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8 Best Law Firm Bookkeeping & Accounting Practices
Attorneys spend several years practicing law after completing years of formal education and training. You might have also done the same and are now probably running your law firm. All these years, your professional life must have been around laws and the legal system but not accounting. However, if you are aware of bookkeeping and accounting basics, you wouldn’t know the core roles and responsibilities of professional bookkeepers and accountants.
Even if you have one of more accountants on board who minimize your need to look into financials and have you only oversee their work, you should learn more about the process and its importance. So let’s begin, starting with learning;
The Importance of Bookkeeping & Accounting for Law Firms
As a law business owner, know that efficient accounting for law firms is crucial to financial success. While there are many significant factors involved, here are some of the top reasons why you should focus a little more on your firm’s bookkeeping and accounting process.
Ensure Complete Compliance
It is mandatory for your law firm to comply with all accounting standards, norms, and regulations. Although some rules may vary according to geographic regions, some remain common. The American Bar Association’s Model Rules of Professional Conduct outlines rules concerning the professional and ethical responsibilities of legal professionals in the USA. For example, how attorneys should record bookkeeping entries, manage trust accounts, and keep clients informed about the receipt of funds.
In case an attorney or a law firm neglects or violates compliance regulations (regardless of intention), it can have repercussions including hefty fines, suspension of license, or disbarment.
Gain valuable financial insights
Accounting helps you gather and evaluate your law firm’s financial information, such as revenue and expenses. As a result, you can make data-driven decisions based on this valuable information. When you know how much your firm is earning and how much it is spending within a specific period, you can find out outstanding payments, tax deductions opportunities, and determine missing income due to not recording some billable hours, etc.
Besides that, this data also helps you identify your business areas that are not making enough impact, and need more of your attention for progress in the future.
Keep your law firm’s reputation Intact
With accounting mistakes, the world around you might see you as unprofessional. Imagine sending an invoice to one of your clients and the details don’t match with their records; they can think of this practice as a scam. Not only that, if your financial numbers are incorrect and you file taxes according to them, tax authorities can impose hefty fines, which can hamper your reputation among clients as well as in the market. Therefore, accurate accounting ensures your firm’s reputation remains intact.
Keeping your firm’s accounts maintained and organized is important; however, it is not as easy as it seems, especially when it comes to handling them on your own. Hence, here we will discuss some of the best ways to improve the financial accounting process of your law firm; read through this piece to get valuable insights on the same.
8 Best Practices to Improve Your Law Firm Bookkeeping & Accounting
1. Lay the foundation for effective financial accounting
As you want your firm to comply with legal accounting regulations, make sound financial decisions, and grow economically, you need to start from the basics of financial accounting – set up a sound bookkeeping system.
This includes deciding whether to manage bookkeeping tasks in-house or hire external legal bookkeeping services. The latter is widely considered a cost-effective option with multiple advantages such as access to law firm-specialist bookkeepers, round-the-clock support, faster TAT, etc.
Moreover, your outsourcing partner will be able to help you set up an optimization-focus bookkeeping system that not only ensures accurate bookkeeping but also streamlines finance functions and meets compliance.
2. Record and store all financial records
Financial records including receipts and invoices are important financial documents that you need to keep for at least 2 years. This means if you look into your books today, you must have receipts, invoices, and any other significant financial documents for the past two years. Here’s a list of documents that you need to store;
- Proofs of payments (receipts)
- Bills and invoices
- Checking account statements
- Credit card statements
- All canceled checks
- Detailed reports on previous tax returns (including forms)
- Work-time sheets/billing papers
Managing these records on paper is overwhelming as you would know. Instead, you may use any reliable accounting software for this purpose as there are several such software tools available on the market.
3. Make sure your bank account set up is right
If you don’t have a business checking account, you must have one because using one bank account for your business and personal financial needs arises inconsistency in records, that require extra time and effort to rectify.
Any law firm must have at least two or three bank accounts;
1 checking account
1 savings account
1 trust account (IOLTA)
Without properly differentiating these accounts, your law firm is at risk of inaccurate bookkeeping, unorganized records, and failing to meet compliance requirements.
