Law firms must maintain accurate business records and follow ethical guidelines and legal requirements like any other business. However, the financial regulations and laws governing law firms are much stricter and require them to maintain top-notch accounting practices to ensure compliance. Failure to comply with legal regulations could result in financial penalties, a suspended law license, or even disbarment.
Most lawyers and legal professionals are not trained accountants. They require assistance from certified accountants with a specialization in law firm accounting. Specialized law firm accountants serve an invaluable role in enhancing the efficiency of law firms so that they can grow and better serve their clients.
Below are the top six ways that accounting can improve the efficiency of your law firm.
1) Tracking Billable Hours and Expenses
Accounting allows law firms to track billable hours and expenses accurately. Law firms must track this information to create accurate client invoices and maintain accurate revenue statements and other critical financial data. Doing this allows law firms to calculate their earning potential better and avoid lost revenue.
Specialized law firm accountants possess the software and skills to track and maintain records of your law practice’s billable hours and expenses. It will improve the efficiency of your law firm by helping you avoid unnecessary client invoice disputes and potentially costly and lengthy collection pursuits. Avoiding billing complications can help your law firm receive its owed revenue faster so that it can grow and prosper.
2) Digital Document Creation and Storage
Lawyers and legal professionals are often too busy to upgrade their computer systems and software applications to improve the efficiency of their operations. So, they must depend on accountants to do that for them. Specialized law firm accountants use state-of-the-art legal accounting management software to create, manage, store, and send digital documents.
Accounting management software lets you digitally create and store as many financial documents as possible. Instead of looking through a filing cabinet filled with thousands of paper documents, you can find and access a particular document within seconds. That is why going paperless is one of the easiest ways to boost the efficiency of your law firm. What used to take several minutes to find documents now takes seconds. Think of how much time and energy that will save your employees.
3) Create Accurate and Reliable Financial Statements
Law firms benefit more from double-entry accounting, where financial transactions are recorded in debit and credit accounts. The benefit of double-entry accounting is that it verifies the accuracy of each recorded transaction by ensuring they balance in both accounts. This accounting system has been proven effective in preventing inaccuracies and allowing law firms to track their revenue and expenses better.
In addition, your accountants will create balance sheets, income statements, and cash flow statements to reconcile both accounts with these financial statements. A balance sheet outlines your law firm’s past or present liabilities, assets, and equity. Subtracting the firm’s liabilities from its equity will give you its total assets.
Law firms must understand their financial statements because they enable them to make better and more informed financial decisions in the future. Financial statements can tell you whether your law firm is profiting or losing money based on its financial performance. If it is losing money, you can create a comprehensive financial plan to reduce expenses and losses and increase gains and cash flow.
4) Complying with Trust Accounting Regulations
Law firms must use the trust accounting method to manage and track their clients’ funds after depositing them into trust accounts. You use trust accounts to keep your clients’ funds separate from your law firm’s primary funds after clients pay your lawyers for their services. Separating the accounts makes it easier for accountants to keep accurate financial records and comply with trust accounting regulations.
Clio’s legal and trust accounting management software simplifies the trust accounting process. It can track trust and operating accounts, generate legal trust account reports, generate client statements, and create legal invoices showing the remaining trust balances.
So, whether you use this software yourself or hire specialized law firm accountants to use it for you, your law firm will save time tracking and managing its trust account funds. And, of course, you can rest assured that you will remain in compliance with trust accounting regulations.
5) Preparing for Potential Tax Audits
An unexpected tax audit could devastate your law firm if it does not keep accurate, real-time financial records. Accounting can ensure you maintain accurate financial records and comply with all relevant local, state, and federal tax laws. That way, you will be well prepared to deal with a tax audit if it ever comes out of the blue.
An unprepared law firm could suffer significant financial penalties and instability if they do not have accurate financial records to back up their tax return information. Some law firms risk ruining their reputation if tax audits reveal too many inaccuracies or discrepancies in their financial recordkeeping. Fortunately, you will not risk letting this happen to your law firm if you have specialized law firm accountants maintaining your financial records.
6) Consistently Look for Growth Opportunities
The best law firm accountants will maintain accurate records and periodically review them every week or month to look for new growth opportunities for your law firm. Since you and your employees are busy managing clients and their legal cases, you probably won’t have the time to study your law firm’s financial data in depth. That is okay because you can leave that responsibility to your accountants. They can inform you when new growth opportunities emerge.
Conclusion
Your law firm must obtain specialized accounting services to enhance its efficiency, grow, and serve its clients better. Good accounting enables your law firm to prepare for tax audits, maintain accurate & updated financial records, track billing hours & expenses, and stay in compliance with all legal regulations. With all these benefits, you should see your law firm become more efficient.
Comments