While they might be a good solution for many small businesses, generic accounting platforms like Quickbooks aren’t designed to meet the specific needs of lawyers.
QuickBooks is the leading accounting software used by small businesses—and there’s a reason for that. Tools like QuickBooks, Quicken or Xero are purposely meant to be used for general businesses, which means that instead of tailoring to the specialized needs of a particular group, they offer a flexible platform that can meet the needs of a wide range of small business enterprises. But for industries with certain requirements, that general-purpose goal doesn’t cut it.
It makes QuickBooks ideal for dog walkers, graphic designers, donut shop owners, and a host of other independent or small-practice professionals, but it can cause significant issues for the operation of a law firm.
The Specialized Needs of Legal Accounting
Accounting is an important part of any business. Proper financial tracking is not just helpful for end of year taxes, but for assessing the current state of your business, ensuring compliance, and making decisions for the future
Legal accounting specifically has many unique requirements. In fact, law firms really need their accounting systems to perform three functions: business accounting, matter accounting, and maintaining compliance.
Business accounting includes financial reporting, reconciling bank accounts, and preparing taxes. This is what most people think of when they hear “accounting,” and it’s the part of the practice that is performed by both law firms and other business enterprises.
Matter accounting is a legal-specific undertaking. It includes recording matter costs, maintaining trust ledges, and allocating invoice payments.
Maintaining compliance is another activity specific to the legal field. Maintaining compliance upholds the requirements necessary to be prepared for trust account audits and adheres to requirements specific to the area of practice.
These latter two categories are really the place whether the shortfalls of generic accounting software becomes apparent. Here are the top five reasons lawyers are making the change.
1) Risk of Incorrect Postings
Flexibility – a hallmark of products like QuickBooks, Quicken, and Xero – is the enemy of compliance. Think about it: the more options you have, the greater the opportunity for mistakes especially when it comes to trust accounting compliance. This can lead to issues such as missed matter linking, incorrect use of general ledger accounts, misallocation of invoice payments, and compliance violations.
Generic tools fail to enforce a solid audit trail for matters. They also give a user access to the full general ledgers, which, while it may be convenient to some, can also lead to misuse or user error. For example, these tools require each user to know that trust deposits should be held in a dedicated liability account and how client costs should be recorded differently from firm costs.
QuickBooks also presents issues around invoice payment misallocation. Because it applies payments proportionally to invoice items, there are problems with tracking which portion of an invoice should be paid first. This can lead to reports that indicate earnings as a portion of a fee before costs and taxes, which results in misleading financials.
2) Struggles with Trust Accounting Compliance
Trust compliance should be one of the top financial focal points of a law practice. Trust accounts allow practices to manage their clients’ money, and the practice is required to do so responsibly.
Unfortunately, generic accounting tools treat trust accounts just like other bank accounts. A user can remove or add funds at will, and there are no safeguard in place to ensure compliance.
This can lead to issues such like commingling of funds, overdrafting on individual matter ledgers, and deficiencies with compliance reporting. Because money can be moved in and out with no matter assigned, it is possible to end up with a pool of money in the trust that hasn’t been accounted for. This will also result in inaccurate ledgers, which is one of the ways that it risks allowing an overdraft. Most of the time, these tools don’t make the available trust account balance visible when a withdrawal is being made, which means that there are no safeguards in place to prevent an overdraft from happening.
Finally, tools that aren’t designed specifically for the needs of a law firm struggle to generate adequate compliance reports like those required for a three-way trust reconciliation report. These tools are necessary both to handle client funds appropriately and to be able to provide the necessary reporting come audit time.
3) Separation from Other Law Firm Functions
Another problem with QuickBooks is that while it offers both billing & accounting functionality, most firms opt for a legal-specific billing or practice management solution to handle the unique requirements of legal billing, This means firms end up employing two different tools, and accounting is left on an island of its own, separate from all other law firm functions.
Keeping the finances separate is never a good thing. In a service business, billing is how you make money, and separating billing and accounting can cause problems with capturing matter costs, receiving invoice payments, and managing retainers.
