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:

Choosing the Right Bank

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.

The Intricacies of Trust Accounting

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

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:

Tax Obligations

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.

Payroll

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

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.

Payment Processing and Collections

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.

Tips for Successful Law Firm Accounting

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.

Every month, firm administrators, attorneys, and billing professionals sit down to handle one of the most dreaded law firm responsibilities: legal billing. It’s not that they don’t appreciate the value of invoicing; they just hate how tedious it is!

From managing the entire process to tracking down time records from timekeepers, legal billing tasks can hamper a law firm’s potential for billable hours and profitability if not handled in an efficient manner.

The following are some tips for bringing a law firm closer to a more structured and simplified legal billing process:

1. Simplified Time Tracking

To streamline their legal billing procedures, law firms should start with a simplified time tracking process. The entire billing process begins with documenting tasks completed for clients. When these records are inaccurate or inadequate, it makes invoicing more difficult to complete. Firm staff members must then spend time chasing time tracking records, throwing off the entire process.

A structured billing process starts the moment a timekeeper completes a billable task. A comprehensive legal time tracking system makes this happen in a variety of ways. This allows timekeepers to track time at any point using whatever method they prefer. For example, when working in the office, an attorney may want to record time as they save documents in Word or send emails in Outlook. With a complete time tracking platform, time can be entered within applications your firm is already using - like Word and Outlook.

Mobile application time tracking helps enter time with speed and accuracy. With this tool, timekeepers can conveniently log time on a mobile phone or other portable devices when completing tasks away from the office. This type of legal billing tool has become invaluable in an environment where attorneys are increasingly working remotely.

2. Electronic Billing System

To simplify the billing process, firms should move their invoicing procedures to a paperless process. Electronic billing (e-billing) software is the most effective way of simplifying the billing process, making creating, presenting, and collecting client invoices more efficient. Not only do these options financially benefit your firm, but they also improve client relations by minimizing errors and inconsistencies.

For a legal practice, the time between the completion of a task and the collection of a client payment is crucial. Payment time directly affects a law firm’s cash flow, which is necessary for handling office overhead costs. Inadequate cash flow is a common problem for law firms, so it is important to track this metric and work to shorten the time frame.

Firms need simplified billing systems in place that help transform payment times from months into weeks. E-billing is an effective tool for getting this done. It helps address bottlenecks that slow down the process by offering the following features:

3. Multiple Payment Methods

Clients are more inclined to make quicker payments when provided with more channels to do so. The majority of modern households utilize online payment methods to conduct business. Consumers want and expect convenience when choosing where to spend their dollars, and that extends to legal services. By offering a variety of convenient payment methods, law firms incentivize their clients to pay invoices in a more timely and complete manner.

Historically, attorneys have been hesitant about the acceptance of credit card payments. They view paper checks and cash as adequate payment methods for services rendered simply because those methods have always been utilized. But this “good enough” mentality can work against law firms by making the payment process more challenging to navigate for clients.

Implementing a credit card payment processing system is critical to simplify legal billing and here are a couple of reasons why:

To maximize the acceptance of credit card payments, law firms also need to offer an integrated option for clients to make payments right from their computer or smartphone. Clients appreciate convenience and ease, so firms need tools like client portals that facilitate these quick payments.

The Takeaway

Law firms can simplify their legal billing process, and even expand their client base, by implementing the acceptance of credit card payments. But remember, credit card payments are just a portion of this simplification. E-billing and simple time tracking combined with multiple payment options are sure to make your billing easier for internal and external clients alike.

Family and domestic relations law firm administrators often deal with three major challenges when handling their practice management duties – client relations, varied billing arrangements, and compliant trust accounting. If handled incorrectly, each of these important components can cause major headaches.

Busy family law firms need legal practice management software that helps navigate each of these challenges with the following features:

Client Relations

Domestic law clients are often going through some of the most stressful times of their lives. They may be dealing with the pain of a divorce, the financial challenges of a broken family, or the fear of losing custody of a child. When they seek out a law firm for assistance, these emotional situations can show up in the form of high expectations and limited patience.

All law firms need to maintain a high level of client service, but family law attorneys often feel an even greater responsibility to provide a premium client experience. This important goal can be met in several ways:

1. Effective Communication

Family law firms need effective communication strategies to keep clients satisfied with the level of service being provided. Administrators should implement a proactive communication style where the firm initiates and maintains dialogue throughout the lifecycle of the matter. This keeps clients informed and comforted by the knowledge that work is being completed on their behalf.

