accounting procedures.
Don’t be pressured into sending clients settlement proceeds immediately. Wait for a notice from the bank that the deposit has cleared. To avoid upset clients, explain your bank’s policy on holding funds and your procedures for disbursements in advance.
If your firm isn’t tracking funds properly, or if you are short on cash one month, it can be tempting to dip into a trust account to pay for business-related expenses. After all, you’ll earn the money soon enough, so it doesn’t matter whether you wait until you’re actually ready to invoice the client, right? Or you might plan to put the money back into the trust account as soon as more money comes in.
Either way, this is wrong. It’s unethical to transfer unearned money from the trust account to your operating account to cover expenses for your firm or another client. You’d also be violating a number of other ethical duties, including failing to account for your client’s funds, commingling business and client funds, and failing to maintain accurate records.
If you don’t limit who has access to your trust accounts, you’re putting client funds at risk and breaching your ethical responsibility to safeguard them. And if you aren’t following good accounting practices and regularly reconciling your accounts, you may not notice if a check goes missing or if someone writes a check to themselves until it’s too late.
Law practice management software and online banking systems can alert you in case of problems like these. You can also ask the bank to send you an email whenever a check clears. Additionally, consider implementing physical safeguards, such as keeping trust account checkbooks locked in a cabinet.
Memories fade, so recordkeeping is important. It’s especially important when you have a fiduciary duty to track your clients’ funds and to be able to give clients account statements on demand.
To make sure you don’t lose track of checks, make sure you write the client’s name and matter number on each check that you issue. This will also help you reconstruct records in the event your records are lost, hacked, or destroyed. If you have to rebuild your client ledgers using bank statements and old checks, you’ll be able to more quickly get back up to speed.
When you receive funds for a client trust account, don’t record it as income in your accounting software. These funds are your client’s property, not your own. If you record them as firm income, not only are you breaching your fiduciary duty to your client, but you are also creating a potential mess with taxing authorities and regulators, including the IRS.
ABA Model Rule of Professional Conduct 1.15 recommends that lawyers should maintain trust account records for at least five years after the termination of the representation. Some states require longer periods and start the retention period with the last disbursement of funds.
Best practices suggest that you should keep online records as well as hard copies of every important document. Print and securely store all client ledgers, monthly reconciliation reports, and trial balances for receipts and disbursements. And, make sure to back up your electronic records frequently.
The best approach to managing retainers is one that complies with your jurisdiction’s requirements, meets your clients’ expectations, and is the easiest for you to manage.
In many cases, that will mean that you should keep client retainers in your trust account. A few jurisdictions will allow you to keep a retainer in your operating account. Check your state’s rules if you’re not sure of the requirements.
No matter which account you choose, the key is to keep good records of your client trust funds. You must make sure you know which client and matter to associate the retainer with. You must also keep each client’s retainer funds separate, and, if you’re keeping the retainer in your operating account, keep it separate from other firm funds. This is why client ledgers are so important: you must be able to segregate each transaction for each client and keep up to date with each client’s balance.
It’s also prudent to keep your clients apprised of the status of their retainer balance. That way, when the retainer fee is running low, you won’t ever have work in progress that exceeds your retainer balance. Legal practice management software can alert you when a client’s retainer dips below a certain level.
Settlement checks can pose another accounting quandary for lawyers—especially if settlement checks are jointly payable to the lawyer for fees and expenses with the balance going to the client.
Settlement checks are the client’s property and should be deposited in a client’s trust account or an IOLTA account—never in the firm’s operating account. Before depositing the check, make sure the client and the firm both sign the check if the check is made out to both parties. Record the client number, matter number, and matter description on the check. Copy or scan the check, saving the copy in the client’s file.
The lawyers should present information to the client that explains how they propose to disburse the funds. This statement should spell out what funds will be payable to the client, what portion will cover fees and expenses, and what if any, portion will be paid to a third party. You should be able to get a copy of the expenses paid from your practice management system.
Sending a report for the client to review also allows time for the settlement check to clear. Lawyers cannot advance funds from a trust account to pay the client while they wait for the bank to process the check.
After the check has cleared and the client has approved the disposition of funds, the lawyer should transfer the funds from the trust account to the client. Before doing so, prepare an invoice detailing your fees and expenses, then write a check from the trust account payable to your firm. The check should include the client’s name and matter number. Be sure to record the transaction in your client’s account ledger, then deposit the payment in your firm’s operating account. Write any other checks to your client and third parties as required by the settlement statement.
Finally, check for a zero balance. Run a client ledger report that shows all deposits and checks written. When you’re satisfied that you’ve reconciled all of the transactions, send the settlement statement, settlement check paid invoice, ledger report, and signed settlement agreement to the client, saving a copy of everything you send in the client’s file.
With so many moving parts in trust accounts, it’s easy to see how a lawyer might make a mistake. That’s especially true if you’re using manual bookkeeping methods or Excel spreadsheets to keep track of your accounts. It’s always prudent to run your accounting methods by a professional accountant who has experience with trust accounts and IOLTA accounts.
If you're worried that you've made a mistake, a smart first step is to check with a practice management advisor in your state. Many of these advisors work confidentially, so they can advise you without reporting any ethics violations to the bar. Visit your state bar website to learn whether you have access to a free advisor.
In most cases, the safest bet is to self-report a mistake and take good faith steps to correct it immediately. The failure to report can be as bad as, if not worse than, the initial accounting mistake.
As you can see from this guide, trust 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. And if you want to really get serious about your accounting and recordkeeping, you need to ditch small business accounting platforms that weren’t designed specifically to meet lawyers’ 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 trust accounting challenges and meet your firm’s needs, look for a platform equipped with the following capabilities:
Features like these can make the difference between an inefficient trust account management 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.
