Last week, we discussed several important items to check off your to-do list to get your law firm’s accounting in order as the year comes to a close. And while it may seem like it’s a little early to be making resolutions for the new year, today we’re covering what you need to know to prepare for a successful 2018. By devoting time and resources to your practice’s accounting processes now, you’ll be taking a great step toward improving your business and supporting compliance procedures throughout next year.
Specifically, we’re looking at the three major components of legal accounting that deserve your attention in these final months:
Client Funds Accounting
Most law firms use retainers to secure cash flow from clients. However, retainer funds do not belong to the practice until they are earned. In addition, attorneys often handle funds (such as personal injury settlements) that belong to the client rather than the firm. Because of this, client funds accounting must ensure that client funds are not commingled with other monies belonging to the client or with operating funds, and that they are never used to pay for the law firm’s expenses. On the balance sheet, client funds must be clearly distinguished from the law firm’s assets and revenue; remember, improper client funds accounting is the leading cause of disbarment across the country.
Matter Cost Accounting
Due to the nature of law practice, incurred matter costs are most often subsequently billed to clients. While the process is fairly simple, tax accounting for matter costs can seem complicated. First, such costs must be tracked correctly, as not all matter costs are the same. Advanced client costs should show up as an asset on the firm’s balance sheet, while reimbursable client costs should be recorded on the profit and loss statement. Second, the firm must make sure each cost gets contemporaneously allocated to the appropriate matter. Otherwise, it will not get billed, yielding a net loss to the firm. Lastly, when those bills get paid, the cost portion of the revenue needs to be tracked separately from fee payments.
Back Office Accounting
While the client side of billing is certainly important, your own expenses also deserve careful attention. Ongoing costs (including the office lease, payroll, electricity, phone, internet, and more) must be tracked, as this will help you get a handle on how much is spent on overhead, and may indicate that you need to adjust your billing accordingly.
Note: this may make your back office accounting processes slightly more involved, as reimbursement for indirect matter costs (i.e. overhead) requires a different accounting treatment than reimbursement for direct matter costs.
When it comes to managing these three major components of legal accounting in 2018, we recommend you find an accounting solution that:
- Is built to address the specific needs of a law firm
- Eliminates double data entry across billing and accounting systems
- Has safeguards in place to ensure that you are managing client funds and costs appropriately
- Allocates revenue appropriately
- Allows you to track income by practice area
- Processes credit card payments with the specific needs of a law firm in mind.
A New Year is a new opportunity to increase profitability and improve compliance practices as well as peace of mind. Here’s to making 2018 your firm’s best year yet!
To learn more about Legal Business Accounting, please join the final session of our 2017 Legal Accounting Webinar Series on Thursday, October 26. Register for (or view after 10/26) this free webinar event here.
Ready to make the switch?
Start a 10-day Free Trial of CosmoLex