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Mastering The Reconciliation Process With Accounting Software & Bank Data Feeds

Legal Billing Software Selection Guide

Background, Requirements and Options

Every lawyer understands the importance of tracking billable hours and the impact legal billing software can make. Like any service business, billing related activities can make or break a law firm’s financial viability.

When it comes to client billing, a legal practice is quite different from other business services. Law firm billing practices come under state ethics guidelines and, even within the circle of legal practices, billing methods vary. While most other businesses deposit client advances in their business accounts, lawyers cannot do so that easily. Law firm client advances (retainers) need special treatment and must be handled very carefully.

Beyond the financial management and compliance aspects, there is much more to legal billing. If done properly, law firms can enhance client satisfaction, minimize collection issues and build long term relationships that result in referrals.

Below you will find a guide that covers:

  • Specific legal billing issues
  • Typical law firm billing requirements
  • Points to evaluate when selecting billing software for attorneys
  • Differences between cloud vs. desktop billing software

Unique Characteristics of Law Office Billing

A variety of constraints make legal billing activities unique.

1. Varied Types of Legal Matters

Most law firms handle a variety of legal cases. Different types of legal matters require completely different billing arrangements. The most common billing arrangements include:

  • Hourly Billing: A fee arrangement prevalent in such specialties as family law, estate planning, commercial litigation and elder law. With an hourly billing arrangement, law firm bookkeepers record the attorneys’ billable time under the applicable matter. Any expenses directly related to the matter, such as court, document filing or courier fees are also recorded under the matter. At pre-defined intervals, the firm generates itemized bills showing individualized time/expense details. The process continues until the case is resolved or the attorney-client relationship is terminated.
  • Retainer-Based Hourly: Retainers, also referred as advances, are client funds that are received prior to the commencement of legal services. In this arrangement, law firm invoices are paid from the client retainer funds. When retainers fall below a pre-determined level, the law firm issues a request for additional retainer funds.
  • Fixed Fee: A fee arrangement prevalent in real estate, traffic violation matters, and other simple or predictable matters. The client is billed for fixed fees plus any costs incurred that are directly related to the matter.
  • Contingency: A fee arrangement commonly used in personal injury and debt collection practices. In a contingency fee arrangement, an attorney is paid if a favorable settlement is obtained. First, actual costs incurred are deducted from the settlement and then a fixed percentage of the remaining proceeds go to the attorney(s) for their legal services. If the case is not settled favorably, law firms are typically not reimbursed for costs or their time.

A multi-practice law firm must have billing software for lawyers that accommodates a variety of billing requirements.

2. Matter-Based Recordkeeping

Many service businesses bill at the client level. The business may perform multiple tasks for a client and one invoice may cover all completed tasks. The same process does not work for law offices.

Law firms are usually required to keep each task (called a “matter”) completely separate from other matters of same client or other clients. For example, if client John Smith gives his attorney two assignments, one for a “real estate closing” and another for “will preparation”, the law firm must keep track of time and expenses separate for these two matters.

Some billing practices are not permitted in law firms. For example, a law firm cannot apply one matter’s remaining balance to pay off another matter’s unpaid invoices without the client’s written consent.

Legal billing requires matter-based recordkeeping, which is only possible by using specialized law firm management software. All time tracking, handling of client retainer and expense tracking must be handled at the matter level so proper records can be produced in case of client inquires, billing disputes or state audits.

3. State Ethics Rules Govern Attorney Billing Practices

Unlike other professionals who can run their business without state interference with their profit margins, legal practices are highly regulated. Although attorneys define their own rates, they are regulated by state ethics rules that define how hours are billed and how the law firm does business. In the event billing disputes arise, ethics rules also make it necessary for lawyers to produce an audit trail of who did what, when and how, and what the client was charged.

4. Handling of Client Retainers Requires the Utmost Care

A standard practice for most law firms is to collect client payments in advance (retainers) for services. While most other service practices simply deposit advances in their general business bank account, law firms cannot do so. In general, states have strict accounting rules that require depositing unbilled/unearned client funds in attorney trust accounts, also known as IOLTA accounts.

Proper documentation of attorney trust account transactions is one of the most important bookkeeping functions at law firms. Many states randomly audit attorney trust accounts and if gross negligence is discovered the attorneys can receive penalties up to and including disbarment.

Law firms initially deposit client advances in an attorney trust account and transfer money to their business operating accounts as fees are earned. With each billing statement, clients are informed about their remaining retainer balance. Proper handling of client funds requires a billing system that integrates the closely interrelated trust accounting with billing activities.

How Should Lawyers Handle Legal Billing?

In the previous section, we noted how legal billing requirements are fundamentally different from other service businesses. It is possible to perform billing and trust accounting activities manually or with a spreadsheet program. However, just because it is possible does not mean it is the correct choice.

With the variety of billing options and with some specific constraints like matter-based record keeping, interrelated billing and trust activities and adherence to state ethics rules, manual bookkeeping can be a complex task and is prone to human errors. More importantly, once an error is discovered, it could be hard to fix if years of data are affected.

