Class Accounting

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhardt.

Hello everybody, welcome back. Hi Lynda and Sarah, how are you today?

Hi Steve. Hi Steve, doing pretty well.

Good, good.

So we're going to talk about you being the class clown, is that what you said we were talking about?

I'm going to be the class clown today, yes. We're recording this in the holiday season. And it's December. We're coming up to year-end and it's the time of year where sometimes clients want a little more data and they want to go a little bit more granular with their information. And so today's subject talks about that and it's class accounting. What is it and how to use it and what do you— what's the end result? What do you get from it? So who wants to kick us off on—

We charge more for it.

Yes. Yes.

A lot more because it's a lot more work.

It's like having a second set, a subset of books, if you will.

Yeah, it depends on what you wanna track, right? I got a better question.

Do you turn the button on that says remind me if I forget to do the class, or do you shut that off?

No, I, I have it turned on.

I do too.

Yeah. So that's on some softwares. Other softwares, what I do for, um, is location. So I have two, two basically, um, you can't do that in QuickBooks, but in Xero there's I have two dropdowns essentially that I pick.

Yeah, because people, people get confused over location in QuickBooks and class accounting because class accounting, you hit every line. So if you want to do different locations on like an invoice or whatever, I'm sorry, not locations, classes, you can. Location is that one fixed, fixed place.

So you only get to pick one for whatever the transaction is.

So that's the difference. And I think with lawyers, we use it more for tracking partners, like who's makes more money. You can run a profit and loss by class report.

What about location by offices, Lynda? We do that sometimes.

Yeah, we do that too, by offices. Yep.

But by offices within the law firm, is that what you're talking about?

Yeah.

Like if you have like a, a main subset, right? And you got different locations, different states.

Oh, okay.

That's at the invoice level. That you would do that?

We've got one law firm that's tracking their classes. They like it really granular, and I like it that they do because it's really appealed to them and they really pay attention to their numbers because we're doing classes and they are using it to allocate by employee. Like if they purchase literature about some subject for the law library, but it happens to pertain just to the one attorney's cases. They're actually classing it to that attorney so that they can get that cost by attorney, by type of law that they're practicing, by, you know, it kind of gets really granular. But at first when we set it up, I was a little worried and it actually has worked out really well because we just sail through the financials now. They are so happy with the information that they're getting. And this firm is saving money in their savings account. They're managing their employees by the classes. There's, you know, there's a lot of benefits to it that they're taking advantage of. And I don't mind doing the classes. I really do. And, you know, we don't class things like when the Gusto transactions, Gusto payroll transactions come through. Yeah. And it's, you know, a payroll liability entry, we don't class that obviously, but we will class the expense items and the income items and break it all down that way.

You bring up a good point that Lynda and I often will discuss with people. So the Gusto thing, for example, just any integration, you get ledger lines down each way.

Right.

And we call the classes the accordion. Right. I like that because it is like an accordion style. But Lynda, I'm trying to remember.

We had one, remember, Sarah, that was like literally went on page after page after page. It was so big.

But didn't we have to do like a parent and a sub, like we had parent and subclasses or something?

Yeah.

Which was a lot more detailed because you— I could see where you could do that, I guess, by location too. You could call the location the state and then have attorneys under. But you have to put a lot of forethought.

And you have to lay it out.

Yeah.

You have to lay it out. And you also have to teach the client, the attorneys, if you will, that what you're setting up for them, they've got to live with for a while.

Yeah.

You know, you can't change it mid-course. It's kind of like when you do the budget. Just because you have a surprise in June doesn't mean you go and change the whole budget for the year. You budgeted this. And now this thing that happened in— you know, this thing that you said that happened in June is an anomaly to the budget. You know, same thing with classes. You've got to— you can't get so granular that you're worried about who's using what pencil where, you know.

