A guide to bookkeeping systems for law firms, covering trust account compliance, three-way bank reconciliation, and IOLTA account handling. The speaker explains how to track client-advanced expenses, structure attorney compensation, and use KPIs like billable hours and realization rate. Bookkeepers should act as financial advisors, offering budgeting and forecasting beyond transaction recording.
Chapters
This week we're going to discuss building the better bookkeeping system. So not reinventing the wheel, but building a better bookkeeping system for law firms because they do have their unique challenges. And we really, I really want to share some practical tips for long-term success. Managing finances for a law firm isn't your average bookkeeping gig. It's a very specialized, it's a high-stakes environment where compliance is a non-negotiable. We've been kind of discussing that with some clients lately, because there's been a lot of changes in a lot of the bar rules, and the compliance is getting stricter, basically because some people really took advantage of some of their clients. So the bar is stepping in and really making and enforcing compliance a little more. And this is an environment that is a non-negotiable. So we can't just click reconcile now when it doesn't balance and leave it in the reconciliation discrepancy account. That's a big no-no. So it's important as a seasoned bookkeeper or even a new bookkeeper just to start to support attorneys that have some right strategies in place to make a difference. So we'll start with getting it right from the ground up. We'll start with trust accounting. Oh, surprise, right? Trust accounting is a unique animal. We have to track monies that are put into a specialized bank account called a trust account or an IOLTA bank account. Special bank account where we have pooled money for individual clients that we need to track at any given time what the balance is. And in a, in a particular account, we need to know all the ins and outs to get to that balance that's left. So the separate bank account is key. Money should never be collected in an operating account and transferred to a trust account. That's a big no-no. The bar will call you out on that. So make sure your attorney's not doing something like that. We see them using Square and Stripe and all different ways to get the money, get paid instead of using like a Gravity Legal or Confido, actually it's called, because you wanna stay compliant. It's really important that the money lands in the, uh, uh, IOLTA bank account and that we track those funds using a trust liability account showing how much is held for each client. Don't forget there's a 3-way bank reconciliation. And it's funny, when we get a new client, I'll say, can I see your last good 3-way bank reconciliation? And they have no clue what that even is. So a lot of attorneys are flying blind out there without that document. It's a very important document to have. You have to have it for compliance. The, a bar audit will ask for that document to know I had $10,000 in, in the IOLTA bank account and I had 10 clients with $1,000 in that account that equals that $10,000. And that's just a really so high-level snippet of what you would see. Obviously the amounts will be different and it's going to equal to a different amount at any given time, but the balance in the trust account minus any transactions in transit in the bank is what you're going to be balancing to. The balance on the trust bank account in QuickBooks has to match that balance in the trust bank account. Just reconciling IOLTA does not cut the— cut it for that piece. And then you need to have that liability expanded out with how much is in each one, that if you collapse it up, those numbers align. There's your 3 ways. So— You want to track that, and you want to make sure that that's— if it's not correct, you want to dig in and fix it. Now you want to track your client costs in the advanced client cost. It's called client advanced cost. I've heard multiple ways it's described. Most— sometimes you're gonna see clients using billable expense, billable income. That's the old-school way. They really should be putting in an advanced client cost. It's kind of a clearing in and out. They don't make any money off of it. They are loaning their client a mini loan on advanced costs that they then bill back. So you want to make sure you handle that correct— correctly. There's a code in the IRS that kind of spells that out for lawyers. But also, if you're working with PI firms, I've seen it where we've actually blown out that, like, a trust liability, because some of those go on for years and years and years, and you really want to track those costs to the penny. So that when the matter's resolved and the court case is won, the attorney recoups all that money and it doesn't get lost in the shuffle. 