It is undeniable that bookkeeping is a necessary task to operate a successful legal firm but lawyers would rather spend their valuable time helping clients rather than doing bookkeeping. As a head start, here are some bookkeeping pitfalls common to legal firms and how to avoid them, whether you decide to do it yourself or outsource your bookkeeping to a professional bookkeeping firm.
1. Master Client Trust Fund Account
One common practice for law firms to secure cash flow is using retainers. This means that funds are given in advance to the firm for the work that is to be specified later on, but it does not belong to the firm until they are earned. It may sound simple, but problems arise as you need to continuously track client ledgers individually and separating all trust funds in one bank trust account. You will need to make sure that your clients’ funds are not mixed with each other and that these funds will not be used for your firm’s expenses until your firm completely earned these fees.
The simplest way to avoid problems regarding this is to use legal-specific accounting or bookkeeping software. It will help you prevent mistakes like:
2. Treat Case Costs Properly
Law practices’ case costs are acquired from the beginning of every case and all will be billed to the client eventually. All of these costs should be accounted for properly and this might seem like a very basic task, but you must remember that not all costs are treated the same.
Treatment of costs depends on your case type. There will be times where you need to treat costs as ‘advanced client costs’ which needs to show up as an asset on your firm’s balance sheet or a cost should be treated as a ‘reimbursable client costs’ which needs to be recorded on your Profit & Loss Statement.
3. Differentiate Income and Revenue
Having the mistake of not being able to separate the legal fees received representing firm’s “Reimbursable Client Costs” and firm’s actual income will result in having inaccurate books and compliance issues. Remember that if a bill is paid by a client, a portion of it must be allocated first to your incurred costs for more accurate recording and for a future basis for evaluating which cases have become more valuable to the firm.
4. Understand Where the Money Came From
Right from the start, being a lawyer is not an easy job and it will just get harder if one decides to start and manage a firm. Your clients’ cases will not only be your workload, but you will also need to have a fundamental understanding of how to manage a successful business. Closely monitoring your firm’s financials is a good business practice. In addition to monitoring the income and expense, consider taking the time to understand what these numbers mean. Remember, accounting is the language of business and it will be difficult to assess your practice financial performance if you don’t know what those numbers mean. Surrounding your firm with the right and trusted professionals will help you transform these that appear to be intimidating tasks to more manageable learning opportunities to achieve success in your firm.
If you need help with bookkeeping, tax preparation, or avoiding the mistakes we mentioned above, contact us today at email@example.com or 832-437-0385.
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