Accounting

Trust Accounting for Law Firms

hammer-719062_1920.jpg

Maintaining correct trust balances and reconciliations is extremely important for your law firm. It seems boring and tedious but is required.

Let’s face it, you went to law school to practice law, not to do accounting. Accounting for law firms can seem overwhelming and time consuming.  Actual it is both of those, but it’s a requirement and there are standards to follow if you want to keep your license and ability to practice law.

The Basics of Trust Accounting from The Florida Bar

Here’s an overview of your requirements.  This is not to be an all encompassing list, but the basics of what is required.

Maintain a Separate Bank Account.  You are required to keep trust funds separate than operating funds.  No commingling is allowed. When setting up your trust bank account, let your bank know this is an IOLTA account.  The only deposits that go into this account is advances for legal fees, prepaid fees, and advances for costs and expenses of the client.  The only expenses paid from this account will be the legal fees earned and payment of direct client costs.

Monthly Reports.  Each month you should prepare these reports:

  • Bank Reconciliation- comparing what is in your accounting system with what has actually cleared the bank.

  • Cash Receipts Journal- a report showing all deposits for the month including, date, amount, description of what it’s for, and client name.

  • Cash Disbursements Journal- a report showing all of the disbursements made from your trust account for the month including date, check number, amount, description of what it is for, and client name.

  • Client Ledger- a report by client showing their trust account including deposits made into trust, expenses paid out, and remaining balance.

Record Retention.  At a minimum you should keep:

  • Copies of all deposit slips including the items that make up the checks

  • Receipts for wire transfers in

  • Receipts for wire transfers out

  • Receipt book for cash received from clients

  • Documents to support any checks or expenses paid

  • Bank statement

  • Copies of all cleared checks, front and back

I advise clients that more is better.  It’s better to keep too much information rather than not enough.

Let’s face it, you went to school to practice law, not to do accounting.

In order for you to bring the most value to your clients your time is best spent on client matters, business development, and training staff.  Not paperwork and accounting.

You should understand the trust accounting rules because, ultimately it is the attorney’s responsibility, but you shouldn’t be doing the day to day accounting.  Consider the benefits of outsourcing your law firm accounting. You will be able to focus your time on what matters and while experts care for your business, which leads to happier clients and more profits!  

Here’s more information on outsourced accounting services.  

Aligned CPA helps service professionals run better businesses. We’d love a chance to talk and see if we would be a good fit for your firm.  Contact us for a consultation today.


 Joy Lizotte, CPA

Joy Lizotte, CPA

About Joy

I help service based businesses GROW by providing accounting and growth planning services that will take their business to the next level.

I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease. 

Understanding Your Financials

sharon-mccutcheon-556371-unsplash.jpg

When growing a business, one of the most important things you can do is understand what your financial statements are telling you.

Understanding your financials will help you spot trends, make decisions, and be more profitable because you will be more proactive in making changes.

Here’s an overview of three of the most informational financial reports. We recommend viewing and analyzing these reports at least once a month, if not more often.

Balance Sheet

This is a snapshot of what your company owns and owes at a specific moment in time. Your balance sheet contains critical information about the financial health of your business.

What your balance sheet shows:

  • Assets. An asset is what you own

  • Liabilities. A liability is what you owe

  • Equity. This is what is left over and due to owners

Income Statement

This statement, also called a profit and loss statement, is an essential part of gauging the operating performance of your business. It is a detailed statement reporting the various expenses of running your business, showing the net profit you made over a specific time.

This statement can provide a lot of information to you such as gross profit, net profit, what you spend in certain categories, etc.

The most valuable information can come from trend analysis where you are analyzing changes over time. This can show when sales increase or decrease by month, or if net profit is trending up year after year., etc.

Seeing and reacting to trends can be profitable. This is why it is crucial to have accurate accounting records.

Once you have been in business for a few years you can use past records to create accurate projections of profits for growth for the future. These projections can serve as goals for your business and help you review your income trajectory throughout the year.

Accounts Receivable

The A/R Aging is a report that lists unpaid customer balances by date range. It is used as a tool to identify which payments are overdue and haven’t been collected.

Additionally, this report can help you identify bad debts (we hope you have none!). Always try to keep debts in the 0-30 day bracket because the chances of collecting this payment get lower as you move right through columns. Or, change up your accounting policies where client’s pay upfront. Then you’re never chasing money!

All of this may seem like a lot to take in. It’s okay for it to be daunting at first, however, with a little bit of time and help, it definitely gets easier. I recommend making it a priority to review your financials regularly, ask questions, and make sure you understand what story they tell.  

 

Aligned CPA helps service professionals run better businesses. We’d love a chance to talk and see if we would be a good fit for your firm.  Contact us for a consultation today.


 Joy Lizotte, CPA

Joy Lizotte, CPA

About Joy

I help service based businesses GROW by providing accounting and growth planning services that will take their business to the next level.

I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease. 

How to Know if Your Bookkeeping is a Mess

Tech- computer.jpeg

Messy bookkeeping is a common occurrence we see in business. Usually the business owner has attempted to do the bookkeeping themselves or they’ve hired an unqualified bookkeeper.

No matter how it happened, it’s good to realize  the current state of your accounting and get it on track.

