Legal penalties! If you are involved in bookkeeping for a law firm, this statement should make your blood run cold, and rightfully so. The consequences of not being compliant as a practitioner can have a dire impact and may even lead to disbarment in certain cases.
To help you mitigate this, below are 9 ways to ensure compliance and to assist in maintaining the integrity of your law practice:
1- Trust Accounts
Trust accounts are a good place to start when accounting for a law firm, especially pertaining to compliance. These types of accounts are designed to ensure that client finances such as retainers are kept separate from that of the law firm. Further benefits of a trust account are:
- Clear records of all client’s transactions which creates transparency.
- Regular reconciliation (30 to 90 days) to ensure accuracy.
- No commingling of funds which can lead to serious penalties for the lawyer involved.
With these types of accounts, you should always align with state-specific rules or refer to the state bar for any regulations. You are also encouraged to invest in specialized software to help manage the process and as always try to keep up-to-date records of any document transactions.
2- Compliance for Client Funds:
For compliance in law firm accounts, you must be familiar with ethics on regulations. It is important to be familiar with rules such as the ABA rule 1.15 which concerns itself with the protection of a client’s property as failure to comply with this rule may lead to penalties such as reprimands and fines.
Transparent Communication goes a long way so you should conduct regular audits and keep clients updated on their funds and property. If necessary, when dealing with accounting in law firms you should seek out legal expertise on the more complex requirements of compliance.
3- Budget Management
Consider creating a budget to aid in managing cash flow and expenditure when dealing with accounting for a law firm, here is why:
- A budget helps you identify mandatory expenses such as rent and licensing fees.
- It will help you define business objectives.
- When bookkeeping for a law firm you will also have to estimate potential income.
- Define goals by allowing you to set targets which will require regular reviews and updates to your budget as needed.
- Allows for forecasting and to track all expenditure which is just good business.
4- Expense Reimbursements
One of the functions when accounting in law firms is to keep up-to-date and accurate records of all employee expenses such as credit cards and reimbursements. An easy way to do this is by making use of expense-tracking apps as these allow for easy employee reimbursements as clear policies provide guidelines that may shorten the approval of employee expenses.
5- Time and Mileage tracking
Tracking of billable hours and mileage can be made easier with the implementation of a time-tracking system. This is imperative for both budgeting as well as for the accurate billing of the client. You should record all task and meeting information and client interactions when bookkeeping for a law firm as this is good practice for compliance. A mileage tracker app will also help you track business-related travel expenses. This is important because mileage data for example is used for tax deductions and cost saving. The collected information can also aid in forecasting, especially when planning for future budgets.
6- Cash Flow Projection
A big part of accounting in law firms is the monitoring of accounts receivable to keep track of outstanding invoices. This can also include settlement forecasts whereby a projection of finalized and revenue received is made. This projection will also include cash reserves for the purpose of any shortfall that may arrive during downswings. It is protocol to inform clients about payment expectations as well as setting KPIs to keep abreast of financial performance and revenue goals.
7- Accounting Method
Law firm accounts are simplified when sticking to a single accounting method. You can’t go wrong by using specialized law firm accounting software such as Sage. Whichever software you choose, ensure that it has the capability to handle trust account management. It should also be able to keep track of time expended on cases, client billing, and the maintenance of accurate financial records. It is also a good idea to outsource more nuanced situations to a specialized bookkeeper for additional support.
8- Regular Report Review
The practice of accounting for law a firm is strengthened by the regular reviewing of reports including:
- Unbilled time which is the as yet un-invoiced work done by a law practitioner on a project.
- P&L or profit and loss which reports a clients expenditure and income over a financial period.
- A/R or accounts receivable provides information about what is owed to the firm for services rendered.
- WIP or work in progress captures all work that is still in the process of being completed.
You should focus on monthly revenue objectives and indicators of performance as well as keeping abreast of net income as a revenue percentage.
Examine billable hours to the amounts that were billed and utilize data in the report to make well-researched and informed financial and accounting decisions.
9- Tax Deductions
Lastly, it is important to know the applicable tax laws to the jurisdiction. As always with law firm accounting, make sure to keep detailed records of all deductible expenses such as malpractice insurance as well as travel expenses, among others. A good idea would be to consult a tax expert who may be able to assist in maximizing deductions. These can be utilized to lessen tax liability and ensure the punctual and accurate filing of all tax returns.
While these reference points are a good guideline when accounting for a law firm, they can be laborious and complex. A crucial component to success will be a strong accounting system, however in-house accounting teams can be expensive and require constant supervision. These have also been prone to fraud in the past. A solution to this is to outsource accounting and use cloud-based software. This means that the lawyers in your firm can be focused on their billable hours.
To save yourself many stress headaches in the future, you may want to consider outsourcing these duties as this can provide fast access to experts that will allow for seamless solving of laborios problems. LWI has years of experience in the field of law firm accounting and possesses the right talent and skills to ensure the success of your law firm.
For more articles that help law firms see the below
Law Firm Accounting Tip: How To Track KPIs For Lawyers
6 Benefits Of Outsourcing Payroll For Your Law Firm
Revenue And Expense Tracking For Law Firms: 10 Tips For Success
How human error and manual accounting data entry are costing your law firm
The Top 5 Ways CFO Services Can Help Increase Your Law Firm’s Bottom Line