Bookkeeping, in general, for law firms can be trickier than it sounds, let alone trying to tackle it all at year end. Nothing is worse than spending time during the holidays trying to figure out a year's worth of financials in order to get them to your CPA before the filing deadline. This is true for all small business owners, but especially true for lawyers and attorneys. Law firms, and ultimately the owners, are held to strict compliance standards by state regulatory boards and if anything is out of order during an audit, the law
firm's license could be revoked and the doors forced closed. Some small firms may risk it and go this route, but it's not the least bit healthy for many reasons. Keeping track of the transactions within the Interest On Lawyers Trust Account (IOLTA for short and also called Client Trust Account by some) does require some extra attention since it's not as straight forward as one may think. The last thing a law firm should be doing this time of year is having one of the partners sitting down and trying to make sense of the bookkeeping system instead of going out there and getting new business. The costs of this outweigh the reward.
Stay In Compliance
Law firms are held to different standards with their finances and this can make the bookkeeping that much more tedious. Setting up the books to handle the transactions the right way from the start will be greatly beneficial down the road. Before the books even get started, you need to open an IOLTA specific bank account. Even this step can be tricky because you can't just open a savings account and treat it like an IOLTA account. Not all banking institutions are eligible to offer IOLTA accounts, so it would be smart to do some research to make sure the right financial institution is chosen. That way, the interest that is collected within the client trust account is automatically deducted and paid to the proper agency since the interest cannot stay in this account for more than a month.
The Bookkeeping Gets Complicated
At first, the bookkeeping tasks may seem easy if client activity is low. But as soon as the number of clients increase and their activity grows, things can snowball quickly. Law firms need to collect and hold client deposits as a liability at first and then transition them to income as work is performed. When this work is performed money also has to be transferred from the IOLTA account to the checking account. Depending on what methods you use to bill or invoice your client, this could be several steps within your bookkeeping system to just record income. The management of sales receipts, invoices, transfers, client liability balances, etc. are all very important and can't be overlooked.
Cost vs. Revenue
Though attorney rates vary, I'm fairly confident they are much higher than bookkeeping rates. The point is, wouldn't it make sense to have lawyers focus on growing their firm's book of
business and revenue rather than spend time on the books. This is where our outsourced bookkeeping services can add great value to law firms and their bottom line. I've worked with a few firms that had the light bulb go off when they realized they could be out billing clients well over $100 per hour while we handle their books at a much lower rate. Outsourcing the bookkeeping when the timing is right will reduce stress, increase revenues, and eliminate any errors that may arise from someone not knowing bookkeeping in general.
It's great to have a bookkeeping system set up the right way from the get go. This fosters a healthy financial environment that grows as the firm's client base grows. Between the compliance factors, bookkeeping complications, and costs it should be an easy decision to take a step in the right direction and get the right bookkeeping system set up sooner rather than later.
