Accounting for Law Firms Guide: What You Need to Know
If you're in the legal profession, the idea of tracking the money that comes into your business in a way that can be tracked and analyzed can seem like an insurmountable task. It's important to know where your money is coming from and how it flows through your business. Once you have a basic understanding of accounting procedures, you'll be able to make more informed decisions about your finances and improve your overall business.
The main thing to keep in mind when deciding on an accounting solution for law firms is that no two businesses are alike. There isn't one solution that fits all types of companies.
1. How To Choose The Best Accounting Method For Your Law Firm
There are two accounting methods for law firms. One is the cash accounting method, which means that revenues are recognized when cash is received. Expenses are recorded when paid. The second method is the accrual method, which recognizes revenue when it is earned, not when it is received. So, how does each method work and why care about which one you use?
Cashing in or out?
It all comes down to what your goals are and how much money you're operating. Many people, particularly in bigger firms, don't really care about the money. It's hard to give staff raises without extracting profits. It's also very hard to maintain goodwill. It's easier to focus on whether you got a new contract rather than how much money you made.
That isn't to say that cash accounting is a bad solution. It's obvious to use it in cash-flowing businesses. It becomes a lot easier when you work with large, well-funded firms, because you know you can trust that they will pay bills on time. The issue is that in an environment where smaller firms don't necessarily have that luxury, cash-flowing is often the only option that is available to them.
Balance your books with a system that puts more emphasis on cash flow. If you are running a cash-flowing business, it means that you are employing staff to keep various processes ticking along. Even if you are not employing anyone full-time, you need to employ people to carry out bookkeeping, account management and anything else that may relate to cash-flow.
Why should your accounting be based on cash-flow? If you are running a cash-flowing business and don't want to use a solution like cash accounting, you need to make sure you are using a system that puts more emphasis on cash flow. Your accounting system should be able to distinguish between revenue that is recognized and any money that is received.
2. How To Keep Track Of Money Coming In And Going Out?
Managing your business finances can be a daunting task. When you’re first starting out it’s common to feel overwhelmed by the amount of money you’re bringing in and going out. Using an accounting solution that seems too complicated will just make you want to throw in the towel.
The idea here is to implement an accounting solution that works for your business and your partner, while balancing the needs of your investors and staff. Depending on the type of legal practice you have, your how-to will likely be different.
1. The whole picture is important.
An accounting solution isn’t a set of answers. It’s a start. It is a beginning to guide you on your path to understanding the options and potential of an accounting solution for your business. However, an accounting solution shouldn’t take the place of the support you receive from your hands-on staff–it should complement and support them!
2. Make sure you have a clear picture of your business.
Depending on the nature of your business, it may be necessary to take a step back and view your business in a more holistic context. To get there, you'll need to rethink some of the models that have worked for you in the past. Based on your business goals, it may be helpful to evaluate what helped you get to where you are today, what tactics you can use to work around those businesses that are better suited for the future, and which strategies you can adapt as you expand. Come up with a strategy that helps you work toward your overall business goals, and then chart a course that’s right for you. If the current tools that are working for you don’t work long-term, consider which new business structures have a better chance of working.
3. What Are The Most Important Financial Reports For Law Firms?
The financial reports that matter the most to law firms are typically the annual audited financial statement and the monthly financial statements. The annual audited financial statement provides a full picture of the firm’s financial status and the monthly financial statements provide the firm’s financial activity for a given month.
Looking for ways to make accounting more efficient and prove to clients that you are doing all that you can to reduce your tax bill? Let us show you how using a simple accounting software tool to send reports to your clients is going to make your work as easy as possible.
Running Your Own Accounting
If a client is down with the occasional spreadsheet, the idea of a cloud-based accounting solution is intimidating and may even repulse them. But if you step back and look at the big picture, this type of setup actually makes financial reporting and tracking much easier. It all starts with the software you use to manage your finances. Most of the time a law firm will have a unique set of accounting rules that they follow. But when partnering with other legal entities, the requirements can vary significantly.
After you establish the rules for your accounting and tax reporting, it's time to choose software to proceed forward with. Choose a solution that is easy to use, flexible, and allows you to send your quarterly reports easily, allowing clients to see a full picture of your business.
Why would a client prefer an online solution? Legal software that offers online client reporting helps you send your reports on a consistent schedule so you can be sure that the client sees all the financial information at a time that is convenient for them. When working with other client-facing firms, it can be very easy for them to help each other out by offering tips and tricks on how to use a certain accounting platform better.
Once you understand the basics of accounting, you can begin to track where your money is coming from and how it's spent, giving you more freedom to make better informed decisions about your business. This will in turn improve the efficiency of your law firm and expand your business opportunities in the long run.
If you need help with your law firm's accounting, please give us a call at (559) 227-6115 or let us know.
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