Some of the tools that family law practitioners can use to implement this strategy include a client portal where clients can log into their personalized account any time of the day or night to view correspondence, see task deadlines, receive firm messages, and review billing information.

2. Accurate Calendaring

An effective calendaring system also helps family law firms support positive client experiences. With comprehensive calendaring, firm members can keep ahead of pending deadlines and court appearances, while also keeping clients informed about important dates.

It is not unusual for a busy family law practice to have multiple deadlines, events, and reminders on the calendar every day. They need a practice management system that provides administrators with a bird’s eye view of the entire firm, along with giving individual attorneys and teams calendaring information tailored to their specific caseloads. From discovery deadlines to mediation appointments, missing a deadline or court appearance can be detrimental to the attorney-client relationship, so domestic relations lawyers must have tools to always stay on top of their calendars.

3. Streamlined Intakes

Family law clients often wait until the very last minute to secure legal services. So, they may walk in the door for the intake appointment with a pendente lite or child support hearing already scheduled. Family law firms can address this challenge with legal practice management features that automate the intake processes. Automated workflows and conflict checks can streamline the process so representation can begin expeditiously.

Billing Arrangements

Along with criminal defense practices, domestic relations law firms have been at the forefront of introducing alternative billing arrangements into the legal industry. Many of these firms have been offering flat fee uncontested divorces for years. While these alternative arrangements may simplify some matters, they may not be appropriate for all family cases. This creates a situation where family law firms may need to utilize multiple billing types within their caseloads. For that reason, firms need legal practice management and billing systems that can handle various billing arrangements with the following tools:

1. Simplified Billing Procedures

With a seamless invoicing process, family law firms can quickly prepare, generate, and deliver bills to clients regardless of their billing arrangement. Whether the matter is being billed on an hourly basis, as a fixed fee, or as a project, the firm’s billing software must have the capacity to leverage the invoicing process quickly and easily with minimal input from law firm staff. Once the billing method has been applied to the matter, the system should automatically use it in the generation of all invoices.

2. Quick and Easy Timekeeping

Whether working on a flat fee matter or using the traditional billable hour, family law attorneys need the tools to efficiently track time spent on a matter. For hourly billing, timekeeping data forms the basis of the invoice and how the law firm gets paid. Without tracked time, there is no compensation. For fixed-fee arrangements, timekeeping gives law firms a better sense of how hours are being spent by firm professionals.

Within a legal practice, wasted time equates to lost revenue. With time tracking data, family law firm administrators can review how time is being spent and make adjustments to improve efficiency, productivity, and profitability.

Effective timekeeping tools also add value to family law attorneys as they work away from the office. With cloud-based timekeeping software, they can accurately record their tasks whether they are in a courthouse, conducting a home visit, or attending a client mediation. Some practice management software options even offer automated time capture features that automatically track the amount of time spent on client calls, including those made from a cell phone.

Trust Accounting

As stated earlier, while many family law firms utilize flat fee arrangements for simpler matters, they may still use the billable hour for more complex cases. This is typically done through a retainer agreement, where the client remits an amount of money for the firm to hold in trust. As work is completed on the matter, the firm transfers money from that trust account to another firm account.

A lot of rules and regulations exist around the management and usage of trust accounts, so family law administrators need practice management software that promotes compliance and takes the pressure off firm members.

1. Integrated Accounting Features

Family law firms need integrated accounting tools that help them maintain compliance with the rules of their respective state bars. Even a single mistake can lead to trouble that could have been avoided with the right practice management software.

Efficient billing systems automatically track client funds as they are moved from one account to another. They also provide firms with the capability to manage and report on multiple client IOLTA bank accounts. With comprehensive legal accounting tools, family law firms can maintain all their accounts in one platform for secure and accurate management.

2. Financial Reporting

The ability to run up-to-date and accurate financial reports is also necessary for compliant law firm trust accounting. Some jurisdictions require detailed reporting for individual trust accounts. In addition, should a disagreement or discrepancy arise, the ability to quickly provide a detailed report can mean the difference between clearing up the issue and making a bigger problem for the firm. With financial reporting capabilities, domestic relations law firm administrators can keep a consistent and accurate view of all the firm’s financial data.

