8 Law Firm Accounting Tips and Best Practices
Regardless of the size of your law firm, it’s important to know accounting and bookkeeping basics. Here are some tips and best practices for accurate and efficient accounting.
Trust Accounting
Trust accounting is the practice of keeping client funds given in trust in a separate account from law firm operating funds. Trust accounts are among the most common places to make errors because they have very specific rules about what you can and can’t do with them, and the penalties for breaking those rules can be severe, including disbarment.
Three-way Reconciliations
Every state bar requires you to perform a three-way reconciliation every 30 to 90 days between the trust bank account, trust ledger, and individual client ledgers. A three-way trust reconciliation involves the following:
Reconcile the Trust Bank Account to the Trust Ledger
The trust ledger is similar to a checkbook register and should include every trust transaction for every client. This trust ledger must be reconciled to the bank statement for the trust funds account. There may be some trust transactions in the ledger at the end of the period, which will appear as outstanding items on your reconciliation. This is fine, but look closely at the outstanding items to ensure they aren’t an incorrect ledger entry.
Reconcile the Trust Ledger to the Individual Client Ledgers
While the trust ledger includes all trust transactions across all clients, the individual client ledgers separate these transactions by client. The sum of all the client ledgers must equal the balance in the trust ledger. There should be no reconciling or outstanding items because entries in the trust ledger and client ledger should happen simultaneously.
Budget
It’s important to set a budget to create expectations for cash flow and expenses, and to set revenue benchmarks. Start by making a list of your mandatory expenses. Then, set realistic personal and business goals, such as how much time you want to take off for vacation and whether you want to hire employees or contractors. After projecting your revenue, take a realistic look at what you need to do to achieve your goals.
Expense Reimbursements
To ensure easy expense reimbursements, it’s a good idea to require that all employees and partners use a company credit card. Doing so makes it easier to track expenses for each client and partner, and creates a more direct paper trail.
Compliance for Client Funds
Whether intentional or through neglect, violating compliance regulations, such as mishandling client funds, can lead to serious repercussions like significant financial penalties, suspension of your license, or disbarment.
The American Bar Association (ABA) outlines many rules that you’ll want to be aware of. One in particular is Rule 1.15: Safekeeping Property, which outlines responsibilities regarding trust accounts, recordkeeping, and keeping clients in the loop regarding their funds and property.
Time and Mileage Tracking
It’s essential to have a time tracking system that’s both easy to use and efficient. Employing a mileage tracker app can ensure that you and your employees are reimbursed for all of your business mileage. Many mileage trackers can run in the background on your phone and automatically start and stop trips based on the movement of your phone. You can classify trips as business or personal and add client information. They can also be used to calculate tax deductions, control mileage costs, and plan for future expenses.
Project Future Cash Flow
It’s important to monitor your accounts receivable (A/R) aging report to stay on top of any outstanding invoices and follow up if necessary. Your outstanding A/R will also provide information about future cash you should receive. It’s also important to forecast when settlements will be finalized and when they expect to receive their share of the proceeds.
Cash Basis Accounting
Cash basis accounting recognizes revenue when you’re paid, or when cash is received, and expenses when they’re paid. Since revenue and cash flow are aligned, it’s generally easier to meet your income tax obligations than with the accrual method.
Accounting Software
Accounting software can help you save time on administrative tasks and provide insight into your firm’s financial well-being. Decisions about billing processes, the acceptance of payments, and trust accounting form the foundation for a firm’s financial success.
Save time, boost profitability, and prevent potential compliance issues by following these law firm accounting best practices. If you need help or guidance, give us a call to help you sort through the tough accounting issues at your firm.