This post continues the discussion of how to better manage your law firm’s finances in 2015. Yesterday I discussed four ways with which law firms can keep more of their revenue. We talked about how to make better choices in terms of credit card processing and the tax benefits of forming an S-Corp. This post is going to look at an area where I’ve seen many law firms struggle – keeping their accounting straight.
Before we look at how to improve your accounting practices and why you’ll make more money as a result, I’d like to tell you a couple of stories. So gather ’round ye ol’ fire so grandpa Luke can reminisce.
Law firms cost themselves extra money by not performing their accounting on a regular basis
I’ve done quite a bit of business consulting for law firms over the last few years and keeping the books has been a big issue in many of the firms I’ve visited. I’ve seen quite a few attorneys who wait until the end of the year to try to come up with a list of their expenses or, worse, they simply hand an accountant their bank statements at the end of the year and tell said accountant to make sense of it. This has led to some of the following disasters when I’ve reviewed law firm books as part of the business consulting process:
- One law firm had simply handed their accountant all the bank statements – the accountant misclassified a few capital contributions as revenue and the attorney had paid roughly an extra $4,5000 in taxes.
- Another law firm, again, had turned the bank statements over to the accountant and said “here you go.” The accountant categorized quite a few expenses incorrectly and the 1099’s that went out were incorrect as a result. Time had to be taken later to correct this.
- A third law firm had sat down at the end of the year and tried to put all their expenses in a spread sheet. The spread sheet was given to the accountant along with the bank statement and several expenses were missed – more taxes were paid as a result.
None of the above mistakes can be put on the accountant. You’ve heard the phrase “garbage in and garbage out.” Well these attorneys had handed the accountant a pile of garbage; the accountant isn’t the one working at your firm and managing finances on a daily basis and it’s unreasonable to ask them to piece together your finances.
Another big issue which arises when you 1) don’t keep your own books and 2) don’t keep them regularly is that charges you can otherwise get reversed will be missed. Yesterday we were doing our accounting for our business and saw a few charges that would look legitimate to an accountant because they were from vendors we deal with regularly. It turned out that these were automatic renewals for products we didn’t wish to continue. I was able to call the vendors, get the charges reversed, and $779 went back into our bank account. If we were just handing our bank statements over to a book keeper at the end of year, or even at the end of every month, these probably would have been missed. That would have left us looking like this guy:
The moral of the above story is simple – in 2015 you need to be performing your accounting on a regular basis, probably either once a day or once a week at a minimum. These tasks should be performed by whoever is in charge of paying out money on behalf of your firm. This is going to save you money in terms of taxes and will ensure you don’t overpay on your expenses.
Attorneys can improve their bookkeeping by utilizing Quickbooks Online or Freshbooks
Again, whoever is handling your firm’s finances should be doing the books on a regular basis. By doing the books I don’t mean jotting everything down in a spreadsheet. The best software, in my opinion, for any law firm is Quickbooks Online. I discussed the value of this software when I looked at how law firms can better integrate their information systems. While this is the best, and most robust, of the options I will say I understand why many law firms shy away from Quickbooks – it can feel overwhelming to someone who doesn’t have a financial or accounting background.
If Quickbooks Online isn’t your thing then I would suggest trying Freshbooks. This software can be considered as an accountant solution for non-accountants. While it’s functionality is far more limited than Quickbooks, it does allow you to sync up to your bank account, download expenses, and categorize your outflows. It also features options for time tracking and online invoicing. Even using a more limited program, such as Freshbooks, to do the accounting would put most law firms ahead of the competition as long as it’s done on a regular basis.
Do you want to take home more money at the end of the year? Make sure your accounting is performed, at least once a week, by the person who is responsible for the firm’s finances. Also, make sure they are doing so in actual accounting software.
Why do you think so many law firms neglect their accounting until the end of the year? Please chime in through the comment form below.