The following is a guest post from Kahuna Accounting
One of the most infuriating and frustrating components of operating a successful law firm is finding a way to track, manage and stay on top of the financials. Your financials are critically important. They hold the answers to profitability and ultimately viability for your law firm. Yet most attorneys are flying blind with their financials, with a mix of paper, receipts and spreadsheets and hoping to tie something together at the end of the year.
The financial system provides no insight or forward-looking capability and even puts the law firm at risk with mismanaging trust accounting or failing to properly recognize income at tax time. But how do you get on top of this accounting mess when you have all the other responsibilities that come with running a successful law practice?
The following is a simple step-by-step process used at Kahuna Accounting to help law firms have peace of mind in their financials and also insight for growing and building their law firm.
Getting Your Tools Right
Accounting for law firms is a difficult enough task on its own. You have to understand your categorization and have the discipline to stay on top of transactions to close out each monthly cycle.
To add even more complexity to the situation, most thought-leaders in the accounting world agree that to be effective in bookkeeping is more than knowing the basics of finance. You also have to have enough technology savvy to navigate the flow of transactions and keep everything together.
Accounting, like many other industries, has become extremely compartmentalized. Rather than one single system for invoices, payments, bills, payroll and reconciliation, most companies have a different software tool for each.
In order to set yourself up for success, you’ll need to have the right tools that work well together so everything comes together and nothing falls through the cracks.
Get Your Bills Out and Money In
The first step in getting your accounting right is making sure you can effectively produce bills and get paid. Many lawyers (and all business owners) can overcomplicate bookkeeping. Truly, what we’re focusing on is money coming in and money going out. Then you capture the flow of money and categorize each transaction.
In order to simplify money coming in, you need a system that sends bills to clients, tracks payments and integrates with an accounting system.
In many cases, accounting is seen as debits and credits – making sure you’re following the rules. In reality, your accounting should be much more. You should be using your financial system to drive profitability and cashflow.
A major missing component for many companies in driving profitability is their efficiency in collecting payments. Before you can dive deep into your reporting, make sure your law firm has an Accounts Receivable process that works.
Knowing the Fundamentals
Lawyers should be great lawyers, not great accountants or bookkeepers. Yet it does help to have a bit of an understanding of the fundamentals in building the right system. For the accounting to work properly there are a few things you need to know.
Chart of Accounts
First, you should set up your accounting software with a chart of accounts specific for law firms. This provides a place to record all your transactions. Think of a chart of accounts as the system for categorizing your financial transactions. How you categorize the day-to-day transactions will then reflect on your monthly and annual reporting.
Bank reconciliation
Bank reconciliation is the ongoing process of categorizing your transactions. The key to bank reconciliation is to be consistent and to keep transactions from piling up. When you reconcile regularly, it’s a simple task. When you leave a two to three month gap, then you have a hard time determining how to categorize and you end up with a mess.
Financial reports
When you keep up with bank reconciliation, you’ll have accurate and meaningful data for financial reporting. You can generate a profit and loss statement and balance sheet on demand. This is meaningful for managing your practice of course, but is also great for collaborating with a tax professional. Now tax season is not so intimidating and can be a fast, helpful process.
Your law firm is a business, and the way to keep score in business is with your financial reporting. Many businesses look only at revenue and the money in a bank account to determine success.
A solid financial system will focus on profitability, cashflow, and building forward-looking projections for the future.
Trust Accounting
For a law firm, trust accounting is not something to be messing around with. When you accept a retainer, it’s not your money until you’ve earned it. So it’s extremely important the money never goes to your operating account until it’s earned.
A tool like Headnote, that can send credit card payments directly to your trust account is essential to remain compliant. Then your bookkeeping needs to understand the transfers between trust and operating, leaving a report of what’s been earned along the way.
Ready for Tax Season
For many law firms, tax season is intimidating and a time of year to be dreaded. Fortunately, if you follow the steps above, you can have a simple tax season.
When your systems are set up properly and reconciled, the filing process is actually quick and painless. The reason it’s difficult for many is because of the backlog of transactions to work through.
Take the steps now to get your law firm’s financials in order so you can breathe easily and focus on the big picture in your firm.
About Kahuna Accounting: Kahuna Accounting is a full service accounting and bookkeeping team, specializing in serving growth-minded law firms. See their fresh start options here.
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