Managing Client Relations and Alternate Billing Requires Thorough Legal Practice Management

Family law clients have a lot on their plates as they try to care for their families and traverse the waters of domestic relations law. Family law firms can alleviate some of their worries by implementing legal practice management tools that promote excellent client service, streamline various billing arrangements, and promote accurate trust accounting.

The billing department is the lifeline of a law firm, ensuring that the practice effectively bills and collects compensation for services rendered. Its reach extends from the time tracking phase to reporting on key financial metrics. If the billing department proves unsuccessful at fulfilling its duties, the entire firm may suffer fiscal losses, including inadequate cash flow and an inability to manage overhead costs.

Law firm billing departments typically have two major goals in mind. One is to streamline the invoicing process, so that timekeeping administrators can spend more hours on billable client tasks. The other is maximizing billing accuracy to promote timely payments and reduce client disputes.

Unfortunately, three common challenges may get in the way of these goals:

  1. Billing departments often lack the level of skill and functionality necessary for effective invoicing because billing experience can be spread throughout the firm. The billing department may have some limited expertise, as well as the administration and some of the attorneys. Even the highest level of experience can be useless when it's scattered and disorganized.
  2. Inadequate billing technologies lack the necessary tools and structures that firms need to maintain an invoicing process that meets the needs of their most sophisticated clients. Law firm billing departments require resources that match or exceed the demands made by their clientele. Particularly for firms working with corporate or third-party billing clients, comprehensive technology is vital.
  3. E-billing is still a relatively new concept for some law firms, requiring a level of knowledge that many firm members have not previously acquired. Therefore, billing departments are constantly seeking ways to strengthen critical skills and keep their staff members up-to-date with new technologies.

Practice management software can play a significant role in helping law firm billing departments overcome their challenges and meet firm goals. Keep reading to learn how.

Maximizing Department Manpower

Many law firm billing departments rely solely on a limited number of people to manage the entire invoicing process - from time tracking to invoicing and payment collections. If that handful of people becomes overwhelmed or unable to fulfill essential tasks, the entire invoicing process can suffer, creating a financial risk for the firm. This type of narrow setup is also vulnerable to personnel changes. The separation of even one member of the billing department could mean that a vital piece of the billing machine grinds to a halt.

Law firms cannot afford to trust such an important, business-critical process to only a couple of employees without safeguards in place that standardize the processes so that they can be learned and applied by other members of the firm when necessary. Tools like automation and e-billing help law firms create a systematic process that can be understood by managing partners and administrators, as well as easily taught to new members of the billing team.

Practice management software provides law firm billing departments the level of flexibility they need to maximize even the most limited staffing capabilities. It provides mechanisms for simplifying processes, eliminating the need for multiple software services, and systematically managing department tasks. Once firms set their billing processes in place using practice management software, they can ensure that their billing processes will successfully proceed, no matter what changes or limitations may occur within the billing department.

Improve Billing & Accounting Efficiency

Law firm billing departments take on a variety of responsibilities under the watchful eyes of firm managers, partners, and administrators. After all, every single firm member relies on the billing department to ensure that money earned translates into actual revenue (and payroll). With such high stakes, billing departments need streamlined processes that result in timely and complete collections.

Practice management software assists with this goal in a number of ways:

Another huge benefit of practice management software is the inclusion of trust accounting resources. Trust accounting is one of the most important law firm billing department duties. Inadequate practices can place firms at risk of potential ethical violations, but the right tools help billing teams handle trust accounting accurately and in compliance with jurisdictional requirements.

Legal practice management platforms offer all of these billing and accounting solutions in cloud-based software, which provides a level of remote accessibility that has become absolutely essential within today’s law firm environment. When unexpected business interruptions occur, law firm billing departments need the ability to continue invoicing and collecting payments. Cloud-based practice management makes that happen.

Accessing Billing Data

Law firm administrators and partners want detailed billing data that helps them keep a pulse on the fiscal health of the firm. Without this information, they cannot make informed decisions about the firm’s direction. Legal practice management software helps billing departments generate the reports that the partners need.

It only takes a few clicks to generate data-specific matters, practice areas, or the general ledger. Year-over-year reporting provides detailed comparisons between current and past years, while month-over-month reporting offers shorter timeframe reviews.

Practice management software allows law firm billing departments to customize their reporting and generate data sets relating to:

With comprehensive reporting, partners and law firm administrators can gain deep insights into a variety of additional firm details, including average hourly rates, budget compliance, law firm efficiency, and more. The modern e-billing solutions of practice management software give billing departments the ability to extract rich data from invoices and generate detailed reports that would otherwise take an inefficiently unreasonable amount of time.

