Why Integrated Trust Accounting Is Essential to Law Firm Billing Software – Whitepaper

Originally published in FindLaw’s Legal Technology Center: http://technology.findlaw.com.

Technology is a powerful tool for any business. It is a great equalizer, allowing small organizations to provide services and capabilities that used to be offered only by large companies. However, an inappropriate or incomplete tool is not only useless but can actually make things worse. Law firms have unique needs that generic time and billing software can’t provide, which is why they need a billing solution designed for the legal industry.

Finding the Right Legal Billing System

From a bookkeeping point of view, your practice is defined by your billing model or models. The balance sheet doesn’t care if it’s a criminal defense, a personal injury case or a divorce. Your books only need to know how you bill your fees: hourly, fixed or on contingency. Attorneys need software that can handle all three of these rate structures, as well as matter-based billing, retainer management and other aspects unique to the legal industry.

Unfortunately, what too many firms overlook is a key aspect of legal billing: trust accounting software. Most firms handle client trust funds at one time or another. Trying to use one system to handle billing and another to handle trust funds is slow, confusing and prone to error. Trust fund mismanagement is one of the key reasons for ethics complaints, and you can bet that your state bar is watching to ensure that you are handling client funds appropriately.

Linking Trust and Billing

Advance payment in the form of a retainer is a common practice in law. However, handling that retainer can get tricky, and your state has specific accounting rules that need to be followed to be sure those funds are used appropriately. There are two manners of handling retainers: in operating accounts or in trust accounts.

If retainer funds are going to be used quickly, your state may allow you to deposit the retainer directly into your operating account. You will still need to be able to track those specific dollars, to ensure that those funds end up being used for that matter and not for some other client, or even on another matter for the same client. If your law office software can’t track those funds you may end up inadvertently violating state trust laws.

Retainers that will be kept for longer periods are often placed in attorney trust accounts until the fees are earned, requiring you to monitor two accounts, as well as multiple transactions. Do you really want to have to export information to separate trust accounting software?

The Perils of Retainer Management

When a client pays a retainer, those funds are not yours until you provide service. You are simply keeping them until they are earned. You need to be able to see the retainer balance at any time and be able to pay invoices out of the retainer as needed. You must also be able to show that balance on invoices.

To use retainers from your operating account you need to:

— Apply retainer funds to outstanding invoice

— Update the retainer balance and the client’s unpaid balance appropriately

Retainers taken from trust accounts are more complicated. You must:

— Issue a payment from the trust account to your firm

— Deposit the funds into the firm’s operating account

— Apply the deposit to the invoice

— Update the retainer balance and the client’s unpaid balance appropriately

Can your legal billing system do all of that, or are you going to have to switch back and forth between applications to keep everything straight?

Bookkeeping Shouldn’t Be a Juggling Act

When you use separate trust management and law firm billing software, you have to make double entries to keep everything straight, or you have to export and import data between applications. If you ever miss a transaction — say you record a check in the trust software but not the deposit in the billing software — your two systems will be out of sync and it can take hours to find the mistake. You may accidentally bill the client, even if retainer funds are available to pay the invoice. These types of errors waste time, annoy clients and attract the attention of state regulators.

Keeping an Eye on Your Books

You need time and billing software that gives you a 360-degree view of every aspect of your law practice’s finances without having to go through multiple screens. You need a single screen that shows you:

— Unbilled Balance

— Unpaid Balance

— Operating Retainer Balance

— Trust Retainer Balance

All of these balances are interrelated, and trying to correlate trust balances in one program with unpaid balances in another is a huge headache. Law office software should automatically adjust trust balance down and operating balance up if you write a trust check, or lower unbilled balance and raise unpaid balance when an invoice goes out. This gives you more control over your practice’s finances by allowing you to:

— Invoice immediately if unbilled balances are getting high

— Send payment reminders if unpaid balances are climbing

— Automatically pay invoices from retainers, if available

— Request additional retainer funds if balances are getting low

How Does It All Work Together?

