Law Firm Accounting 101

2 talking co-workers with a folder/notebook going down the stairs

Legal Accounting and Bookkeeping Best Practices

The most important piece of advice you will get from this post is: don’t do your own law practice bookkeeping and accounting. Would you hire a CPA to represent you in a traffic accident? Of course not. Legal bookkeeping and accounting is an expertise that people devote their careers to. Find that person to take over your law firm accounting.

Best Holiday Gift for Lawyers: Hire Yourself a Bookkeeper

Hire a Bookkeeper / CPA / Accounting Pro

Do you love bookkeeping? If you’re an attorney, let’s assume the answer is no. If you earn more than a bookkeeper earns (if you’re an attorney, I’m guessing the answer is yes), your time is worth more than you reconciling your own books. Since you are not the accounting expert, you will also take more time to do the accounting than the expert. This is what money is for. It’s a business expense!

Hire a Law Firm Accounting Professional to Migrate to Your New Software

How to hire the right accounting professional (Outsourced Accounting Is the Way to Go)

Outsourcing your current full-time in-house law firm accounting team is one of the smartest, most cost-effective actions you can take to give you increased peace of mind. Day-to-day accounting records will also improve. Let’s dig in.

When you outsource your legal practice accounting, you can hire an accounting firm whose expertise is the business processes of law firms. Now that cloud-based accounting is the norm, why hire a general accounting professional in your local area when you can hire an accounting department anywhere in the world that deals exclusively with law firms? Their expertise can include:

  • knowing which accounting software will best service your law firm
  • providing virtual CFO services
  • tax planning/ CPA services / tax returns
  • business forecasting / budgeting
  • trust reconciliation / IOLTA accounts
  • LEDES billing
  • payroll processing
  • bookkeeping services
  • controller services / financial statements
  • financial reports

LeanLaw Accounting Pros: An exclusive outsourced accounting program for legal accounting experts.

The financial advantages of hiring an outside accounting firm to handle the law office bookkeeping include no longer having to pay for:

  • Healthcare
  • 401K Contributions
  • Vacation Pay
  • Sick Pay

Questions to ask your CPA / Legal Bookkeeper

How do I hire a qualified accounting professional? When hiring someone as crucial to your law practice as the back office accounting professional, you need to understand the processes and workflows that this person sets up. Some questions to consider asking:

  1. What legal accounting software do you recommend?
  2. Will you coach the law firm staff on how to use the new software?
  3. Have you ever migrated financial data from our current software to the software you recommend?
  4. How will you improve the law practice’s productivity and profitability?

Read more interview questions on this blog…

Get clear on trust account rules / American Bar Association compliance

One of the most important cash flow and profitability opportunities in your law firm are IOLTA trust retainers. If you have evergreen client trust accounts, you can keep your accounts receivable next to zero. With a legal accounting expert who knows how to set up the the trust ledger according to state bar association rules, client funds in trust just get transferred to the operating bank account. You never have to chase a client for payment again.

When your accounting pro chooses an accounting software with integrations that offer three-way reconciliation for trust accounting, recordkeeping becomes a breeze.

Find Out About All Things IOLTA / Trust Accounting

Don’t borrow money from an IOLTA

Making sure that your firm is never borrowing money from your IOLTA account is crucial. It’s also important that you make sure there is no overlap between your business banking accounts and your IOLTA account. These are separate accounts.

When you record a client’s retainer into your IOLTA account, you make sure that the retainer has not been recorded as income into your firm. That money is not yours, yet.

Why Does My Law Firm Need an IOLTA?

Determine how your firm will get paid

If you had the choice between receiving paper checks and processing them manually or receiving payments electronically, which would you choose? (Rhetorical question)

You will not only lower your overhead through electronic payments, but will also increase cash flow, decrease accounts receivable, and increase profitability.

This is how a modern firm operates. Manually processing paper checks will only become more onerous because it is an inefficient way to handle your firm’s finances. Welcome to the 21st Century. Modern legal accounting software will offer a payment processing option.

Pick a lawyer-friendly merchant processor

Once you understand that financial transactions will happen electronically, you will want to pick a payment processing provider that has an affinity for law firm accounting. This is doubly important when utilizing lawyers trust accounts / IOLTA retainers.

How do you know if a software can handle the legal-specific accounting that you need? If it doesn’t say so on the website of the provider, just ask. And ask for a payment processing demo. This is obviously one of the most crucial functions of your law firm accounting system, you can’t afford for it not to work or to be a difficult process. With today’s modern software, this should be a breeze.

Automated invoicing

The more you can automate your accounting workflow, the more time can go into your billable hours. When you have time tracking that gets automatically pushed to your invoicing, you have saved a lot of time, just with that automation.

Bulk invoicing is another automation that is crucial, especially if you work in a midsize law firm. These minutes add up. So do mistakes if you’re constantly doing manual data entry for every time entry someone in your firm updates.

How to manage write downs

You can start to look at patterns. Are certain timekeepers having to write down time? Is it usually for the same task? If you have easy access to this data, you can make more informed decisions for your law practice, matching tasks to the appropriate attorneys, and eliminate bottlenecks or under-utilizing.

LeanLaw tracks the difference between hours tracked and hours billed. Tracked data is not lost in the adjustment.

Writing down the time entry (but still keeping track of the original time entered) needs to be exportable and printable to Excel sheets to use for further analysis. You can capture what was written down, and present the client with the adjusted amount.

Harness Your Own Data Insights for Law Firm Productivity

When you track time, send out invoices, receive payment, and disburse payments to the lawyers at your law practice, you are creating useful data that could help law firm productivity. You just need to understand how to harness it.

A data driven law firm is one that keeps careful track of its operations, meaning timekeeping, billing, and reporting. If you develop a habit of recording your timekeepers, your clients payments, your unbilled work and so on, you’ll be able to aggregate the data to get a clear picture of the financial health of your law firm. Modern software can make this task easy — both for data entry and for access to the insights.

Benefits of Data-Driven Productivity for Law Firms – LeanLaw

Attorney Compensation – The Easy Way

When you take a moment to think about the law firm’s goals, it’s not just to pay people their base salary. Of course, everyone wants to earn a living and feel like they are valued at the law firm, but there are other ways to think about how each law associate and each law partner contributes to the overall success of the law practice.

Compensation reporting: Clear, detailed collection reports when you need them.

You can manually crunch the numbers in a complex spreadsheet each month, or you can get modern law firm software that takes into account all of the time and expense entry, origination, and (endless) other data that you’d like to take into consideration and have the app give you the compensation numbers. We’ve all heard the term, work smart. This applies.

LeanLaw – Modern Legal Accounting Software

At LeanLaw, we believe in best in breed software. All-in-one legal practice management solutions can’t be good at everything. The most complex and critical part of your law firm workflows is accounting, so it should be your first priority in choosing your software.

We have an outsourced accounting program called LeanLaw Accounting Pros (LAPs) — the accounting pros are QuickBooks Online ProAdvisors, Law Firm Experts and Certified in LeanLaw. If you’d like a recommendation, just ask.

Schedule a LeanLaw Demo to find out how dialed in and automated your accounting can be!