Legal Practice Management Lessens the Workload of Billing Departments so Law Firms Get Paid Faster

The expansive responsibilities placed on law firm billing departments necessitate a system that streamlines processes and promotes maximum efficiency. Legal practice management software provides the features that improve processes and drive law firm revenues.

There is a lot involved in the financial management of a law firm. Fortunately, with a good understanding of the principles of law firm finances, firms can reap the benefits of a quality time & billing and financial software system that allows them to handle their firm’s management with ease.

Let’s dive in.

Trust Accounts

It is common knowledge that improper handling of trust accounts results in the highest cause of bar issues for attorneys. It is imperative that the firm’s trust account be handled by a manager who knows what they are doing and that the managing partner maintains close oversight as well.

Your firm’s legal software should have the ability to track each client’s trust fund balances. By having your time & billing software and your financial software all on one platform, you can maintain accurate records without the need for double entry into two systems. Each month, the firm’s manager should reconcile the firm’s trust account with the bank statement, and following that reconciliation, he or she should run a report showing the trust account balances for each client. The total from the client trust listing report should match the total for the firm’s reconciled bank balance. These reports should then be provided to the managing partner for full transparency.

A common mistake that leads to bar complaints is when a firm transfers funds to the operating account before the client has been billed. Trust funds should remain in the trust account until the client’s regular billing cycle. When funds are transferred to pay an invoice, it is important that the invoice template is clear as to what has been billed and transferred from the client’s funds, and that invoice should be provided to the client so that they have a clear understanding of their trust account’s status.

The firm should not keep more than a small amount of the firm’s funds in the trust account. The sole purpose of keeping firm money in the account is to cover any potential wire fees that may result from an automated clearing house (ACH) coming into the account.

Another common mistake that firms make is transferring funds from the trust account before they have cleared. Gone are the days when a certified check can be treated as cash. Standard protocol is to wait 7-10 days for a deposit to truly clear before drawing on those funds. If the funds are drawn before they are confirmed to be “good,” the firm is essentially using another client’s funds.

Lack of Written Agreements

It is important that law firms use Engagement Letters (EL) to spell out the agreement between the firm and the client. The EL should define the scope of work, the agreed rates the client will pay for the work, how often the client will be billed, and any interest fees the firm charges for late payments. It should be signed by a partner and countersigned by the client.

Non-representation letters are often overlooked by firms. If a firm discontinues work for a client, or if they provide a consultation to a potential client but do not engage in the work discussed, it is important to send a non-representation letter so that there can be no claim made that the firm was responsible for handling the matter.

Understanding the Cost of Doing Business

Like any business, law firms have a cost of doing business. Do you know what it costs your firm to have an attorney working on a case? You may think it is just a matter of their direct compensation, but there is more to it than that. By using cost accounting methods, you can combine your attorney’s direct compensation and their share of the firm’s overhead and divide it by the number of hours they typically bill annually to know what their break-even rate is. By calculating this rate, you know what you need the attorney’s billable rate to be in order to receive any profit from that attorney’s time. Taking the time to perform this exercise is very valuable to your firm.

Accepting Credit Card Payments

Accepting credit card payments from your clients can result in faster payment, improving your law firm's cash flow. It can also result in receiving payments that you may not otherwise receive if you have clients with cash flow issues. It is important to use a credit card processing service that will allow for the separate distribution of your fees to your operating account, in addition to your retainers and settlement payments to your trust account. Law Pay is an example of a service that can assist with legal settlement accounting.

Many businesses charge their customers a fee for using credit cards. It is important for law firms to understand that the ability to follow this practice varies from state to state. You need to consult your state bar to determine whether it is considered ethical in your state to pass on those fees to your clients. You will also want to consider, even if you are allowed to pass on those fees, whether it is good business practice for your firm to do so. Will passing on those fees leave a bitter taste in the mouths of your clients? Are you better off increasing your rates by $5 an hour to cover the cost of accepting credit cards?

Understanding Your Firm’s Data

Do you know what your billing and financial reports mean? The best way to have accurate reports that you can rely on and to avoid the issue of having to practice double entry recordkeeping between multiple software applications is to use one software that hosts both time & billing and financial data in one platform. For example, by having everything in one place you should be able to accurately and efficiently run reports that show you things like effective billing rates so that you know if after write-downs and write-offs your attorneys are billing at a rate that is higher than their break-even rate so that your firm will see a profit.