Additionally, time spent on bookkeeping is not billable time. Time is money for law offices. Less time spent on billing and trust bookkeeping means more free time that can be used for billable activities. The best method to handle legal billing is to select time and billing software designed for law firms that is easy to use and performs all the required functions in an efficient manner.

The Basic Functions of Legal Billing Software

A software program for time tracking and billing not only saves time and enhances client satisfaction but will also improve cash flow. Any quality legal billing software handles following basic functions:

  • Client Advances: For retainer-based matters, the client retainer function handles client funds you receive prior to commencement of legal services.
  • Billable Time Tracking: One or more lawyers and support staff in a firm typically work on a case. A billable time tracking function allows you to track billable time spent by each employee who works on a legal matter on any given day or week. Cloud-based software allows attorneys outside the office to enter billable hours immediately rather than when they return to their desks.
  • Expense Tracking: A typical legal case incurs direct expenses such as court fees, witness fees, travel related expenses, etc. The expense tracking function allows you to record expenses for each legal matter as the expense are incurred. As with billable hours, cloud-based software allows attorneys to document expenses the moment they are incurred.
  • Bill Preparation: This function produces a variety of bill types (hourly, fixed fee, contingency, etc.) at a pre-determined interval, such as weekly or monthly.
  • Payments Received: The payment function allows invoices to be paid from either client advances or newly received funds.
  • Collection Support: This function auto-generates reminder letters for overdue invoices and supports your firm’s collection activities for delinquent accounts.
  • Reports: The reports function produces a variety of reports for the purpose of administration, accounting, tracking billable time and bank reconciliations.

The Major Benefits of Legal Billing Software

  • Track all billable time accurately, prepare invoices promptly and correctly, and minimize client inquiries and promote more timely payments because each item charged is detailed.
  • Track all matter expenses as they are incurred. Expenses are automatically included in the bills, minimizing the chances of omitting charges on client billing.
  • Invoice customers based on your retainer agreement. Hourly billing matters have an itemized bill. Fixed rate matters have a flat fixed fee, etc.
  • All client advances are reflected with each matter and each invoice will show the remaining retainer balance. The client can clearly see how his funds are being used and are more likely to understand when you send a request to replenish an initial retainer once it goes below a certain amount.
  • Since trust bookkeeping and legal billing are closely interrelated, good law office management software will include a trust accounting system. You will be able to see a consolidated report showing a breakdown of your trust account balance for individual matters, print checks and perform bank reconciliations. The IOLTA software will also minimize common trust bookkeeping errors such as ledger card overdraft or prevent a matter’s trust account from going into a negative balance. A negative balance may mean that you are inadvertently using trust funds for other matters.
  • Generate detailed statements and records in case of a billing dispute or an audit. A detailed statement will help to quickly resolve billing disputes and ensure an accurate audit of charges.
  • Improve cash flow. Since the dollar value of unbilled legal services and unpaid bills will be visible for each matter, your firm can generate timely bills and take proactive steps to collect on delinquent accounts.

How to Select Law Office Software

There is a wide selection of legal office management software on the market and no program can hope to meet the needs and preferences of all firms. Due to the sheer number of choices, it is often difficult to evaluate and know you are choosing the best legal billing program to meet your firm’s needs.

Before evaluating your software choices, review your current practice and make a list of features you need. Remember, the software you choose must solve your firm’s needs. You should not be influenced by available features, but instead focus on the features that you will utilize and that will help your firm.

Following is a list of the top 10 items that may help you make your requirement list and find the right software solution.

1. Ease of Setup and Use: Legal billing software should be easy to set up and operate. Unless you are willing to deal with product “consultants” who setup, configure and train, and in the process earn a hefty fee aside from the product purchase price, look for solution that is sold directly by the manufacturer and provides all the required training and support at no additional cost. Law firms frequently find their actual cost of ownership is many times higher than the initial purchase price due to on-going consultant engagements.

Cloud-based solutions have the advantage over desktop software that you don’t have to worry about setup or maintenance. The developer will handle the technical side of things so you can focus on practicing law. However the software still needs to be easy to use.

One way to determine whether you can manage the software on your own is to evaluate the program by downloading a trial copy of desktop software or signing up for a trial subscription to a cloud-based solution. If you cannot setup and produce your first billing statement in a few minutes, the program does not need meet the “easy-to-use” criterion.

2. Legal Specific Solution: No other service business that has as many challenging requirements as the practice of law; therefore, law firms must have legal billing software designed specifically for them.

Specifically program must offer:

  • Individual rates for each billing staff member, from clerks to senior attorneys
  • Matter-based time tracking. Time entry must be flexible and detailed so clients can see breakdown for each time-entry made.
  • Matter based expense tracking
  • Integrated client advances handling
  • Invoices incorporating recorded time, expenses and any client advances
  • Flexible billing options such as hourly, fixed fee, retainer hourly, and contingency
  • 100% built-in trust account software & check printing capabilities

3. Billing Rate Flexibility: Hourly billing rates are not rigid and you may offer discounted rates as necessary. At the time of matter setup, you should be able to specify any billable personnel’s rate if it is different than their global rates for this matter. For example, you might have given a 20% discounted rate for Matter A, or Matter B which was started 5 years ago and is billed based on 5-year old billing rates. Such flexibility is needed as you are now billing personnel’s at different rates for different matters.

