Running a legal practice can often be an all-consuming job; with so many cases, clients, and court session to attend, attorneys can often overlook the importance of looking at the nuts and bolts of their finances and end up in less-than-ideal financial quagmires. At the end of the day, your legal practice is a business, so it should be a profitable one at its core.
From CPA Solution’s working experience with various law firms, we have noted a few key areas that all law firms can review and improve on to reduce their costs while increasing profitability.
Integration of Billing and Collections System
At most firms, law practice management and business accounting are two separate systems and in many cases, the same data needs to be entered twice. This means that every time a transaction is entered or edited, it must be done in both systems in separate instances. Doing it this way allows for plenty of avoidable human errors.
To fix it, there are two solutions to the problem:
- Keeping business accounting and practice management in one system so the data will only need to be entered once, reducing costly errors and time spent on data entry in the practice, OR
- Integrating the practice management system into the accounting system through automation. While you will still be operating with two systems, integration eliminates double entries caused by manual input. Controls must also be in place to reconcile the two systems.
Tracking Income by Practice Area
Determine which case types produce the most revenue and where the firm should invest its marketing dollars. By doing this, law firms will also be able to identify which practice areas are contributing the least and are potentially deadweight.
Allocating Costs Properly
Allocating direct costs to matter files as they are being spent helps to build a clear picture of your expenses and where your revenue is heading to. It is also important to make sure expenses are billed at the appropriate time (the earlier, the better!), helping you account for all overhead costs more effectively.
Staying Compliant with IOLTA
In most states, IOLTA (short for ‘Interest on Lawyer Trust Accounts’) accounting is mandatory and regulated. Law firms across states must maintain compliance with IOLTA accounting regulations as it is a major component of maintaining and managing a successful law firm.
These are the three areas you should keep in mind to make sure your law firm is compliant with IOLTA regulations.
1. Co-mingling of Funds
Avoid any type of co-mingling, be it client to client, client to law firm funds, or clients’ multiple matters co-mingling. You cannot use an IOLTA account to pay for your company's running expenditures as you would first have to transfer the cash to a company account.
2. Three-way Reconciliation.
Depending on what state your law firm resides in, firms are required to perform a three-way reconciliation every 30 to 60 days. To make this process more efficient, firms should utilize technology that allows this process to be automated for ease of mind.
3. Own the Compliance Process
Don’t take the easy way out and pass compliance issues to internal bookkeepers. As a successful firm, it’s considered bad practice. Your firm’s ability to practice law should not be compromised.
This means that to remain compliant, legal-specific tools and professionals that are experts in your industry are necessary.
Efficiency, profitability, and prosperity can be achieved by any law firm. But to get there, you need commitment, consistency, and alignment with other professionals that have the skills and experience in the legal industry. CPA Solutions can provide you with a free 30-minute consultation to help your legal firm learn more about its financial standings and how it can improve.