Law firms today are finding it increasingly necessary to meet specific client needs with their invoices. If your firm is to receive payments from clients in a timely manner, it is important that your invoices communicate the information expected by each client in the format that they require. With the right software and planning on the front end, this does not have to be an onerous task.

The Basics

To begin, there are some criteria that should be included on every invoice, regardless of the invoice format or template. You want to ensure your invoices provide:

Ensuring Accuracy with Attorney Time Entry

Research shows that time not kept concurrently results in as much as 30% of billable time lost. By using a system that provides a timer and ease of use for time entry, attorneys can easily track their own time in the billing system as they are working, ensuring both efficiency and accuracy of your billed time. With user-friendly software, it is no longer necessary for attorneys to handwrite their time entries, with a staff person paid to take the time to enter those tasks into your billing system.

Not to mention, attorneys can utilize technology that will allow them to automatically capture time throughout their day without missing a beat. Whether they're texting a client about an upcoming meeting, sending documents over email, or answering a call after hours, every second is automatically captured and converted into a time entry.

The Importance of Billing Templates

By using software that allows the use of multiple billing templates, your firm can create templates to meet each individual client’s needs. While some clients will pay your invoices regardless of the format (as long as the information is communicated clearly), if you have corporate clients or represent insurance companies, you will find you have many that have specific requirements. By assigning the appropriate billing template to each matter on setup, you can ensure that each client is automatically receiving their invoice in the format they require.

Additionally, make it easy for your clients to pay you directly from their bill. Think about all the bills your clients pay on a monthly basis... from utilities to internet and wifi, cellphone, the list goes on and on. And then when you think about how people are paying these bills, you'll come to find that a majority of them are being processed online electronically. So meet your clients where they already are and offer credit card payments of eChecks. Some of your clients may prefer snail mail and that's okay, but the world is trending digitally, so it is becoming best practice to offer both payment methods.

Reducing Human Error with Pre-Bill Templates

Do you have clients who have billing requests beyond the formatting of their invoices? For example, if you typically email invoices but you have some clients who require their invoice to be mailed, how does your billing staff remember this each month? By setting up pre-bill notes in your matters and using a pre-bill template that will show those notes, when your billing staff is ready to run the final invoice, they will have that information directly in front of them.

Other information that may be included in pre-bill notes is whether there is a special agreement for the matter – is it a flat fee, a contingency matter, or does it have a fee cap? How about a budget? By including all of this information in a way that it will show on the pre-bill, you will save your staff time (and therefore the firm money) while also ensuring that special agreements with clients are not missed.

The Takeaway

You can meet your client needs while also working smarter, not harder, by having specific templates assigned to each matter and tracking time in the billing system concurrently. Invoices can then be generated efficiently and painlessly at the end of each billing cycle, improving your law firm's cash flow and resulting in prompt payment from happy clients.

Law firms who wish to work for insurance carriers or larger companies are finding it almost impossible to do so if they are unable or unwilling to practice LEDES e-billing. For the firm manager who has never dealt with LEDES e-billing requirements, the task can feel daunting. With a basic understanding and a few tips to get your invoices approved through the audit process, your firm can accept clients who require e-billing without fear.

What is LEDES E-billing?

LEDES stands for Legal Electronic Data Exchange Standard. This billing format was created in 1998 to address e-billing issues. It creates uniformity among all law firms to assist corporations and insurance companies in processing and comparing law firm invoices.

How does LEDES work?

The LEDES process requires firms to use a defined set of Uniform Task Codes (UTBMS). There are different sets of UTBMS codes used for different matter types. The most common set used is the Litigation Set, but there are also sets for Workers Compensation, Counseling, Projects, and Bankruptcy, for example. Full detail of the code sets can be found on the American Bar Association website.

What do Law Firm Managers need to know?

For starters, you need to ensure that the task codes used for each billing entry come from the UTBMS code set for the practice area in which you are billing (typically the litigation set). Some firms require their timekeepers to enter the codes as they enter their time entries; other firms allow their timekeepers to enter a normal billing entry, and the billing department will edit each entry at the time of billing review to include an appropriate task code.