4. Custom Billing Statement/Letter Formats: When it comes to billing statements, each law firm has their own preferences. After all, professionally presented and uncluttered bills also reflect a law firm’s image. The same applies to invoices and other correspondence. While legal software can provide base templates, a law firm must be able to customize almost every aspect (header, footer, body, billing presentation, etc.) to meet their needs and preferences. It should not be necessary to hire “consultants” for such basic tasks.

5. Collection Support: Law firms often deal with a portfolio of unpaid invoices. Legal billing software can assist you in number of ways, enhancing cash flow and collection efficiency without a significant investment of time. The software should be designed to:

  • Warn you when the advance balance goes below specified levels for matters where a minimum advance (retainer) balance is required.
  • Provide you with an uncluttered financial picture all the time. As you are entering billable time, you should be able to notice when a client is significantly delinquent. Why throw good money after bad?
  • Issue batch reminder letters. Imagine you need to send 30-day or 60-day overdue reminder letters to all clients or letters to clients whose advances have fallen below a certain level. Program should be able to produce customized letters for all matters matching the criteria.
  • Generate personalized letters, supporting documents (i.e. past due invoices) and mailing labels. And yes, the software should have an email function.

Collection activity must not affect staff productivity. Don’t be surprised if good billing software takes the place of a bookkeeper.

6. Multi-User Simultaneous Access: Even if you are a solo practitioner, it is unlikely that you would use program only from one computer. You are likely to need to give access to a secretary or legal assistant, and maybe an outside bookkeeper or accountant. You should be able to set up the software so that multiple authorized users can work in the program at the same time.

7. Permission Controls: While it is one thing to provide access to multiple users, it does not mean that you may want to provide unrestricted access to all financial information. You may want to prevent certain users from making edits to trust accounts or performing bank reconciliations. Or you may want someone to simply record billable time and generate invoices and not able to view anything else in the program files. Again, only you can determine your office needs. Your time tracking and legal billing software must have an interface that provides permission controls.

8. Trust Accounting: If your firm conducts trust account activities, do not ignore proper trust bookkeeping even for a second. State laws are very stringent and consequences for improper trust account administration are severe. Since billing and trust accounting are closely interrelated, you get the best results when your billing system includes integrated trust accounting software. Trust funds are not your funds. They do not affect your profit and loss, assets and liabilities and hence, do not belong with your operating account records. Trust software for attorneys must be able to:

  • Show trust bank balances for each individual matter.
  • Prevent common mistakes, such as ledger card overdraft.
  • Print checks for disbursements from trust accounts.
  • Perform bank reconciliations including three-way reconciliations.
  • Reflect remaining trust funds for the billing for all matters.

9. State Ethics Compliance & Dispute Resolution: In case of a billing dispute, you should be able to produce a variety of detailed reports, substantiating billing activities for quick resolution of the matter. Also, since trust accounting and legal billing come under state ethics requirements, every single report, such as monthly three-way reconciliation reports, must be readily available in your bookkeeping system.

10. Data Backup: One disadvantage of modern technology is loss of data. If you lose data, you lose everything! Computers do crash, hard drives do fail. If computer problems have not happened to you, they will sooner or later. You must protect your critical client data with regular backups. Legal billing software must make it easy to back-up and restore data and should be a simple one-click function rather than requiring the services of a software consultant. Most cloud-based legal billing systems have the advantage of automatic backups so you don’t have to worry about this task yourself.

Cloud Or Desktop?

Cloud-based software has exploded in popularity over traditional desktop applications. When you use cloud-based billing that means the program is installed on professionally managed servers rather than your own computer. You access the billing functions across the internet.

The advantages of cloud software are numerous:

  • Flexibility – Use the software from any brand of computer and from any location you have internet.
  • Ease Of Use – Installation and maintenance are handled by the software developer so you don’t need an IT expert on staff.
  • Security – It might seem strange but cloud software is actually more secure than desktop, due to the fact the software is installed in professionally managed datacenters.
  • Backups – Automatic backups mean your data is archived without you having to lift a finger.

Desktop applications may still be a better choice if you don’t have reliable internet access, or if you prefer a flat licensing cost over a monthly subscription fee.

If you apply the above guiding principles, along with your own requirements, you should be able to procure and implement the right law practice management software for your firm. And, when you do that, you will be glad you took sufficient time in analyzing your needs rather than picking what was most popular or what a consultant recommended. No one is in a better position than you to protect your business and your cash flow.

About Us: CosmoLex is a leader in cloud-based software for lawyers. Our CEO, Dr. Rick Kabra, has worked for many years in the legal software industry, catering to the specialized technology needs of small to medium law firms.