Yeah. And this is the time of the year, too, when you're starting to review all the records overall for the year. You need to run that profit and loss by class report and see if there's any classes that are unclassified. Because that means you need to move it, which the reclass tool can handle pretty quickly. But a lot of times, I mean, that's just simple, happens really fast, dumping it out of the bank feed. And, you know, somebody ignored the warning that you didn't put something in, or they don't have the warning on at all. I've seen people—

We look at that monthly, part of the month-end close.

It's like— Yeah, it should be monthly because it's a lot of work when you get to the end. But sometimes you're looking at the end of the year and you're like, oh, there's a whole bunch of stuff not classified here. We have a client that does the class tracking internally, and I run the reports for them quarterly, and half of the stuff isn't classified at all. And they're not diligent about it. They're just kind of lackadaisical about it. I don't know what's the purpose of doing it if you're not going to— Exactly.

Yeah.

If you're going to go in half—

Yeah.

You know, you are going to find that you're going to get that for your data back. You really don't want to have it. I mean, we do it. I do it for my apartments, my condos, because they're all different. There you go. Locations. So one company owns 3 locations and I have run 3 separate P&Ls just on the specific location. Did this one make a profit? Did this one have a loss? Overall, it's all the same company, but they have to see it that way for on the tax return because they depreciate everything differently. They're run like little separate. And if I'm selling one, of course, the person buying it want to see— they don't care what I did at the other buildings. They only want to see the one that they're buying. No.

The benefit, Lynda, like for us to talk about the stuff that goes down the row versus across the accordion, the benefit is that you have one ledger line, right, to put everything in. And then you, like you're saying, that visibility, that's why you would use class. That's an example of why a good class would— classes would make sense to your point.

It's a perfect example. It's the one that I think is the main one that I've ever seen or used for businesses. But also we see it with attorneys that they want to know, like if they have multiple offices, Yeah. They want to know which office is more profitable. That's very eye-opening sometimes. They usually generally know it, but they know it by their checking account balance. But sometimes it's just to see it in black and white. Would you run that profit and loss by the location? Then you're going to see it, which is sometimes you use classes for that. And sometimes they do it for practice area. I've seen that too. But that's a lot of, again, a lot of work for what? If you're going to do that, you should have Clio turned on and have Clio's class location.

Practice area tracking. Yeah, you would do locations inside their product to your point. Yeah.

Yeah. And then how many places do you need to do it?

That's true. And then they can bring over, like to your point, Lynda, they'll bring over either line item of an invoice, timekeepers, if that's— because we've seen that in a lot of the eat what you kill or some sort of model to understand production. So we oftentimes will see that data come out to see it against the regular revenue of a full set of books, hours, and all kinds of stuff. So the production— but would you— let me ask you this question. Would you all class track trust?

I can't think of— off the top of my head.

I only ask because I can see when you're a kind of a new bookkeeper. I can see you going down that road.

I'm glad you brought that up.

Yeah, yeah, yeah. But I think Lynda said it, for what point, to what end?

Right. And then also, I mean, we've seen it too. Remember, Sarah, we went into one set of books and we're like looking, it had class tracking. We're looking at it and we're going A, C, B, D, and then we see Brian Denning and, you know, Yeah, she's just something or other. And I'm like, oh, that's the same people. Then we had to merge things to clean it up because they actually had— sometimes they put initials, sometimes they put the full name, and they had multiple classes that were the same. Or we've also had it where people— the attorneys were tracking by attorney, and then the paralegal does some billing, so we have to do the sub-class for the paralegal. So that's been another case of you get a class and a subclass that you're tracking it all under.

I guess the point is to to what you both were saying is the value of why you're doing it and what is the gain in the end?

Right, what's the value?

What value does it—

And you know, one of the things that it does help prevent, which I think is a plus, is that it keeps those attorneys that like to get really granular on the P&L itself from causing that to happen.

Yeah.

You know, you don't have, you know, where they like to use names of people on the P&L.

Yeah, we all have names.

