“It’s a mess.” When we first meet a lawyer who owns a small law firm, this is often what they tell us about the state of their bookkeeping. We know some small law firms who have just accepted their fate and believe this mess is the only way to handle their financials. Fortunately, a mess is not impossible to get out of and it can be turned around, so we encourage you to NOT be satisfied with a messed up or broken system for bookkeeping. It’s adding to your stress, costing you time and money, and limiting your opportunities to succeed. Here’s how to fix your law firm accounting mess.
Step 1: Find Out If Your Law Firm Accounting Is A Mess
Determining if you have a mess is the easy part. Chances are you’re already well aware of the mess. If not, these are some common indicators.
- Thinking about talking to your tax preparer makes you want to cry
- Your tax preparer thinking about talking to you makes him or her want to cry!
- You have a stack of paper and receipts on your desk
- You can’t pull a Profit and Loss statement on demand
- You use a practice management system or invoice system, but it has no integration with an accounting system
- You are doing double-entries for your transactions
The list goes on and on, but for most attorneys with an accounting mess, this is your reality. You’re looking backward, playing catch-up, and you never have a true sense of where you stand financially.
Many of you are aware of the accounting mess, but aren’t exactly motivated to fix it because of one of three reasons:
- You believe that’s just how it is and have accepted it
- You believe it’s too hard or expensive to fix the mess and would rather not deal with it
- You haven’t yet been burned by the negative outcomes a messy accounting system can have on your business
Let’s break down the true cost of the mess and how it’s negatively impacting your business today. Then we’ll get into how to fix it, and hopefully you’ll start to prioritize making a change. Here are 5 reasons your bookkeeping mess is killing you:
1. It is costing you money
With a mess, things will fall through the cracks and you will lose money. At Kahuna, we often dig through a client’s finances and find invoices that were never paid from long ago. It also costs more money at tax time when you aren’t able to get strategic advice and you spend money on getting the mess cleaned up.
Cleaning up your law firm accounting mess will not only help ensure that all money owed is accounted for, but also that you’re maximizing your tax deductions and avoiding unnecessary expenses at tax time.
2. It is costing you time
This is the most obvious, but when you have an accounting mess, you spend more time chasing paper, entering data and trying to figure things out. This is time that you could otherwise be spending working with clients, networking to generate business, or simply relaxing and enjoying life.
3. It is raising your anxiety
When you don’t have a good system in place for your bookkeeping, your anxiety can go through the roof. If you are not using a disciplined approach, you are constantly reacting and playing catch up. The last thing you need as an attorney and a business owner is more stress.
4. It is putting you at risk
We covered this topic in-depth in this guide, but when you have a mess as an attorney you are putting your firm at risk to mishandling funds with trust accounting or your business at risk by falsely reporting revenue. Get a good system and reduce the risk.
5. Your business is suffering
When your bookkeeping is a mess, you don’t have the ability to see your margins or understand what part of the business is performing well, and what part isn’t. This lack of insight puts you at a huge disadvantage because you aren’t able to make informed decisions with hiring, marketing or anything else you do to build your business.
A proper accounting system is the foundation you need in order to know your numbers inside and out, and knowing your numbers is key to the success and continued growth for your business. Here’s how you can fix your law firm accounting mess.
Step 2: Fix the Mess!
With those 5 reasons in mind, let’s hope you’ve committed and said, “I’m tired of this mess, I’m ready to get it fixed, and set my firm up for growth and success. What do I do now?”
Let’s again break this into 5 steps:
1. Start with the proper setup
The reason so many law firms and small businesses currently have a mess for bookkeeping is that 99% of them never got started correctly in the first place. When you start off with a messy, disorganized approach, things are only going to get worse over time.
The first step in getting on the right track is to simply stop what you’re doing, and start over. That might not sound like the easiest fix, but your accounting system has to be built on a strong foundation, just like a house should be built on rock instead of sand. You need a new system with a clean slate and to start rebuilding the transactions. How to get the proper setup will be covered in the next points.
2. Use good tools
Attorneys are likely very reliant on a practice management system. Many of the attorneys we work with love using Clio to manage their matters and better serve their clients. Clio has some built in trust accounting and bookkeeping features to help manage your accounts.
If you don’t use Clio, or even if you do, you should also think about implementing some type of accounting software to setup and document all your transactions automatically. Some good options are covered in this guide on the top law firm software products.
You need to get into an accounting system you are comfortable with and that works well with the practice management system you are using. Invoicing is not enough. If you’re using Clio, you can integrate it with Xero for a comprehensive financial solution.
3. Create a chart of accounts
One of the most important steps when you are implementing your fresh accounting setup is to create a chart of accounts in your system. Your chart of accounts is the structure of your business’ accounts, which you will use to book transactions to the proper accounts, and keep organized financial records on where all they money is located in the system.
Having a proper chart of accounts is particularly important for attorneys due to strict trust accounting requirements, so be careful about setting this up properly to avoid committing any ethical violations.
4. Reconcile regularly
With the proper setup in place, meaning you are using accounting software, your bank accounts are integrated, and you have a chart of accounts, you are already way ahead of the game. It’s all downhill from here.
Now the goal is to regularly reconcile transactions so your financials remain up to date and you have useful information from which to make good business decisions.
What this means is you need to categorize every transaction and follow everywhere that cash moves. When you receive a payment, you need to tie it to a revenue account and invoice. When you pay a bill, you need to reconcile it to an expense account and tie it to a receipt. These expense and revenue accounts are in your chart of accounts.
Bank reconciliations are something that require discipline and consistency. Many business owners get lost here because they let things pile up. Reconciling your transactions is like doing the dishes. If you do a little bit every day it’s not such a big deal. But if you let them pile up, now you’ve got a real mess on your hands, which is what you’re trying to get out of in the first place.
When you reconcile your accounts regularly, you’ll have access to real-time information and financial reports that are extremely helpful for guiding your business. Plus you’ll have everything you need to complete your bookkeeping and have a smooth, painless tax season by providing the proper reports to your CPA at the click of a button.
5. Get help when you can
Even though the steps to fixing your law firm accounting mess are simple enough in theory, at some point, it’s good to recognize that your time is valuable and it’s not best spent on reconciling transactions.
A best case scenario is to find someone who can do the setup for you, integrate your systems and who will reconcile your transactions regularly and send you financial reports. Outsourcing administrative functions that lie outside your core competency is a necessary part of running a successful business.
But regardless of how you go about cleaning up your accounting mess, the real key is that you make fixing the problem a top priority. The longer you let it slide, the larger your financial mess becomes, and eventually it might seriously impede your business progress and keep it from growing and thriving.
Micky Deming is the Director of Marketing at Kahuna Accounting. Kahuna Accounting serves small and solo law firms all over the country by taking the headache of bookkeeping and turning it into a smooth, helpful part of the law practice.