5 Great Accounting Tips for Lawyers
Accounting, as intimidating as it may be, can be of huge importance to a law firm's success.
It's essential in ensuring that your financial statements are accurate and up-to-date, but also in assessing the financial well-being of your firm.
However, legal accounting comes with many challenges that can make your life a nightmare if not handled properly.
Luckily, we’ve got you covered with these 5 great accounting tips for lawyers. Check them out!
1. Stay compliant in your trust accounting management
Trust accounting requires lawyers to keep their client's money in a special trust account, separate from his personal bank account. This is because the money still belongs to the client, even though the lawyer can be given the right to use the money under special circumstances.
For example, a lawyer can use trust money to charge a retainer at the beginning of the representation, distribute settlement money, or when handling real estate transactions. Just make sure to clearly define the purpose with the client.
State bars have strict compliance regulations regarding how much money can be put in and taken out of a lawyer's trust account and for which reasons.
That's why you should reconcile all of your client's funds at the end of the month, to ensure that your trust accounts are audit-ready in case the State Bar randomly selects you for an examination.
Expert tip: abstain from withdrawing the "earned" fees prematurely, even if you intend to pay them back. It's not worth the monetary penalties and potential disbarment.
2. Set a clear budget
At the end of the year, you should do an overview of your law firm's financial aspects. That includes your loans, outstanding debt, interest expenses, annual bar association dues, IT upgrades expenses, etc.
Figure out which of your expenses are mandatory and where you have the space to make some cuts to save money. This will help you have a clearer idea of your cash outflow.
If you want to predict your cash inflow, try monitoring your A/R aging report. This way, you’ll know which outstanding invoices to follow up on and when you can expect your share proceeds.
In the end, create a financial strategy regarding future investments, prioritizing the most realistic and efficient goals.
3. Use a customized legal accounting software
Legal accounting software is a great way of making law firm accounting management easy.
Using customized accounting software, instead of a generic one, can make your accounting process more efficient and effective.
If you have customized accounting software, you can use it for the automatic allocation of revenue as income, in the case when client invoices are only partially paid. Just make sure that your liabilities and expenses are paid first!
But even if you have a generic version of the accounting software, you can use it to issue and change client invoices, split legal fees, pay your staff, track your expenses, handle and reconsolidate separate client trust accounts and so much more.
Besides saving time, using accounting software will allow you to track the overall financial health of your law firm.
How? By assessing various key performance indicators of your law firm, including your average revenue per attorney, employee, the weight of different expenses on your gross revenue and others.
4. Keep your accounting up-to-date
Predictions are pointing towards an incoming recession and falling behind on your accounting records contributes to unnecessary costs that you really don't need right now.
Unless you have a hefty cash reserve, you should perform regular accounting as the consequences of doing the opposite are just not worth the risk.
In Law S&B Law offices, keeping records up-to-date is a tactic used for monitoring of the business progress, identification of the income sources, tracking of the expenses and preparing the financial statements.
Timely accounting ensures accuracy, which can help you create a budget strategy and increase your chances of running a successful business.
5. Track your firm’s revenue by area of practice
Separating your revenue by area of practice has a huge potential in showing your which practice areas you might be overlooking, that may generate you a lot of revenue.
Apart from that, it can also help you identify unprofitable practice areas and types of cases.
By understanding this, you'll be able to make informed and fact-based financial decisions about moving forward with your law practice.
You might also consider different billing depending on the case type. For example, if your law firm is dealing with torts, you might introduce separate billing systems for personal injuries and property damage.