Yeah, yeah, yeah, yeah. And so if you can encourage them, okay, You really need to know why, you know, again, what's the end result? Why do you want to do this? What does it mean to you? What are you going to do with it? And what accountability is it going to cause in your business? And if you can sell it that way, when that subject comes up, it really makes them stop and think. And it does help prevent from ending up with a really messy P&L and balance sheet.

Yeah, we've all seen that.

We've seen that P&L with the names on it and we're like, Why are all your employees' names on your profit and loss?

New attorneys generally want to do that because they don't understand that Lynda, Sarah, Steve, Tiara should not be on the P&L report.

Right. What will a bank do when they look at that?

Exactly. A lender, you know, an auditor, you know, that's not where it should be.

Practice area is another one. I'm thinking out loud here. Practicer is another one we sometimes see going, you know, down the list.

Down.

Yeah. But a lot of times you could do it by— you could take that revenue and just—

What are you going to get out of that though? What are you actually classing? You're classing the invoices and the payments. You're not classing client fees because those are in and out. And I don't know why you would go all that work. Just turn it on. First of all, have the software. That's number one.

Yeah.

Make sure you have software and then do it there so you can run it there and not in your accounting, that you don't really need to have it in your GL. You just don't.

That's— I said that, so she gave me the good response that I was looking for.

It's true though. It's true. You don't want to have this. No. What's the— what are you looking to accomplish? Because you can get— it's kind of like the KPIs. Are you going to go crazy with the classes in the or the tags. Remember when tags first came out, Sarah?

Right.

People were tagging everything. I'm like, I'm getting things tagged. I see Staples. I'm like, why does this say— what's this tag Staples? What are you trying to do?

Yeah.

And then they try to take them away. Did they ever take them away fully? I think there was a big uproar and they didn't.

Well, some people really relied on them. And like, if we look at A Ledger of Zero, it's categories, which, you know, you, you have like It's a similar idea. You can do that work. I see that for valuable— for example, you know, similar to classes in QuickBooks. But you could also do it at the— you know, if you're a real estate person, let's say, or if you are actually a legal firm that offers real estate advisory and/or, you know, law, and you've got different categories because there's, you know, if you look at real estate in and of itself, it's sort of large. You've got a whole bunch of different clients in there. You don't just have residential and homeowners, you also have, you know, other types of, um—

But that's a good use case if you work with a contractor, residential and commercial. So you know how many jobs you did is residential, how many jobs you did commercial.

Well, and you kind of need that for— it's Going back to the value of that, you would need that actually for your general liability insurance.

Yeah.

Especially if you're a contractor because they want to know what types of buildings you're on at a certain level that becomes a different style of an insurance.

Yeah.

And I guess in, in that regard, if you're looking at the risk exposure of things as a law firm, how many practice areas are you in? Or within the area that you're in, what is the sub-niche? Does it make sense to track that?

Well, this is, this applies especially to younger law firms, the startups, the ones that get out of law school, they might practice individually for a while and then they join up with somebody and then that joins up with somebody and so on. And it's going through all those gyrations. That's where class accounting by practice area is so cool to use because it'll identify where the holes are, where the, you know, the window's open and the money's flying out versus the solid law practice that you have going on, whatever that is. Yeah. You know, maybe personal injury isn't something you want to do, but you want to do a little more immigration or a little more family law or what have you. That's— classes really help out with that.

Yeah, the multi-area.

Do you have a lot of clients, Steve, with class accounting?

Not a lot. I'm actually consulting with one tomorrow that I think it's two different attorneys that are joining up. And from what I've seen so far, I'm like, hmm, that might work for them. You know, I'm going to be open-minded about it and see where it goes. Because they've already provided us with a list of things that they want to do, which aren't really conventional. So I'm looking forward to having that discussion with them and what's the purpose? What are you going to get at the end of this? And it looks like an eat what you kill situation.

Well, there you go, kids. There's the tip. Unconventional, go to Steve. No.

Standard and boring, come to Lynda Artesani.

Pretty like—

No, I'm kidding.

