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 are four ways we at Kahuna Accounting have helped law firms have peace of mind in their financials and also insight for growing and building their law firm.
1. Integrated Technology – Removing Data Entry
Technology has improved the capabilities for lawyers in so many ways. Cloud-based technology has streamlined the practice of law. But for most, the efficiency stops there. Not as many lawyers, or business owners in general realize, is that technology has greatly streamlined accounting too.
With web based technology like Xero you can integrate with bank feeds, merchant accounts and credit cards so all transactions are automatically brought into the system. You can insert receipts and bills by a simple email or by taking a photo. Most importantly, you can sync a practice management tool like Clio so that your invoices and contacts come through automatically. How much time does your law firm waste re-keying data or shuffling paper? With the right technology integrated, you can drastically reduce busy work and improve efficiency.
2. Knowing the Fundamentals
It’s a core belief at Kahuna Accounting that 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.
- Bank reconciliation
This is the process of assigning every transaction to an account. It’s like doing the dishes. Somebody on your team needs to be doing this regularly to prevent the dishes from piling up.
- 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.
The best case scenario is that you have a system set up so that you, the attorney, are not too involved in this day to day other than pulling reports. Cloud technology has made it much easier to collaborate, because multiple team members or professionals can access the same information without sharing a lot of reports. Successful law firms should aspire to have someone either outsourced or in house who can manage their bookkeeping. You should be looking for someone with knowledge of law firm accounting and familiarity with the software tools you are using for your practice. This will make it a smooth collaboration.
Once you have someone who can manage that role, you’ll see incredible results just by having the weight off your shoulders, or someone else in your office (paralegal, attorney, administrator) who aren’t truly skilled in accounting and accounting technology. Like most things, day-to-day financial management is a professional skill and you should aspire to collaborate with professionals who can handle it efficiently so you can focus where you are a professional.
Prioritize and Invest
Where all of this breaks down in the first place, and why so many law firms are struggling with their financial management simply comes down to prioritizing and committing. Law schools don’t teach lawyers how to handle accounting, so you start a practice and prioritize getting clients and serving those clients well. The only problem is the accounting and finance tells the story of the health and viability of your firm. If you are truly building this for the long term, you need to prioritize the accounting system, get something in place. When you do, you’ll find added efficiency and insight about your firm that you never had before.
Micky Deming is the Director of Marketing at Kahuna Accounting. Kahuna is a team of accountants and bookkeepers who have helped hundreds of law firms transition into an accounting system that’s done for them and provides insight on their firm and peace of mind about financials. Visit their site to set up a discovery call to see if their service is a good fit.