Your invoices will need to be created in a LEDES format which will allow the invoice to be uploaded into the e-billing system that your client is using and be read on the receiving end. These invoices are uploaded to a third-party administrator’s site. There are several third-party administrators (TPAs) out there, and you may find that you have different clients using different TPAs. Your invoice will first be audited by the TPA, and they will review your entries for acceptability before releasing them to your client.

It is important to understand that the TPA is going to analyze every entry, looking for entries they can reject as unacceptable. You want to start by reviewing your client’s billing guidelines very carefully to have a full understanding of what their billing requirements are, what they will pay for, and what they will not pay for. Many clients who bill under this format are unwilling to pay for some firm expenses. For example, items like postage, photocopies, and online research may be considered by the client to be operating expenses that they will not reimburse.

The firm administrator or billing supervisor should review your LEDES pre-bills very carefully prior to submitting your invoice so that you can avoid rejections. Items to bear in mind include:

  1. No block billing. Every task needs to be its own entry on your invoice. Part of this process includes the TPA and client wanting to see the amount of time billed for every task; accordingly, you cannot have two tasks combined in one entry.
  2. No clerical tasks. Paralegals need to ensure their entries make it very clear that the task they are performing is legal in nature and could not be completed by an administrative assistant.
  3. No paralegal tasks performed by attorneys. Attorney entries need to show that the task was such that it could not have been performed by a paralegal.

What happens after your invoice has been uploaded?

You will receive an email from the TPA indicating whether your invoice has been accepted. This does not mean that it has been approved at this stage, it just means it has passed the first hurdle. There are several items that could cause your invoice to be rejected at this stage:

  1. There are timekeepers on the invoice that have not been added to the TPA’s system. Any time you add an attorney or paralegal to a client’s matter who has not billed the client previously, you need to ensure you have added that timekeeper into the system so the TPA recognizes who they are and what their accepted billing rate is.
  2. The rates billed do not match accepted rates. If you inadvertently billed a timekeeper at the incorrect rate, the system will kick it back.
  3. The invoice beginning date includes a date that has been billed previously. While you may not enter a beginning date as part of your “normal” billing process, for LEDES billing you must enter the beginning date of the invoice, and it must fall after the ending date of the last invoice on the matter.
  4. Missing UTBMS codes. Any entries on the invoice that do not include a task code that is included in the UTBMS code set will cause the invoice to be rejected.

Once your invoice has been accepted, it will be reviewed by the TPA. Each entry is analyzed. Any entries that show block billing, clerical work, or attorneys performing paralegal tasks will be rejected. You will need to watch for your invoice to either be approved or have entries that have been rejected. If entries are rejected, you have the opportunity to appeal that decision. You need to follow the protocol for the TPA’s system to appeal or accept the rejections. If they are claiming something is clerical in nature, you may be able to appeal the decision and provide more detail to show why it is not clerical. You may decide they are correct in their rejection and accept the rejection of that entry.

Once the process has been completed and you have final decisions, you will want to write down the invoice balance due in your billing system to reflect any rejections that you have accepted.

How can technology help?

Your time and billing system should be set up with the UTBMS codes already in place. It should also have templates available for you that create your invoices in the required LEDES format automatically. 

While LEDES e-billing can feel overwhelming at first, with some understanding of the process and the right time and billing software in place, you can accept clients with confidence that you can successfully meet their billing requirements.

The legal billing process can be a challenge for every law firm, but it doesn’t have to be. A combination of the right policies, procedures, and technology can be used to stay on top of attorney time and make the billing process efficient and accurate.

Software that encompasses both practice management and time and billing in one platform is an effective way to keep everyone on the same page and meet your clients’ needs. Use your firm’s legal software and good policies and procedures to:

Client Onboarding

Your law firm’s billing protocol should start with your client onboarding process. Using your practice management software, create a standardized client intake form that captures all of the necessary information upfront. It is important to set appropriate expectations from the start. Once the client and attorney have agreed on a budget and a billing rate, an engagement letter should be sent to the client for signature to ensure all parties have acknowledged in writing what is included in the representation and what the fees will be for that scope of work. Best practice steps include:

Law Firm Billing Policy

Once the client has been engaged and you have received the returned EL (and a retainer payment if one was requested), it is time to get to work. Your firm should have protocols in place that set clear expectations for your attorneys with regard to posting their time to your time and billing system promptly. Research shows that up to 30% of fees are lost when time is not captured concurrently.  Best practice steps for a firm billing policy include:

Law Firm Billing Codes

Some clients require LEDES e-billing, and it is important that your time and billing software support this requirement. The American Bar Association has created a Uniform Task-Based Management System (UTBMS) that allows large clients (typically insurance companies, but sometimes large corporations), to track the work their law firms are performing by task. The Litigation Code Set is most often used, but there are other sets for Counseling, Project, and Bankruptcy Codes as well.

