Lawyers are lawyers because they are not accountants!
No matter the size of your law firm, legal accounting can get complex and overwhelming.
Are there any actionable legal accounting tips for law firms that you can quickly implement to better manage your legal accounting?
In this article, we will look at twelve legal accounting tips for law firms that we believe will help law firms better handle their legal accounting, improve their cash flow and profitability, make better decisions and set the stage for long-term growth. We will look at things like managing revenue by area of practice, properly tracking your law firm income, measuring your law firm financial health and more.
This article is divided into the following sections:
- Manage revenue by area of practice
- Accurately recording your law firm income
- Assess your law firm’s financial health
- Create invoice accurately
- Manage your law firm costs and expenses
- Minimize double data entry and errors
- Manage your trust account well
- Keep accurate records
- Set aside an emergency fund
- Don’t fall behind in your accounting
- Create financial budgets and projections
- Use legal accounting software
- Takeaways on accounting tips for lawyers
1- Manage revenue by area of practice
Unless your law firm practices law in only one area, you will need to track your law firm revenue based on the areas of practice.
Understanding your law firm revenue by area of practice will lead you to make valuable and strategic decisions about where you are and where you are heading.
If your law firm is generating a lot of revenues in a segment with very little profit margin and high overhead costs, you may want to assess if that was by design or do you need to bring your firm back on track.
Depending on the area of law, your law firm may handle its billing differently depending on case type.
If you have relevant data about your law firm business and the most profitable segments to you, you can make business decisions based on concrete and hard facts.
If you are able to track your law firm revenue by areas of practice and even drill further by case type, region, industry and type of client, you will have all the right data points to make a solid data driven decision.
2- Accurately recording your law firm income
You received money from rendering legal services, collecting money to reimburse your costs, you withdrew money from your law firm’s credit line, you invoiced against a retainer deposit, you collected sales taxes and so on, what do you record as law firm income?
Income is how much your law firm has actually earned excluding the reimbursement for out-of-pocket expenses, disbursements and costs.
A legal accounting tip we have for you is to make sure you take your revenue and properly allocate the incoming cash flow to the right accounts. Keep a clear accounting record of that.
Accurately recording your law firm income is important to be able to track your law firm’s true profitability, to stay compliant with your law society rules and stay on the good side of tax authorities in the event of an audit.
Make sure you do not confuse revenue with income!
3- Assess your law firm’s financial health
There are rule-of-thumb metrics you can look at to assess your law firm’s financial health.
To set yourself a few reference points and benchmarks, consider the:
- Average revenue per employee on payroll (example $150,000)
- Average revenue per attorney (example $500,000)
- Weight of law firm salaries on gross revenue (example 60% to 65%)
- Weight of marketing expenses on gross revenue (example 8% to 12%)
- Weight of rent expenses on gross revenue (example 5% to 7%)
With proper law firm accounting, you can easily track your law firm KPI’s and ensure that you remain on target.
4- Create client invoice accurately
A great legal accounting tip is for you to invoice your clients correctly and accurately.
At the end of the day, your law firm needs to generate revenues and pass on case related costs to its clients.
By accurately invoicing your client, reflecting the correct fee arrangement, accurately reflecting legal rates, accurately identifying case costs, reimbursable disbursements, out-of-pocket expenses and any other expenses charged to your client, you will help improve your law firm’s cash flows by minimizing disputed invoices.
Law firm clients do not like seeing you make mistakes in their invoice.
Inaccurate invoices reflect poorly on your law firm’s image and reputation, so make sure you stay on top of it.
Improving your invoicing will also help you track clients who are consistently delaying payment or failing to pay your legal fees.
Accurate invoices means less invoice modification, edits or write-offs.
As an additional benefit of accurate invoicing, you will not have to make invoice corrections, modifications and changes after it has been issued.
If you have too many changes in your records, you can make your client account extremely confusing to understand, your customer will get confused, your auditors will get confused and your account receivable process will become a nightmare!
So do yourself a favor and ensure that your law firm invoicing is as accurate as it can be.
5- Manage your law firm costs and expenses
There are so many costs and expenses that you can incur in running a law firm.
Payroll, marketing expenses, payment of court costs, process server costs, bailiffs, stenographers, rent, advertising, events, you name it.
Tracking and labeling your expenses can result in an important cost saving to your firm. This legal accounting tip should not be neglected!
Some expenses must be charged back to the customer and some expenses should be absorbed by the firm.
You don’t want to absorb expenses that should have been charged back to the client.
You also want to charge back the client as soon as possible so you don’t effectively extend unwanted credit.
At the end of the day, your cost and disbursement management should allow you to quickly pay for the disbursement, quickly reflect it on your client’s invoice if it must be charged back to the client and properly tracked in your accounting records, the bank records and so on.
Properly managing your expenses can also help you maximize tax write-offs and credits.
Every dollar counts and there is no reason your law firm should leave money on the table.
6- Minimize double data entry and errors
This means that you may need to record the same financial transaction in two different systems.
This is fertile ground for human errors to creep into your accounting and therefore throw your system balance off.