For example, if a lawyer pays for a matter cost out of pocket, the record of that cost is entered on the accounting side, but not on the billing side. In order for that item to be billed for reimbursement, somebody else has to enter it in the billing software, creating workflow redundancies and introducing the potential for error. Thousands of dollars can be lost in this way.
Receiving invoice payments is also a problem. When a firm receives a payment, the funds go into the bank account – but somebody also has to record the impact on financials, and that invoice could be made of fees, costs, and other items that must be recorded in your accounting tool as well as your billing software
Managing retainers is another problem. Because retainers are typically held with the intention of being earned, they are tracked in billing tools as funds on hand, but also in accounting tools as dollars in the bank account. If at any point these records do not match, firms run the risk of thinking there are more funds available than there are. Simply by paying an invoice, a firm can end up overdrafting on a client’s ledger.
All of these struggles result in time wasted on double data entry and cross-checks while also increasing the risk of inaccuracy.
While pursuing an integration between these two separate tools might seem like the obvious solution, there are some challenges to keep in mind when using any integration. When syncing, it is important to consider what information is being shared, whether or not the sync is bi-directional, and what happens if the sync fails. QuickBooks syncs are typically one-directional, which means that if you spot a mistake and rectify it in QuickBooks, that change will not be reproduced in your billing systems.
Another issue – syncs are also never perfect. Any integration is error-prone, and accounting is not the place to risk making a mess of data and records. If a sync fails, firms might not even realize immediately that an error has taken place, which can lead to a practice operating on a completely fabricated version of it’s financials until somebody figures out the problem. No thanks!
4) Missing the Big Picture
With any business, it is important to see the big picture operations in order to properly assess the health of the business. Law firms specifically keep an eye on matter financials, profit by matter owner or practice area, utilization and realization rate by timekeeper, ROI on non-billable time, and client cost analysis.
Because these are mostly law-firm specific, QuickBooks doesn’t have a way to account for these critical metrics. The ideal software solution should track balances such as accounts receivable, work in process and trust balances. It should also help with tracking profit by recording what fee or costs are attributed to a certain person or area, how much time spent is actually billed, and what percentage of billed time is collected.
QuickBooks also obscures ROI on non-billable time such as administrative work or fixed fee cases, making it difficult to see if any inefficiencies are creeping in.
Although many firms have a specific distribution model that they follow to track income by matter owner, timekeeper or originator, this can become incrementally more complex when manual steps or data manipulation is required.
These are just a few examples of metrics that can be helpful for your firm, and all of them require a unified picture of your billing & accounting data.
5) QuickBooks Online Shortcomings
One more problem with QuickBooks is the fact that the online and desktop versions differ. With integrations becoming more popular and more and more working remotely, many are looking toward the more modern, streamlined QuickBooks Online.
While the online accounting system is more modern and accessible, most do not realize that it is a simplified version of its desktop counterpart. If you rely on the more advanced accounting functionality, this option may not work for you.
What to Look For in Law Firm Accounting Software
Given all of these obstacles with QuickBooks and other generic accounting programs, here is what a law firm should look for in an accounting solution.
- Matter-centric Recordkeeping. Software should keep all matter details in one place and easily accessible. This is especially key for trust fund management.
- Legal-specific Functionality. Know what is most important to your firm, and make sure your software has the required tools. This can include advanced analytics, reporting, compliance, or functionality unique to a practice area.
- Trust Accounting Safeguards. If your firm has a trust account, safeguards are a must. Any legal accounting provider should offer them.
- Compliance Reporting. Software should account for what is required in an audit and be able to generate those reports easily and accurately.
- Seamless Connection Between Billing & Accounting. Whether through developing more streamlined processes or managing billing and accounting within one unified system, software should ensure these records match at all times.
- Cloud Access. Having remote options is not only helpful for your internal staff –
it also allows you to secure high-quality assistance regardless of location.
Thankfully, legal-specific practice management software exists. These platforms are designed to specifically meet the needs of law firms – meaning that they offer all of the functionality a firm requires while also including the necessary safeguards.
Want to learn more about why lawyers are switching from QuickBooks, and what they might choose instead? Check out our on-demand webinar, The Top Five Reasons Why Lawyers are Switching from QuickBooks.