For your clients who use the LEDES e-billing practice, it is important that your time entries are drafted very carefully. Your invoices will be reviewed by a third-party administrator who is looking for anything that appears to have the potential of being an uncovered activity. Best practice steps for LEDES e-billing include:

Billing Your Client

When it comes time to send your clients their invoices, if your attorneys and paralegals have kept accurate, concurrent time and they have followed your firm protocols for time entries, the billing process should be painless. Your time and billing software should allow you to have a billing template that is specific to your firm. Some software will allow you to review invoices in the pre-bill state within the system, where partners can review the pre-bills, forward questions to timekeepers on their time entries, and release the pre-bills to be invoiced when questions have been answered. Best practice steps in the billing process include:

Take a Breather (Until Next Month!)

The monthly law firm billing process does not have to be painful. With the right technology and a few policies and procedures in place, your process can run smoothly and you can have accurate invoices that show value your clients are willing to pay for.

How are changes in today’s climate impacting your law firm profitability?  Technology has changed our world significantly, and law firms are slowly catching up to the rest of the business world in many areas. Gone are the days of the large offices, where every attorney has their own secretary, and the firm houses a large library full of books that must be manually updated with those supplements that would arrive on a regular basis, much to our chagrin.

As we have slowly joined the rest of the world in the ways of online research and paperless offices, we are also considering more appropriate ways to look at profitability. This is due, in part, to client demand. Clients no longer accept the idea that they will pay our firms by billable hour, with no budget or foreshadowing of what their final out-of-pocket expense may become. Technology allows for broader communication and stiffer competition, and if we want to remain competitive, we must become more efficient and readily able to consider alternative fee arrangements (AFAs) such as flat fees, risk collar agreements, etc., or at the very least, offer accurate budgets that clients can count on so that they know their worst-case scenario.

While we may have given in to the fact that we must agree to these terms in order to get the work, many firms find themselves no longer profitable as a result. Where they are falling short is in the failure to recognize that, like other businesses, they must have a cost accounting model that allows them to understand what their cost is for producing the client’s product before they can agree to a sale price.

If you think only manufacturing companies can use cost accounting methods in their businesses, think again. Law firms who are using these methodologies will leave behind those who don’t educate themselves in these practices. You may not be producing widgets, but you are selling a “product” (time) that can be measured in order to determine the cost to produce that product.  By implementing a cost accounting system, you will be able to determine profitability by producer, department, office, client, and matter. (You may be surprised to learn that your largest fee income client is not necessarily the largest contributor to your bottom line!)

Determining the Cost of Your Product

So how does a firm determine the cost of their product? It isn’t as complicated as you may think. By determining the direct costs of your timekeepers (salary, payroll taxes, insurance, training, etc.) and allocating the remaining firm overhead to your timekeepers (how the overhead is allocated to differing timekeepers is another article in itself), you can determine an annual cost per timekeeper. By then looking at the number of hours each timekeeper bills per year, you can determine their hourly cost.  (Timekeeper annual cost including overhead allocation ÷ number of hours billed = timekeeper cost per hour.)

Once you have determined the timekeeper’s cost per hour, you can readily understand what you can (and cannot) afford to offer as your billable rates and AFAs. You can determine the necessary billable rate for each timekeeper in order to meet your profitability goals, taking into account anticipated write-downs and write-offs (typically 10 percent). You will also know very quickly whether you can afford to offer a client a discount on any given invoice and still receive a profit on that work. 

See the example below:

What does this spreadsheet tell you?

How does that help you?

By doing a small amount of legwork on the front end to create a model that works for your firm, you can

One final note – be sure to require your attorneys to capture their hours, even on flat fees and other AFA arrangements. If you don’t, you will not be able to determine how successful your AFA models are working for you in helping you to maintain profitability.

What does your law firm's cash flow look like this year? How about your net income by year-end? Having a quality budget in place removes the guesswork and fear from your financial picture and ensures you end up where you want to go. We have all heard the phrase, “Failing to plan means planning to fail.” A good budget will not only help to forecast net income and cash flow, but it will help you to plan for potential problems before they become emergencies.