To minimize double data entry and errors resulting from it, consider integrating all your accounting into one system, one central accounting system where all your accounting records, transaction, journal entries and so on will be recorded.
This will save you a lot of time and headache when your law practice management system and accounting system balances get out of sync.
7- Manage your trust account well
How well are you managing your trust account? When managing your trust account operations, you’ll need to be very cautious.
Depending on your law society’s rules, you’ll need to keep track of the sums of money coming in and going out of your trust account, record clear details, ensure that your trust account money is tracked to the right client and so on.
An important legal accounting tip that we have for you relating to trust accounts is to ensure you properly manage your trust account interest, safeguard against overdrafts and ensure that you are ‘audit-ready’ at all times.
Being audit-ready means that at any point in time, your trust account should be fully and accurately reconciled with your client accounts and bank statements and all transactions fully documented.
This is typically called a three-way reconciliation.
8- Keep accurate records
Another tip we have for you is to keep accurate financial and accounting records for your law firm.
There are so many financial transactions going through your law firm that if you miss a few here and there, at the end of the year, you could potentially leave thousands of dollars on the table.
To help you keep accurate records, try to centralize your record keeping and keep all your accounting information in one location, in one central repository.
Most law firms opt for a legal accounting software to help them manage their law firm accounting, manage trust accounts and properly manage their accounting records.
9- Set aside an emergency fund
In good times or bad, you always ensure that you set aside an emergency fund to smooth out financial fluctuations and variability in your law firm’s cash flow.
Your law firm’s cash flow fluctuations can create an operational disruption that you should plan for, monitor and address.
Although this is not a pure accounting tip, we wanted to add this tip in our list of top tips to ensure you are sensitive to this topic.
You can read our article on ways to improve your law firm finance in the short-term and implement strategies to help with your law firm finance.
Make sure you manage your law firm’s cash flow tightly and have enough cash reserves to allow you to pay for your law firm’s operations for a few months in case of an emergency.
10- Don’t fall behind in your accounting
Another legal accounting tip for you is that you should keep your law firm accounting up-to-date and not fall behind.
This should not be a surprise to you!
The last thing you want to do is to fall behind in your legal accounting resulting in a domino effect of adverse consequences.
Without up-to-date legal accounting data, you may be operating your law firm blindly and dangerously unable to assess it’s true financial health to make the proper business decisions.
If your law firm has deep pockets, lots of cash reserves and credit facilities, falling behind a little may be managed although not acceptable.
However, if your law firm is running lean and does not have an important financial cushion, it could be catastrophic if you do not have a clear and real-time view of your law firm finances.
Make sure your accounting team provides you with regular updates and feedback as to where they stand, what challenges they are facing and how you can help them solve their operational pain points.
11- Create financial budgets and projections
No matter if your law firm is financially sound, you want to make sure you have a clear budget and a clear plan for your future.
Every year, you should review your law firm’s budget and see the areas where you were successful and the areas that you had challenges.
Having a good view of your law firm’s financial performance stacked against your budget can help you assess your overall efficiency but also your ability to implement and execute your go-to-market strategies.
With a financial projection, you can project your law firm’s finances into the future and define where you want to go and how you will make it happen.
You can better decide where to invest more and where to scale back.
You’ll manage your law firm’s liabilities, loans, outstanding debt and define your debt-to-equity ratio, current ratio, interest expenses and any other financial ratios in ensuring you are leveraging debt efficiently.
12- Use legal accounting software
If you are not using a generic accounting software, or are not using an accounting software at all or perhaps you are using an outdated accounting software, then consider evaluating what’s out there in the market today and modernize.
Making use of a good legal accounting software can dramatically improve your law firm operations, streamline processes, accelerate your accounting tasks and ensure your law firm properly tracks its key performance indicators.
There are many benefits in using legal accounting software.
You can read our article on what to expect from an accounting software for law firms to see the benefits that you should
Some of these benefits are:
- Invoice online and electronic billing
- Split legal fees between multiple clients
- Track your law firm’s expenses
- Change your invoice easily and do write-offs
- Trust account handling
- Get real-time reporting and analytics
Having the right information at the right time is crucial for all businesses. Law firms are no different.
A legal accounting software will help simplify your accounting processes, accelerate your invoicing cycle and improve your collection and cash realization.
You can also report on key performance indicators (KPI’s) you’ve established for your law firm and monitor your firm’s overall financial health through relevant and timely reporting capabilities.
13- Takeaways on accounting tips for lawyers
If you are a lawyer reading this article to find legal accounting tips for law firms, we are proud of you!
This means that you are serious about your legal accounting operations and recognize how crucial it is for your law firm’s overall success and long-term growth.
In this article, we looked at twelve points that we consider will help lawyers in law firms better have a handle on their legal accounting.
Look at your legal accounting operations, identify the areas that you can improve and plan for making the necessary changes to optimize your legal accounting operations.
In some cases, you will need to redefine your internal processes and other times you’ll need to consider using a legal-specific accounting software.
Whatever your strategy, take the time to bring about the needed changes.
What are the legal accounting tips for law firms you recommend? We would love to hear from you. Drop us a comment.