What does legal accounting involve? How is it different from practice management? What can your law firm do to ensure its financial success? Your path to legal accounting knowledge starts here.
The legal world has many different moving parts that lawyers and law firms have to navigate on a daily basis. Between cases, clients, and negotiations, and the daily ups and downs of running a legal business it is easy to overlook legal accounting. It goes without saying that legal accounting plays a pivotal role for a law firm; it ensures financial integrity, compliance, and efficiency when done well and can jeopardize a firm’s success and reputation when done poorly. Still, law firms don’t seem to re-evaluate their legal accounting applications as frequently as they do other practice management tools.
Let’s start with the basics: when one refers to legal accounting, what does that entail? The general answer is that legal accounting encompasses the management of financial transactions, bookkeeping, compliance and regulatory guidelines, and reporting within the legal industry. Legal accounting differs from other buzzwords in the industry such as ‘practice management’ as its sole focus is on the financial and regulatory health of a law firm, and deals less with client intake and document management. Legal accounting is used in all areas of the legal industry from individual attorneys, to legal departments within other organizations, and has strict guidelines often mandated by governing legal bodies such as State Bars or Law Societies.
A law firm with good legal accounting will be able to efficiently and competently run the following day-to-day and year-end accounting tasks:
As an attorney, you often hold funds in trust for your clients such as advance payments, settlements, or retainer fees. Trust accounting is a fundamental aspect of legal accounting that allows legal professionals - including bookkeepers and clerks - to meticulously track these funds; ensure compliance with legal and ethical requirements; get accurate record-keeping for both business and audit needs; and provide transparent reports to their clients.
When it comes to client matters, your law firm will need to track numerous different financial details including billable hours, flat fees, expenses, disbursements, and discounts. Effective legal accounting systems enable accurate timekeeping and detailed expense keeping so that reconciling accounts is simple and law firms can send comprehensive invoices to their clients.
Law firms must maintain compliance with their local governing body’s legal accounting rules and regulations. Practices with proper legal accounting are able to easily produce the required financial reports and documentation. However, good accounting practices should stop there; savvy law firms should use other financial and productivity reports to check in on their financial performance, and to make informed decisions that will grow the success of their business.
Not every law firm has a dedicated accountant, and the business of running a law firm is not always taught to attorneys. Legal accounting can help practices and individual lawyers manage expenses, track the costs related to a case, formulate a budget for their business, optimize resources, and identify potential areas where costs can be streamlined.
End-of-year taxes for law firms face complex requirements which, if not adhered to, can lead to financial or legal consequences for your practice. When done right, legal accounting is able to make the process of closing your year; producing all your key financial statements; and collecting the necessary reports simple.
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Legal accounting is a law firm’s backbone. While practice management tools focus on ‘front-of-office’ processes such as client intake or document management, only a tool dedicated to legal accounting is able to manage your practice’s compliance, expenses, and trust effectively. Law firms with up-to-date financial information gain an advantage over others as they are able to monitor cash flow, strategize for long-term success, and ultimately maximize their profitability.
Legal accounting systems that can automate timekeeping, billing, and financial processes reduce manual effort and save valuable time; which allows legal professionals to focus more on their core competencies; legal analysis, case management, and client representation.
Want to move your legal accounting to the cloud? Learn about switching legal software.
At the end of the day, legal accounting is an indispensable aspect of the legal profession. Embracing legal accounting safeguards the future of your business. While all law firms must have some level of legal accounting to operate, the performance of your practice’s accounting process can help or hinder its financial integrity, compliance, and efficiency. Now that you understand what legal accounting means within the industry, the next step to a successful legal practice is to evaluate your law firm’s software and tools on how effectively it manages your trust accounting, time and billing, financial reporting, expense tracking, and tax matters.
Soluno is user-friendly, cloud-based billing, accounting and time tracking software made for law firms of all sizes.
Confidently manage your firm’s business all in one place; with matter management, time/expense entry, billing, accounting, trust banking, and reporting that’s accessible from anywhere. Soluno empowers law firms to be more efficient and profitable than ever; combining the advanced features and customizable workflows of on-premise software with the freedom, security, and convenience of a cloud solution.