Yeah, that's—

I thought you liked me.

All family law goes to Steve.

Oh man. I do, I can see where, as you both were speaking about this, is if you're trying out a new practice area and you want to track it.

Yeah.

And you want to give yourself like, you know, a class for that so that you can understand how many dollars you've spent towards it. I can see where that's valuable, but I, I feel like what you both said in the beginning, you gotta want to commit to something and see it through versus like Lynda, your experience of having someone half do it. I mean, selfishly, I've done it in files, non-legal files where I've done it because it served a purpose in the end of the goal. So it might be an R&D moment. So it might be a custom field for that or a type of class. And it also may be like jurisdictional. Like, I need to know within the state which counties you're serving because of tax.

Oh yeah, I like that.

But going back to kind of what Lynda was saying is your software will also have a lot of that. And we will look to say, hey, what is a value to put in there? Because that's the first source, right? And that's where it should be. The end benefit of the books and the full ledger, that serves what purpose to who and why? And, and where, where will you be budgeting from cash flowing your reports out of from that? So.

And that's a good one to use for a practice area if you're going to try something new and you want to see how profitable it is, because sometimes that's just what the reporting that they need to see if, oh, that really did well, or maybe that didn't do so well. And. You know, you might want to not do it anymore because it's costing you money. And then you wouldn't know that if you didn't track it, especially if you've got multi-practice area.

What do they say that if you don't measure it? What's the phrase?

Yeah. What you measure—

What gets measured gets done.

Yeah, there you go. Okay.

Well, I'll tell you the one law firm that I worked in had 50-some-odd attorneys and we classed everything. I mean, we had to because maybe 40 of them were contract attorneys that were working on a big project. And so they wanted to track everything from office supplies that each cube used to how much of the utilities were allocated out to that. Once we got it set up, it wasn't hard.

Yeah.

Yeah, but there's always those things, like I got one that I do it for and it's like, all right, they use the paralegal. So the thing comes with a bank fee and I have to wait for them to let me know how much of the paralegal went to this one, how much to that one. Like I feel like you'll never— You're right. Go get your own paralegals so that way you don't have to do that and make more work for me because it has to sit there and I like to clear it out.

Yeah, yeah, you're right. But it really was an effective tool in that scenario to find out.

But then you see it when you do the compensation reporting and you do the eat what you kill. Then they're like, oh, we're straight up eat what you kill. Oh, but by the way, we track this, this, this, this, this on Susie, and then we have to deduct that off of what she gets, and then we take it off of Harry and this, this, this gets deducted off of Harry, and then all of a sudden that simple compensation report is no longer simple.

Mm-hmm.

Right.

Mm-hmm. Yeah. You know, you guys are making me think too with the subcontractors, because that makes sense. Like, you want to know based on maybe practice area or like maybe it's a group, maybe the firm is set up where this group does this, this group does that, depending on how it's Exactly, that's where I was going with that. Yeah, okay.

Yeah, that— And on this big case that they were working on, it was in the— it was a result of a large real estate company from the 2008 financial crash and recovering funds many years later. And then they would allocate the attorneys out to different pieces of that negotiations.

I see.

And we would class it Yeah. Depending on their productivity and what they were recovering and getting back. It was fascinating to watch the results of that class accounting play itself out. And then they were able to take, let's say Lynda had one part of the project and Sarah had another part. We were able to see their productivity and their expenses and all that because it was all classed out. And then we were able to maybe merge and have the two of you work on the account and merge the efforts that you had. So again—

Wow.

You know, we've said this several times during this recording. What, what do you want to get out of it? And that's where you really have to get the attention of the firm owners and say, sure, we can class account for you. But again, you've got to see it all the way through and you've really got to think about it upfront what you want from it.

And you got to pay for it. You got to pay for it.

It's not—

yeah, it's a lot extra work.

It's double accounting.

Yeah. Yeah. Because I think that has to be—

they think it's automated.

