Previously we discussed the trust accounting challenges associated with attorneys using Quickbooks Online as identified by industry expert Caren Schwartz. While trust accounting is an extremely challenging area for attorneys and there are a number of challenges presented to them when using Quickbooks Online (QBO), the challenges don’t stop there. For attorneys utilizing QBO, they also need to be mindful of challenges associated with billing and tracking client costs. Again, we will be summarizing just a few of the challenges attorneys will face when they don’t utilize legal-specific solutions as highlighted in the article The Critical Challenges of Using QuickBooks Online for Law Firms.
Challenge #1: lack of rate flexibility Law firms often charge different rates based on a variety of factors, and though your practice may set a specific rate for each of your individual services, you cannot assign clients different rates for the same service using QBO. This can result in a long list of services, and confusion about which service/rate combination should be selected. The same is true for expenses, which can also have only a single rate in QBO. While there are add-ons available that can make time tracking and rate management easier, this may introduce additional levels of complication and areas for error.
Challenge #2: invoicing Generating invoices for matters using QBO can present a variety of potential issues.
First, you cannot assign a specific invoice template to a client. This is especially problematic for firms that have clients with different billing requirements, as this makes the process complex.
Second, there is no draft billing capability. As Caren Schwartz states, “while it is easy to create an invoice, and enter unbilled time and expenses, the editing process is limited.” If, for instance, you should attempt to remove a mistakenly placed item on an invoice, it will not be automatically returned to “unbilled.” Though QBO does allow you to view transactions and make additions to invoices on-the-fly, these are not saved if the invoice is deleted. This is particularly problematic if you are trying to add soft costs within QBO since they cannot be easily entered as a specific client cost to be billed.
The customization ability on invoices is also limited. While QBO can produce a summary that shows balance forward, new charges, and the amount due, there is no way to automatically include who completed the work, to sort, or to include a timekeeper summary table (a common preference among law firms).
Additionally, for firms that do electronic billing, bills cannot be formatted for electronic billing, and there is no way to add both an activity code (A code) and a task code (L code) to a billing item. While you can enter a flat fee for a client by merely typing it onto the invoice or by carefully using groups, the ability to measure the profitability of the flat fee based on the time actually worked is difficult.
Challenge #3: requesting and managing evergreen retainers Some firms make use of an evergreen retainer when – as the trust balance is reduced – the client is asked to provide additional funds to bring the retainer back to a certain level. There is no way to do this automatically within QBO, which means the firm must constantly run reports and correspond with the client to request funds.
Challenge #4: payment allocation It is the practice of many law firms that when a partial payment is received, it should be first applied to any outstanding costs, and then the remainder applied to fees. In QBO, a partial payment is allocated proportionately across all line items on the bill. This lack of control may be an issue for firms that incur substantial advanced client costs.
Client Cost Tracking
As the acting fiduciary of your clients’ funds, tracking costs must be done with the utmost care. There are a number of tools that make it easy to track costs and pull the costs into QBO, including images of receipts and “automatic” creation of expense reports. QBO also offers an extensive capability to download from bank and credit card accounts. When downloading, however, it is important to verify the transactions in order to confirm the charges are in fact valid. For law firms, it is equally important to verify that the coding of the transaction is correct, and if appropriate, that the correct client is charged. If a firm does not properly capture client costs and bill them back to the client in a timely manner, it may lose substantial revenue.
Challenge #5: handling soft costs As a general rule, soft costs, or those that are not paid by direct check but are billed to the customer (e.g. internal copies, postage etc.), must be added to the QBO customer invoice at the time of billing, which makes it easy to miss a cost and lose the firm money.
Challenge #6: tracking third-party liens In addition to verifying client allocation, it is also important to track when the invoice should be paid. QBO allows for setup of payment rules for bills and handles this efficiently, however, challenges arise if you are:
- Trying to determine if the client has already paid the firm for the expense so that the vendor should be paid.
- Tracking what bills are being held as third-party lien claims, which will be paid on settlement.
While it is possible to create a report of advanced client costs by client and matter, there is not a simple method to remove those clients whose balance has gone to zero, making the report grow over time. While you can reconcile transactions to remove them from the report, it is not always easy to identify the correct transactions to match (especially when there are multiple payments for the same amount).
QBO or QuickBooks Online is a fine product and it works great for most small businesses. Even attorneys can sometimes have success by using add-ons to meet their specific needs. But with billing and managing client costs being such an important part of a law firm’s business, why take the risk? Implementing legal-specific practice management and accounting solutions can help eliminate the need to worry about whether or not your firm’s requirements will be met.