The two most common types of budgets are zero-based and incremental. If you are a new firm with little to no history, you will need to start with a zero-based budget. A zero-based budget is just what it sounds like – you start at zero and forecast each expense you anticipate incurring, as well as the revenue you hope to achieve.

With incremental budgeting, you have the luxury of looking back at your history and creating the next year’s budget based on what you have experienced before. Be careful though – with incremental budgeting, it can be easy to fall back on past numbers with little effort made to improve efficiencies and drill down on ways you can do better.

Regardless of the approach you take, the first step is to ensure you have a good general ledger chart of accounts. If you are not familiar with the chart of accounts, it is simply a list of income and expense categories used to track your spending. In a law firm, typically your income is fee income. You may also have a rental income if you own a building and rent a portion of it to other tenants. When it comes to expenses, you want to find the happy medium between having enough detail to aid you in future years without having so much detail that it is a cumbersome system to use. It is also helpful to ensure you keep any expenses pertaining to meals separate – your CPA will need to know that number at tax time because your meals are not 100% deductible!

Steps to Creating Your Budget

Step 1: Plan

Don’t plan in a vacuum. Start by reaching out to all stakeholders in your firm. What do their CLE expenses look like for the year? Any conferences planned? How is the equipment looking? Is anyone going to need any major purchases to replace outdated equipment? What about staffing? If leadership is planning to add more employees to the firm, you need to know whether you are going to have the money to cash flow that addition. Attorneys typically take six months before they show a profit for the firm.

Step 2: Insert Your Plan Into a Spreadsheet

It is helpful to use a spreadsheet for planning your budget. You should have a sheet for income, a sheet for expenses, and a sheet that links the bottom line of your total income and expenses so that you can see your forecast net income.

Begin your budget by estimating income. In your budget spreadsheet, you can estimate the fee income for each timekeeper in your firm. It is a simple list for each timekeeper, with their estimated billable hours for the year multiplied by their average realization rate. Your financial software may be able to run this realization report for you – if it does not, you can estimate a fairly accurate number by looking at the timekeeper’s previous history and dividing their fee receipts by their billable hours. If your firm has any contingency matters, don’t forget to account for them as well – some may be at a stage where there is guaranteed income to the firm, and some may still be truly contingencies – you should account for the contingencies in a separate line item that is not counted on.

When it comes to budgeting for your expenses, be sure you have a good plan for your GL accounts before you start. Try to anticipate everything you may want to be able to track in the future. Your financial software should allow you to have parent accounts and sub-accounts. For example, you may have a set budget for firm events for the year, but you may want to be able to track what the firm spends on the annual holiday party v. its summer outing and its annual Administrative Professionals’ Day celebration. You can have a parent account for firm events, with sub-accounts for each of those sub-items. This will allow you to easily plan in future years by having a quick picture of your historical spending.

Another great way to use sub-accounts is to track costs the firm incurs for each attorney. Examples include insurance, association dues, CLEs, conferences attended, etc. By creating a sub-account for each attorney, it is very easy to run a report from your financial system to track their direct costs when you want to determine their true profitability for the firm.

Step 3: Look at Your Bottom Line

When you have completed your income and expense entries into your spreadsheet, ensure that you end up with the desired net income at the end. If you don’t, you need to sharpen your pencil!

Step 4: Enter Your Budget Into Your Financial System

When it comes to entering your budget into your financial system, be sure you are entering the expenses in the month that you expect them to occur. Some items will be spread equally throughout the year, like rent and equipment leases. Others will occur in specific months, like professional liability renewals and holiday parties. By planning for your professional liability renewal to occur in the appropriate month, you can have your eye on the ball in cash flow planning and avoid the extra expense of paying for financing your premium. 

Don’t Just “Set It and Forget It”

Use your budget for decision-making. If someone is requesting something that was not planned in the budget, is it necessary? Is it something that can wait until next year? If not, is there a way you can make up for the added expense by changing your spending in some other areas or increasing firm revenue?

Once you have entered your budget into your system, make sure you monitor it regularly. You should be running a monthly YTD income v. budget report to track how you are doing against your budget. Don’t despair if you see variances v. your budget. No budget is perfect, but by having one in place and monitoring it regularly, you can prevent any big surprises and make contingency planning when necessary.