And this one, right? Your transaction needs to be touched a couple more times. So I guess the thing is, I'm just trying to think in my mind, if you are— I'll just play devil's advocate here. You're flat fee versus hourly and you're tracking your expenses. Like, class accounting will not— I'm just thinking like somebody— I could see someone draw this line. Taxi Company is not really going to draw that sort of granularity that you're looking for in that way, if that's what somebody's thinking. Do you, or am I missing something? Because you could—

Give me a little more detail what you're thinking.

So if you want to do flat fee, if you want to track by the type of like you're doing hourly billing versus flat fee, that would be a lot of work on your invoices to track that. Those different buckets and then to see productivity against that.

Would you have to do that with like, you know, I can hide all the detail in the invoice in QuickBooks. You can kind of hide all— I don't know how you would do that.

I wouldn't know either. I'm just thinking like that.

That would be manual.

Yeah, because there's a lot of other software out there that could extract that for you.

You're right.

But I just think of like, I could see someone's thought process of we've met those individuals where they're either the service operator providing that service to someone or a firm newly starting out even or an existing firm that they've done this granularity and I kind of go, well, how do you figure that out? Like, how do you understand how productive that is? There'd be a lot of outside spreadsheets I'd imagine to—

Yeah, there would be because especially like on a flat fee.

Yeah. You know, or project billing style, you know what I mean?

Right. How would you allocate all that?

How would you allocate that? And I would maybe wonder, like, how do you do that in a firm that does originating and responsible? And that would just get really tricky, I think.

If you were trying to do all that manually, yeah.

Yeah.

No.

Because I feel like, Lynda, what we did once was no matter what the revenue was, we had to allocate at a high level the originating and then the responsibility team members to that. That's how I felt like it. Like, you saw this large accordion, and it was really difficult to follow in a report.

And seriously, what are they going to do with that data when you're done?

What is the value back to the client? And if, if they're willing to pay for it, what is the value? Because you also don't want to sit with a client who wants, you know, every single thing turned on, and then you find out later, like, what were you looking to gain? And then if they're not getting what they need to gain, why would they waste that kind of money to do it doesn't make sense. So I think that's the biggest part of it.

Oh, this is a headache. And I think I should take the rest of my vitamins so I can—

I know, I think I'm getting a headache from this, Steve. So we learned one thing, that Steve loves class accounting.

Yeah. Well, in certain situations, Lynda. Don't get me down a rabbit hole here.

You don't love it as much as you love KPIs.

Correct. Okay. I mean, I will do class accounting and I will entertain looking into it, but you've got to be on the bandwagon with me.

Okay.

True. That's a good point. Like, you have to want to— there has to be a good goal in mind that makes sense. And it would get us excited as individuals to understand that.

It'd be great to be able to have it set so that it would remember. I mean, they do have split in the bank feed. That you can split it, but— Yeah.

Yeah. Yeah, it's a lot of training. And if you have changeover in staff too, it takes a lot for that firm to remember all those things.

Well, and you don't want to just cookie-cutter it and do it thinking you're going to make more money from doing it. And then in the end, the client's going, "I spent all this money and this means nothing to me." Even though in the front end, you were trying to get them to understand the border they were crossing and with the territory they were getting into.

True. Oh, well, that's enough about class accounting. There you go.

Why don't we take the afternoon off and go shopping?

Yeah, I know. It's just Monday. It's the Monday blues.

Well, thank you so much, everybody.

Thank you.

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You know what?

What?

This makes me want to go to my spice cabinet or my medicine cabinet and organize everything by classes.

I was hoping you were going to say alphabetically.

Oh yeah.

Oh yeah. That would not last very long in my house.

It does not last long.

I can tell you that. It'll just look like a bomb went off in there. Just pick up, goes right back in the open slot.

That's not gonna stay.

Your son coming home would fix that alphabetical problem.

I'm sure he probably would. It just, it just wouldn't last.

Wouldn't let. All right everybody, thank you so much.

Thank you.

We'll see you next time.