A budget is an estimation of revenue and expenditures for a specific period of time.
By thoughtfully creating a budget ahead of the coming fiscal year, you can better align anticipated revenue and expenses with your law firm’s goals. Successful budgeting involves critically thinking about your financial expectations so that strategies can be implemented to promote greater profitability and prevent financial pitfalls.
Budgets also provide a measuring stick for periodic review throughout the coming year to determine whether desired milestones are being met and adjust as needed. With a comprehensive budget, you can be proactive in addressing your firm’s financial issues before they become serious problems. This will provide a bird’s eye view of financial performance on a monthly, quarterly, or yearly basis which will help facilitate adequate forecasting.
Therefore, law firms need a budget to help with managing, mitigating, and minimizing financial risk.
These nine tips will help you build a solid budget for your law firm as you wind down this year and prepare for 2022:
Setting goals is the first step in budgeting. Goals act as the benchmarks of every budget and dictate the allocation of firm capital. In an environment centered around putting out one fire after another, goals allow you to set your focus on something positive.
First, brainstorm all the goals you’d like the firm to achieve within a particular time frame. Classify them according to the following categories:
Make sure these goals are specific, measurable, and realistic to current circumstances. Keep these goals in mind as you create your law firm budget. Look for opportunities to further them, in addition to identifying potential pitfalls that may derail your progress. Also, don't forget to review your firm’s goals throughout the year, just as you would review the budget. This will help keep you focused and moving in the desired direction.
To grow, law firms must invest in areas like technology, people, marketing, and other revenue-building tools. Think about what your firm will need in the coming year to attract new prospects and continue providing high-level service to existing clients. Once you have identified those expenditures, include them in your budget.
Remember those realistic goals that we spoke about in tip #2? Well, the same concept applies to your revenue expectations.
Let’s start with what you should classify as revenue. First, there’s the revenue your firm will incur through daily operations before any deduction of related expenses. Then, there’s the revenue that remains after all expenses are deducted. This is your firm’s net income, otherwise known as profit or the bottom line.
Just like goal setting, start by thinking about an end result and what your firm will need to do in order to achieve it. For instance, how many clients will you need to service over the next three months to bring in the desired level of revenue?
One more point about revenue: be sure to consider its seasonality, as different practice areas may incur more or less work at different times of the year. With that awareness, you can account for these business patterns and budget accordingly, so that necessary funds are still available during the less profitable months.
Keep your eyes on the prize - and the prize is always the profit margin. The profit margin is the main benchmark that indicates the wellness of your firm’s financial position. It measures the effectiveness of your firm’s income and expenses. It also points you in the direction of the most successful revenue streams and the most problematic expenses.
Every budget includes costs and spending - there’s no way around the fixed and variable costs of doing business. The goal is to tackle them in a way that makes the best possible use of revenue.
Fixed costs are expenses that remain somewhat consistent over time. These may include internet, telephone service, and software licenses.
Variable costs change depending on use and other factors. They may include travel costs, insurance premiums, marketing strategies, and continuing education fees. Incidental one-time expenses also fall under the variable costs. These are unexpected expenses that pop up from time to time, like equipment repairs or the cost of revamping your law firm website.
Both fixed and variable expenses should be factored into your 2022 budget.
If the past two years have taught us anything, it is to expect the unexpected. That’s why it’s necessary to budget up to 10% over the estimated figures for expenses and revenues. This will help ensure that your firm is adequately prepared for any unpredictable event that may occur during the coming year.
The uncertainty of the times has resulted in some budgeting trends that reflect a legal environment still recovering from a pandemic. These include:
In this digital era where information is just one click away, you’re never alone when it comes to accessing knowledge and expertise in areas that benefit your law firm. Numerous budgeting tools are readily available and specifically customized for the legal profession. Access these tools for assistance with the budgeting process or reach out to an accounting professional for help with creating a solid budget that will put your law firm in the best possible financial position for 2022.
Most law firm leaders do not enter the legal industry with an accounting background, but a basic understanding is important to ensure the proper management of your law firm’s finances. Decisions about billing processes, the acceptance of payments, and trust accounting form the foundation for a firm’s financial success. Therefore, it is critical for law firms of all sizes to properly position their financial systems. It will not only save time and boost profitability but will also prevent several potentially serious compliance issues.
A lot goes into navigating the world of law firm accounting. Let’s explore some of those vital components:
Every firm is different, so identifying the best banking option depends on your specific needs and goals. The wrong bank could create financial complications for your firm and result in serious legal problems.
When choosing a bank, consider the following:
After conducting this research, you can make informed decisions about your best banking options and make plans to open the necessary accounts.
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 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.
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 of the obligations 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 meeting tax obligations and limiting tax liability. Accounting professionals can also help firms with financial forecasting, reporting, payroll needs, and trust accounting.
It is not an easy task to calculate legal time, 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 such components as:
The rise in outsourced legal work adds another layer to payroll duties. Law firms should carefully categorize employees and independent contractors for payroll and taxation purposes. Incorrect classifications could lead to fines and legal consequences.
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 systems include extensive data reporting capabilities so firm leaders can quickly access financial reports with just a few clicks of the mouse.
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 payment from clients, electronic 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.
Law firms should utilize a payment processor that recognizes the specific rules that attorneys are obligated to follow. Standard payment processors typically maintain a percentage of each transaction as their fee. When these fees are deducted, it can potentially break state trust accounting rules.
Lawyer-friendly payment services provide law firms with the option of paying processing fees directly from the firm’s operating account instead of the trust account, which significantly lessens the possibility of non-compliance with IOLTA accounting rules.
Mastering law firm accounting is no easy feat. However, if you keep the above components in mind and put them into practice, in addition to following the tips below, you’ll be well on your way to navigating your firm’s finances successfully and without penalty.