Here is an example of just how easy it is when trust management and law firm billing software work together:

  1. In March a client gives you a $7000 retainer, which you deposit in your trust account. The client’s trust balance is $7000.
  2. Later that month you incur $4500 in billable time and expenses for this matter. At the end of the month the software shows $4500 unbilled and still shows the $7000 trust retainer.
  3. On April 1, when you generate your invoices, the software automatically moves the unbilled balance to unpaid so the client’s account shows $0 unbilled, $4500 unpaid and $7000 in a trust retainer.
  4. You see the trust balance and use those funds to make payment. The trust account shows a $4500 withdrawal and the operating account shows the same as a deposit. The client’s unpaid balance is adjusted to $0.

All of this is done automatically, without having to type information twice or export files to another piece of software.

Invoice and Retainer Reminders

Don’t let unpaid invoices sit. Numerous studies show that sending periodic and consistent payment reminders greatly increases your chances of getting paid. Sometimes an invoice really did just fall behind the file cabinet and the client may not even be aware that any payment is due. Most time and billing software allow you to send automatic payment reminders as invoices get more than 30 days old.

Outstanding invoices aren’t the only item clients need to be reminded of, however. As retainer balances drop, you can’t depend on clients to send you additional funds, even if you display retainer balances on the invoice. It’s important to be direct and request retainer replenishments. If you can see retainer balances at a glance, you will know which clients need reminders and which are fine for another month.

Protect Yourself from Common Trust Mistakes

A legal billing system needs to do more than add and subtract numbers from account balances. Again, you need to remember that a retainer doesn’t belong to you until you provide service. You are holding it in trust for the client, and if you betray that trust, whether on purpose or by accident, at best you will lose a client, and at worst you will be subject to an ethics inquiry. A billing system with trust accounting software provides these tools to help you manage your funds correctly:

— Monthly bank statement reconciliations

— Three-way reconciliation reports that tie together bank balance, book balance and individual ledger balances

— Detailed ledger balances that show whether or not specific payments have cleared the bank

— Automatic alerts to prevent you from making common mistakes, such as overdrafting a trust balance, paying one client’s charges with another client’s retainer, issuing duplicate check numbers and more

— Printing checks, deposit slips and other banking documents

Two Powerful Tools that Work Together

With a full-featured law office software package, you have the bookkeeping and trust management features you need to run a modern legal office, so you can:

— Spend less time as an office administrator and more time as an attorney

— Protect yourself against common bookkeeping mistakes

— Provide audit trails for state regulators

— Increase your collection rates and your cash flow

— Sleep better at night, knowing that your practice’s finances are taken care of

Mobile Tools for a Mobile World

Practicing law is not like it was 10 years ago. The sudden surge of mobile devices, such as smart phones and tablets, have given today’s attorneys unprecedented mobility and flexibility, but only if they have the technology they need to take advantage of it. Cloud-based law firm billing software allows you to:

— Record time and expenses as they happen — no more forgotten charges!

— Look up client billing records

— Use whatever device you like, from a desktop computer to a smart phone

— Take advantage of the latest technology, without needing an in-house IT expert

— Protect client information in a professionally managed data center, rather than on your office computers

— Guard against disaster with automatic data backups

CosmoLex for the Modern Attorney

Get all of these features and more by using CosmoLex, the first cloud-based law office software with integrated trust management features. Handle all of your billing and trust management needs from the comfort of your office, your home, the courthouse or anywhere else you have Internet access.

Contact CosmoLex at (866) 878-6798 to find out more, or sign up now to try the product completely free for 30 days — no credit card required!

About Us

CosmoLex is a cloud-based legal billing & trust accounting system specifically designed for solo and small law firms. CosmoLex’s sole mission is to simplify law firm operation. CosmoLex integrates time tracking, billing and trust accounting functions, allowing lawyers to focus on the practice of law. CosmoLex’s CEO, Dr. Rick Kabra, has years of experience in the legal software industry, catering to the specialized technology needs of small to mid-sized law firms.

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