“The riches are in the niches.” – Pat Flynn
Law firms must use specific financial management systems to ensure a long and profitable future in compliance with industry-specific regulations. Cloud-based accounting software has solutions that effectively – and accurately – track revenue, manage expenses, and help you make informed decisions.
Here are some key principles and practices that successfully anchor law firms in the choppy waters of financial accounting management.
Understanding Law Firm Financial Structure
We know how law firms generate revenue: billable hours, flat fees, contingency fees, and retainers.
We know their biggest expenses: salaries, rent, utilities, professional services, marketing, and technology investments.
And we know that firms want to increase the former and reduce the latter.
Law firm accounting software is the solution that tracks revenue and expenses and provides data that indicates profitability.
Data essential to these processes can be found in seven key components.
- Accounting
- Bookkeeping
- Payroll
- Billing & Invoicing
- Payment Collections
- Financial Reporting & Taxes
- Managing Trust Accounts and Client Funds
The seven components don’t stand alone. They include management, tracking, and forecasting to demonstrate the firm’s financial health and performance.
If this sounds exhausting, it’s because it is. You need the latest financial management software and a financial manager familiar with the system to interpret the data and reveal opportunities to streamline processes and increase accuracy, visibility, and productivity.
Implementing a Chart of Accounts
A chart of accounts (COA) is a good way to stay on top of your firm’s financial status. Its structure is perfect for categorizing revenue, expenses, assets, liabilities, and equity accounts, making it easier to track transactions and generate accurate reports.
Categories in charts of accounts include:
Revenue Accounts
Keep a record of income sources, including:
- Billable hours
- Flat fees
- Contingency fees
- Retainers
Expense Accounts
Ensure accurate expense management, including:
- Salaries
- Rent
- Utilities
- Professional services
- Marketing
- Technology expenses
- Overhead costs.
Asset Accounts
Ensure the accuracy of asset accounts, including:
- Cash
- Accounts receivable
- Prepaid expenses
- Investments
- Tangible assets: office equipment and furniture.
Liability Accounts
Stay on top of all liabilities, including:
- Accounts payable
- Accrued expenses
- Loans
- Other financial obligations.
- Equity Accounts:
- Capital contributions
- Retained earnings
- Partner distributions
One of the great things about COAs is that they are customizable. You can tailor them to suit your firm’s specific needs and ensure accurate financial reporting and analysis.
Tracking Billable Hours and Client Expenses
Lawyers short-change themselves if they don’t have an effective system to track time and accurately calculate billable hours. Law firm accounting software can streamline time-tracking functions to maximize revenue and profitability and make it easier to log billable hours and manage client expenses.
Software automation generates invoices based on all revenue sources. No human interference improves efficiency and cash flow management.
Automation also vastly improves tracking client expenses (court fees, travel expenses, expert witness fees), ensuring accuracy in billing and reimbursement.
Managing Trust Accounts and Client Funds
According to regulatory requirements, law firms must keep client funds in trust accounts that are separate from the firm’s operating accounts. These trust accounts ensure accuracy in client deposits, disbursements, and reconciling account balances.
Non-compliance with regulations or ethical violations of trust accounting procedures have severe penalties, including disciplinary action and legal liabilities.
Trust accounting software automation streamlines processes, enhances compliance, and minimizes risks associated with errors and discrepancies.
Budgeting and Financial Reporting
Budgeting and financial forecasting are essential to manage expenses, monitor revenue streams, and achieve profitability targets. Several reports are required to provide insights into financial performance, trends, and strategic decision-making including:
- Income statements
- Balance sheets
- Cash flow statements
It’s important to regularly review these reports to see if real results match budgeted targets and key performance indicators (KPIs). Discrepancies can be addressed through proactive financial performance management, adjustments to business strategies, and proactive corrective actions.
Ensuring Compliance and Risk Management
Both law and financial industries are highly regulated. It stands to reason that law firm financial management follows strict regulations regarding ethical, professional, and legal operations. This includes compliance with:
- Accounting standards
- Tax regulations
- Professional ethics
- Trust accounting processes
You can ensure compliance through regular audits, internal controls, and risk assessments. Regular monitoring and management identify non-compliance risks so you can take immediate action that strengthens internal controls and avoids future risks.
The Role of Technology And Cloud-Based Accounting Software
Technology, particularly cloud-based software, has revolutionized business processes. For instance, law firm accounting software streamlines old financial management processes, making them more efficient and cost-effective.
Here are a few examples of how technology impacts legal processes.
Accounting software
Automation in accounting software delivers several benefits, including reduced errors. The software also shaves time off processes so attention can be focused elsewhere. It’s cost-effective because, in addition to enhanced operations, you don’t need expensive in-house systems.
Billing software
Billing software improves the efficiency and accuracy of automated billing, and tracking billable hours. It also integrates easily with existing systems.
Financial analysis tools
Analysis is essential to determining your firm’s financial health and developing strategies to improve financial health if necessary. Typically, this includes data visualization and enhanced analytics, while keeping accounts updated and accessible.
Cloud-based and mobile solutions
Cloud-based software ensures data is always available and accessible to authorized users, wherever their location. Data is updated in real-time so the reports are always accurate and data security and protection methods are robust and reliable.
Read our comprehensive guide to Trust and IOLTA accounts.
Learn about Sage Accounting Software for Law Firms.
Need help with your Law Firms Accounting and Bookkeeping? Find out how Lescault and Walderman’s outsourced accounting services can benefit your law firm.
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