'Cause the attorneys are spending their own money on this stuff or they're getting a loan, and that's a whole nother conversation. Uh, you want to streamline any complex attorney compensation. These are the conversations you're going to have with the attorney when you meet with them in the initial call. Find out how they're paying their attorneys. Is there a bonus structure? Do you have some kind of a side spreadsheet with this in it, or is it just straight up the, the partners take a draw? The work of the attorneys that are on staff are salary, they're getting a paycheck, or are there performance-based bonuses? Are there reimbursed expenses that you're gonna be dealing with? And then you wanna work on a workflow for that. These are things you're gonna face with a law firm. So you really want to understand how that's going down in the firm and what processes are currently in place and maybe how ways you can make that better. Mm-hmm. You want to definitely customize your chart of accounts and give it some clarity. You want to have a trust liability for each trust bank account. You want to see those closest client disbursements in the trust account. You want to have matter-specific income and costs. As they earn the revenue of doing the law firm work, that's your legal fee income. You want to see that. You want to see the costs coming on there, any soft costs. You want to have that come in as billable expenses and actually soft costs would be whatever you paid for, whether it's postage or whatever, and then you're going to book that in as billable expense income. But tailoring that chart of accounts for a law firm is important. There's a few other accounts that you're going to need to make sure they have, like bar dues and things like that, that are a little bit different than regular clients, but you want to have those in place. Track matters using— you know what to track is you want to track some legal-specific KPIs. Perhaps some of our favorites are billable hour, hours versus actual hours worked. Now, you're going to do that in that external software like the LeanLaw and the Clio. Uh, realization rate, what's billed versus what's collected. Client acquisition cost, important. A lot of times people don't track that. They track how many clients are coming in, but they don't track how many became a client. Like that whole process that you can get with like a Clio Grow, um, is something you could do. And then the case profitability, what practice area is making more money? So these are insights that can help guide decision-making. For your client in the long run as you start to strategically help them navigate the waters of their goals, set some goals, look at their profitability. How can you tweak their workflow to make it better? And really, you want to look at becoming that trusted advisor. Oh, how I don't like that saying. But you don't wanna be labeling yourself, oh, I'm just a bookkeeper. That's another saying I don't like. We just recently met with a tax person coach who was like, let's just bookkeeping. Yeah. And if it's just bookkeeping, how good is it if it's bad? So I've seen plenty of bad bookkeeping with attorneys. So it's not just bookkeeping. We offer a high level of service, and that's not to be lost in all of this. You can help your client with budgeting. You can help them with forecasting. You can help them with cash flow and help them improve their cash flow. You can help them navigate client costs and streamline some operational inefficiencies. So you start to work with the client and find out how maybe certain areas are being— Mm-hmm. Worked on. Accounts receivable is a real big one. If do they have a team working on accounts receivable, how is that being managed in the firm? So when you take that proactive role and go, you go about being more than just a bookkeeper, you become a valued member of that extended financial team. And that's important. And get involved with working with that tax professional, even if he insults you and says you're just a bookkeeper. So definitely do that. I see a lot of coaching programs and coaches out there that I don't see where they're offering a lot of value to the client other than making the client do a lot of work, making us do a lot of work. But I don't see on the other side of it that the client's making any more money. So if you see that, try to connect yourself with a firm that's gonna help your client grow, and one that respects you. That's so important. So you may have to work with somebody that doesn't really fit your demographic or your mindset of being the person that you are with your firm and offering that high level of service. But sit with it, find a good team that you can, that can support you, that will work with you on the financial side, maybe a good tax firm, and then see if you can grow from there. That's what we've done in our firm. It's been very, very great relationship. So the best legal bookkeepers keep the books and help build systems and workflows and spot risks and fuel intelligent decision-making. So by sharpening those trust accounting skills and those client-advanced law skills and helping them customize their system and giving them really meaningful metrics, you're gonna help that law firm thrive with clarity and confidence. So if you found this interesting, please join us, Accountants Lala. We have big decision— we have big meetings on and all sorts of topics just like this. And on that note, we'll see you all next week. Bye now. Bye.