Messy books are a huge frustration.  You can’t make informed business decisions, you’re running a business blind, and you’re always caught off-guard come tax time.  Just because you know how much is in your bank account, doesn’t mean you know if you’re making money or not!

It’s costing you money, time, and anxiety!

Aligned CPA serves many accounting clients in the professional services industry.  For our clients, we setup a web-based system so the client and our office have access, categorize income and expenses into correct accounts, reconcile bank accounts, and many other functions.  Using our firm allows you to have peace of mind that your bookkeeping is getting done, correctly and timely, and at a fraction of the cost of an in-house bookkeeper.

If you’re unsure if your bookkeeping is a mess or not, look at these items:

  1. It’s been over 3 months since your bank accounts have been reconciled

  2. You can’t run an accurate Profit & Loss statement

  3. Your Accounts Receivable aging report does not accurately show what your customers owe you

  4. Your Balance Sheet doesn’t show the correct balance of your bank loans

  5. You don’t know what your break even point is

  6. You have no idea how much you had in Sales this year compared to this point last year

  7. You don’t know how much you owe your vendors

  8. You haven’t issued 1099s to vendors (did you know there’s a $530 IRS penalty for not complying with this!)

After going through these items you should have a good idea if your bookkeeping is a mess or not.

I know bookkeeping isn’t exciting to you, but it is important.

It can help you make better decisions and be prepared. You can monitor where your money is going and make changes that add up.

What’s next?

We can help.  We can meet with you, gather documents, setup a system, and get your records cleaned up.  We’ll guide you along the process and make it as easy as possible. Contact our office today for a consultation.


 Joy Lizotte, CPA

Joy Lizotte, CPA

About Joy

I help service based businesses GROW by providing accounting and growth planning services that will take their business to the next level.

I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease. 

Measure What Matters

alvaro-reyes-517391-unsplash.jpg

With technology at your fingertips you can measure almost anything. It’s what you do with that information that really matters.

If you are a service business, measuring and monitoring your Key Performance Indicators (KPIs) will help you determine if you will hit your business goals.  By tracking KPIs you know well ahead of time if you're on target. 

You may ask, why not just look at my Profit & Loss statement? Financials report historical information.  You can't go back and fix what went wrong.  By tracking KPIs you can make changes well before you would see the results on an outdated Profit & Loss. Think of it as your KPIs produce the results on the financials.

So what metrics really matter? We recommend viewing the below metrics on a weekly or monthly basis:

Utilization = Billable hours / Available work hours

Realization = Actual Billed hours / Billable hours

Collection = Actual Collected revenue / Actual Billed hours

Here’s what each of these KPIs can tell you.

UTILIZATION

Overview:  Number of hours marked as billable compared to the number of hours you were available to bill

How are you spending your workday?  Are you, or your staff, bogged down with administrative tasks?  You can tell based on your utilization rate. If you’re constantly getting to the end of each workday realizing you’ve gotten very little client work done, you have a utilization issue.

Constraint:  Time Management

How to Fix:  Look at your days and determine what you can automate, delegate, or outsource.  Automate your meaningless tasks that technology can handle, delegate what isn’t making you money, and outsource what needs a higher level of attention.

In our firm we automate the prospect phase.  When a prospect is interested in working with us they complete an online form. Based on the form responses, it generates an email with a link requesting the prospect book on our online calendar.  It also sends their info into our CRM and workflow system. ALL of that comes from the bots inside my computer!

REALIZATION

Overview:  Billable hours worked that are actually billed to a client

When you are under billing there can be several causes.  Generally, you are spending too much time on a client matter.  Is this because you didn’t know the topic well, you have constant distractions (hello email), or there are other interruptions in your office?

Constraint:  Efficiency and Time Management

How to Fix:  Use time blocking in your day.  With time blocking you block time off on your calendar to work on specific tasks.  You don’t let others interrupt you and shut off all distractions (put your cell phone away!).  

Realization rates are usually higher in firms who have niched in a specific area.  Niching allows you to become the expert in the matter, which in turn means you can finish each client matter faster. You no longer have to allocate time to learn the specifics of different industries or areas.

Law firms that are niched in an area of law make more money and are seen as an expert over attorneys in general practice.

COLLECTION

Overview:  Of what you actually billed on an invoice, what was actually collected

This is always the worst!  You’ve done the work, billed the client, and now crickets.  The wait is on.

Constraint:  Processes

How to Fix:  Look at your collection process.  Should you consider collecting a higher retainer?  Progress billing? Or is there a way you can require the client to pay when the service is delivered.  

If your firm has a low collection rate, consider reviewing your client selection process.  Not all clients are created equal! You would be better off with less clients than with lots of clients that don’t pay.

After understanding these KPIs you can see how you are leaving money on the table and how even a little improvement in each area could have a huge effect on your bottom line.  I’d recommend looking at these metrics over a rolling 12 months. See if you can pinpoint the missing link. It could be a process that needs to be implemented, better time management, new technology, or extra training for your staff.

 

Aligned CPA helps service professionals run better businesses. We’d love a chance to talk and see if we would be a good fit for your firm.  Contact us for a complimentary consultation today.


 Joy Lizotte, CPA

Joy Lizotte, CPA

About Joy

I help service based businesses GROW by providing accounting and growth planning services that will take their business to the next level.

I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.