Bookkeeping is thought of as the simpler younger sibling of accounting. Well, it is, isn’t it?
No. Not really.
Legal bookkeeping can be especially tricky, straddling two detail-oriented industries (law and finance). The precise nature of the difficulties depends on many unique circumstances, but there are five challenges – and solutions – that are universal.
Let’s take a closer look below.
1. Recording Deferred Revenue and Expenses:
Problem:
Legal services aren’t necessarily straightforward, and neither are their fees and expenses. Things like deposits and retainers called deferred revenue, are usually paid upfront. Deferred expenses, on the other hand, can be paid on a piecemeal basis, with the final amount paid when the contract has been completed.
Human error is a real risk, especially if manual systems are used. Manual systems also take time, which is inefficient and can indirectly rack up costs.
Solution:
Legal bookkeeping software has automation features capable of recording deferred revenue and expenses. It eliminates human errors that accompany manual tracking and accounting systems and virtually guarantees accurate financial reporting.
Manually tracking these multi-stage transactions can be time-consuming and error-prone, but cloud-based software ramps up efficiency and accuracy and ensures resources are allocated sensibly.
2. Long Waiting Times for Client Payments:
Problem:
Clients don’t always pay invoices promptly. They might leave payment until the last minute, or flirt with collection services. The reason doesn’t matter, all that matters is the effect late payment has on your cash flow and financial health.
Solution:
Your best bet to keep delinquent clients on track is a streamlined collections process that uses legal accounting software. Software should include:
Clear Communication: Fee structures and payment terms are made clear from the first meeting, verbally and in writing (engagement letters).
Prompt Invoicing: An automated system that issues invoices as closely as possible to the end of the contract. You don’t want to give clients any excuses for late payment.
Follow-Up System: Use software that includes an automated follow-up system to remind clients about outstanding payments, including automated emails to notify tardy clients of late payment fees.
Online Payments: Online payment systems are convenient and people are so used to paying for items online that it’s second nature.
3. Managing Payroll and Taxes:
Problem:
Small law firms often have to manage payroll and tax calculations on their own. This can be complex and time-consuming, especially if bookkeeping is not your forte. Unfortunately, there are serious penalties for certain errors. However, there are two solutions.
Solution:
Legal Bookkeeping Software: Software with automation features can manage almost all things payroll and tax-related, including payroll calculations, deductions, and tax filings. You needn’t worry about errors and accuracy or late payments because the software has you covered.
Payroll Outsourcing: Payroll, taxes, and industry compliance requirements are notoriously tricky and there is no need to put yourself through all that worry. Instead, take advantage of outsourcing options and devote your attention to what is important to you; the health and growth of your firm.
4. Managing and Reconciling Trust Accounts:
Problem:
Managing and reconciling trust accounts on behalf of trustees is a serious responsibility. It’s also highly regulated. Errors in recordkeeping or non-compliance with regulatory requirements can result in serious legal penalties.
Solution:
Below are best practices to stay out of trouble and ensure accuracy and compliance in trust account management.
- Dedicated Accounts: It’s important to keep trust accounts separate, dedicating one account to one client. It’s also essential to ensure that funds from clients’ accounts are kept entirely separate from your own operating accounts.
- Detailed Records: Document everything – record every transaction, including deposits, withdrawals, and disbursements. It’s also important to create and maintain supporting documentation for each transaction.
- Regular Reconciliation: The last thing you want is for errors to creep in and remain undetected, gradually compounding until they become a tangled mess. You can avoid this by regularly reconciling trust account statements to identify discrepancies and take steps to fix them.
- Compliance Training: If you have a bookkeeper on your payroll, it’s up to you to ensure they are properly trained in trust account management, including regulations and best practices.
5. Tracking Billable Hours and Expenses:
Problem:
Manual processes are time-consuming and it’s all too easy to make mistakes that have serious financial consequences. To stay on top of your revenue and expenses, you should invest in legal accounting software that accurately tracks billable hours and records expenses.
Solution:
Software and technology remove the risk of human error and guarantee a far greater degree of accuracy in your bookkeeping records.
- Law Firm Accounting Software: Sophisticated software helps lawyers stay on top of finance-related tasks, like time-tracking to accurately record billable hours. Software also plays a role in admin management, so lawyers can categorize tasks by project or activity codes.
- Expense Management Integration: You might need to support your accounting software with additional programs or tools that can be integrated into your system, for example, expense tracking tools for capturing receipts and linking them to billable hours.
- Clear Policies: Establish and communicate clear bookkeeping policies, for example, recording billable time and expenses. Policies include things like what constitutes billable work and expense categorization.
Possibly the single best thing you can do to manage your law firm’s financial requirements is invest in legal accounting software. Software can be dedicated to specific tasks, like expense tracking or it can be multi-functional with payroll, time and expense tracking, and employee tax.
Talk to specialists in the field before you commit to a specific software package.