4. Select and use one accounting method
Learn about different accounting methods and find which one suits best for your law firm. You might need to consult a legal accounting expert before you make a decision. If you start implementing one, you need to stick to it for several years because it will have an impact on how you manage books, calculate and file taxes, etc.
You can either use accrual accounting or cash-based accounting. You may also use accounting software to manage books using accrual-based monthly accounting and generate cash-based statements for tax purposes. Determine the advantages and disadvantages of both and then consistently use one to ensure accurate track of your financial records.
5. Carefully prepare a budget and try to stick to it
A law firm will go through tough times to succeed if it doesn’t have a budget, which is crucial to set revenue benchmarks, project cash flow and expenditure, set clear amounts for fixed costs, etc. While you might already be having a system to prepare budgets, you need to have a strong strategy in place to prepare an effective one. Here’re a few tips to help you with the same.
- List down your firm’s necessary expenses
- Set goals for your personal as well as business finance management
- Project revenues
- Use software that makes budgeting easier
In case you or your clerical staff has a shortage of time for accounting and if you don’t have an in-house accounting team, outsourcing legal accounting services can be your best action. A reliable provider would be able to help you with bookkeeping, accounting, reconciliations, cash flow management, payroll, budgeting, financial reporting, and many other accounting functions.
6. Keep regular track of your trust accounts
- Follow the best trust accounting practices;
- Keep precise records
- Set up separate ledgers for operating and trust accounts
- Generate statements to look into funds removed from your trust account and funds remaining in the account
- Generating trust accounting reports
- Conduct three-way account reconciliations
Again, the end goal of staying on top of your trust accounts is to leave no room for inconsistencies in records and ensure meeting compliance requirements. This will keep your law firm away from penalties, saving you from paying additional money in the form of hefty fines.
7. Review financial reports to identify weaknesses & opportunities
Organizing financial numbers, maintaining accurate records, and preparing a complete database out of that information is fine. But when it comes to utilizing that data, know that it needs to be monitored and analyzed regularly.
By doing that, you would be able to see a detailed picture of your law firm’s finances and financial performance. Digging into the available data helps you find when did you face loss and find the reasons behind it – this will define your weaknesses. Similarly, you can find when your firm realized the maximum revenue or profit and why – giving you strong insights on where to invest in the future for growth opportunities.
The sheer objective of regular accounts monitoring is to make data-driven decisions to minimize loss and maximize profits, leading to your law firm’s overall growth.
8. Track all applicable tax deductions
Taxes are unavoidable and preparing for taxes in advance can be an excellent way to minimize your tax liability wherever possible. Although tax deductions are advantageous when used right, many attorneys and law firms could not use them efficiently due to not being aware of tax rules. As a result, they either claim all deductions (regardless of the rules applicable in their region) or they miss out on important deductions due to lack of knowledge.
When it comes to filing taxes, never wait till the peak tax season. Learn about tax laws applicable to law firms in your jurisdiction and what’s better – consult a tax expert. It will be of great help and you can significantly reduce your tax liability if possible.
Setting up an in-house accounting team can be expensive. In addition, you will have one more department to supervise. Instead, you can outsource accounting services and rest assured about the effective management of the finance and accounting processes of your law firm. Besides cost savings, you can get more time for core business operations and client servicing.
Therefore, it is highly recommended to consider outsourcing legal accounting services to a reliable service provider like Cogneesol. We are a global business process management firm offering attorneys, law firms, and legal departments a wide range of accounting services, from accounting setup to financial analysis, from management reporting to reconciliation and tax preparation.
In order to meet your special needs, we offer custom-made solutions that can include specific services you may need. Cogneesol has been providing high-quality services to hundreds of law business clients across the globe since 2008. We can help you set up an effective accounting process, clear backlog, streamline functions, and optimize the entire process to add value to your law firm’s bottom line. To learn more about us and our service offerings in detail, do not hesitate to contact us today; call us at +1 646 688 2821 Or send an email at firstname.lastname@example.org.
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