While no two law firms are the same, many of their needs are nearly identical regardless of size, location, type of law practiced, etc. After over a decade of working closely with solo and small practice attorneys, the experts at CosmoLex have identified key areas that each law practice must vigilantly maintain in order to be successful, and have tailored software to meet the legal-specific demands of:
- Legal Accounting, which includes:
- Business Accounting
- Matter Cost/Income Accounting
- Fee Advances/Retainer Accounting
- Calendar & Tasks
- Documents & Emails
Because these areas of practice management interact with each other and directly affect a firm’s finances, it’s important to use a legal-specific practice management and accounting system that incorporates the “big three” of billing, business accounting, and trust accounting. Unfortunately, many firms still rely on a general accounting tool, like QuickBooks, which can bring up multiple challenges.
In the rest of this post, we will discuss the top seven legal accounting challenges that law firms face when using separate, general accounting programs like QuickBooks rather than a complete law practice management system.
Challenge #1: Enforcing Correct Use of COAs
Every accounting system requires a general ledger or chart of accounts. While most are equipped with standard items, they lack legal-specific items such as trust liability account, reimbursable client costs, etc.
Challenge #2: Double Data Entry
When using two disjointed applications, or even in a system that “syncs” with your accounting program, multiple entries must be made manually. Matter costs, invoice payments, and even trust retainers all affect billing and accounting information, so a data entry error can make a big impact on your books and can be difficult to remedy.
Challenge #3: Handling Client Funds
The management of client funds involves trust accounting, and trust accounting involves compliance. So what can go wrong when relying on a tool that isn’t designed to handle legal-specific requirements to manage your trust accounting needs?
- Commingling of trust funds
- Trust ledger overdrafts
- Un-cleared funds not being addressed
- Sloppy bank reconciliations
- Billing and trust records kept in separate locations
- Lack of controls and proper data protection for users
Challenge #4: Recovery of Client Costs
It’s a common occurrence that firms pay for costs out of pocket and seek reimbursement afterward from their client. A disjointed setup and workflow, however, can often cause the (preventable) situation in which you’ve paid a cost but forget to bill for it, which means a loss of income. A complete law practice management system understands the differences between the various costs that law firms contend with, and handles each one appropriately by ensuring these costs are booked to the right accounts and then billed.
Direct (hard) costs are expenses paid by a transaction (i.e. check/credit card) and are directly attributed to a matter (e.g. filing fees, expert witness fees, etc.). These must be entered and linked to the respective matter as soon as an expense is incurred. When your accounting and matter management systems are separate, this is nearly impossible.
Indirect (soft/in-house) costs are expenses attributed to a matter for which there is no transaction because they are part of the firm’s operations (e.g. photocopies; postage; administrative activity by an employee, etc.). Again, if the firm’s business expenses and bookkeeping are managed in a system that is separate from the firm’s matter records, establishing a system and process to properly allocate these costs and be time-consuming.
Challenge #5: Allocating Revenue Receipts
Invoices consist of several components such as fees, costs, late charges etc. And once an invoice is paid, both billing and accounting updates must be entered. But what happens when an invoice is partially paid? What is allocated first?
Legal accounting regulations stipulate a designated order, which generic software doesn’t automatically follow. Incorrect recording of income can result in distribution miscalculations and tax consequences come year end.
Challenge #6: Tracking Financials by Practice Area
Whether you’re a solo or large firm, it’s in your business’ best interest to track financials by practice area in order to determine which areas are the most profitable. Where are you losing billable hours? Where should you focus your marketing dollars? These can all be difficult questions to answer when the accounting system used by the firm is not designed for law practice use.
Challenge #7: Fee Distributions by Party
Whether for compensation or productivity purposes, the ability to track parties by the income they collect and then apply a formula to determine what that party is owed is vital. While this serves as an effective motivation tool for multi-party firms, it is a complex process form an accounting perspective if the right tools are not in place.
Why is CosmoLex the #1 Alternative?
CosmoLex provides the convenience of cloud-based practice management while also supporting the compliance needs of law firms. The challenges listed above are easily managed by the fully integrated accounting built into CosmoLex. By switching to a fully integrated system that has been specifically built with attorneys in mind, you can rest assured that your firm’s “big three” (business accounting, trust accounting, and billing) will be handled properly and effectively every time — meaning you can spend less time managing your practice and more time practicing law for your clients.
To learn more about why CosmoLex is the #1 QuickBooks alternative for law firms, watch in-depth, 30-minute webinar CosmoLex: The #1 QuickBooks Alternative for Law Firms.