In this instructional video, Linda Artisani of the Accountants Law Lab explains why law firms must meticulously manage advanced client costs—expenses incurred on behalf of clients such as filing fees, process server fees, investigators, expert witnesses, and other related charges. She defines advanced client costs, distinguishes between hard (direct, tangible) and soft (indirect, percentage‑based) costs, and outlines how bookkeepers should record each type in the firm’s accounting system. Hard costs are entered as an asset in an Advanced Client Cost account and later billed to the client without ever hitting the firm’s P&L, while soft costs are recorded as ordinary expenses (e.g., postage, copying) and then billed back as billable income, appearing on the P&L. Artisani stresses the need to tag expenses to specific matters, reconcile the Advanced Client Cost account, and handle write‑offs for closed matters, noting that missed or mis‑allocated costs directly affect firm profitability. The video concludes with a call to join the Accountant’s Law Lab mastermind for deeper learning on expense management tools and a reminder to subscribe for future content.
Chapters
Hello, Linda Artisani here from the Accountants Law Lab. In this video, we're going to be discussing the importance of managing advanced client costs in law firms. For law firms, advanced client costs can significantly impact profitability, why it's so crucial for us to track these expenses, the client expenses, and manage them effectively. So what exactly is an advanced client cost? If you're new to this industry, might be a term you're not familiar with. So advanced client costs refer to expenses incurred by law firms on behalf of legal representation. So you're— any expense that comes in that is for the client specifically, and you need to track it as such. So these, these costs can include fees like filing fees. Almost every file has those. Process servers. If depending on the type of practice, they might have investigator services, expert witnesses, research, and all sorts of similar costs. How do we track these? So to be effective, to be effective in managing your advanced client cost, it's critical as the bookkeeper of record at a law firm to keep accurate records. You need to keep these records pristine. You need to track them and tag the matter so we can track the profitability of these cases, and also know how many expenses there are, because a lot of these expenses, many of them, if not all, which— that's the goal— all of them will get billed back to the client. So this involves you tracking hard costs and soft costs, client fees, and you make sure you document them in the attorney's accounting records. So exactly what is a hard cost? That might be a new term as well. So you know, a lot of different lingo at law firms, and hard cost is definitely one. That's a direct cost. So you might hear the word direct cost as well. And they're tangible items that can be reasonably charged directly to the client. Again, those filing fees, process server fees, they're usually directly to the client. So you'll get the bill, and it will have the matter name on it. If it doesn't, you want to go back to the attorney and ask them what who this bill was for so you can properly allocate it to the file. And then when it comes time to bill it back, you're billing it back to the client. So soft costs are different. So soft costs are fees that if you think about soft costs, think of— well, in the day it was faxing, but copying fees. So the— maybe the legal assistant or some admin is making copies. There's a cost behind that, and Some firms will bill that back directly. They'll take— they'll take a percentage, or they'll kind of calculate how many pages are in the copies. Some firms just do an overall expense percentage, which would be in the original agreement that the client will have with the attorney. So you want to ask those deep questions when you're talking to especially a new attorney. Do you— how do you handle soft costs? How are they calculated on the bills? Is this something I need to know about? Is there a percentage so I can understand and make sure that it's on the billing when we do the billing every month for the clients? So soft costs, think of postage. So your firm buys a bunch of postage. Maybe they have a postage meter, maybe they actually buy stamps, and they buy a roll, and there's some of it allocated to each client. You won't be able to kind of pinpoint that down, but they'll put a fee on the bill for calculating any soft costs like postage, copying, those kind of things that you can't really target as expenses directly to the client. They're expenses to the firm, and just a percentage gets billed back to the client. That's kind of where you would sit with soft costs. A little bit more confusing. How do you enter that in accounting? Well, with the hard costs, you're gonna enter the actual bill. So the filing fee bill comes in, you put it towards advanced client cost account, which is an asset sitting on the books. And then it gets booked over to the client matter. When the bill time happens and the client is invoiced, it comes off of the Advanced Client Cost account and it gets billed out. Never touches an attorney's books on the P&L at all. That's how the IRS wants to see it too. They look at Advanced Client Cost as a mini loan to the client. Now, soft cost, a little different. You're gonna get the postage, it's gonna go in the postage expense, and then when you bill it back to the client, it becomes a billable income. So you're gonna see that as a line item as billable income in the book. Bookkeeping, and it does show up on the P&L that way. But you wanna really prac— make sure that you track these accounting-wise to the penny. Any missed cost might sit up in advanced client cost account, and then you might be sitting there at the end of the day. You reconcile that account, and if the account or matter is closed, if it's significant like a filing fee, which is like $400, you will go back to the attorney and say, you know, this was not captured for this particular matter. Do you want us to bill it back? Then it's up to the attorney to decide whether they're gonna bill the client. Sometimes if the matter's completely closed, they'll just say to write it off. Then you're gonna need to book an entry in to get that off of advanced client cost account. Remember, it's an asset, so you're gonna credit that and you're gonna debit the expense, which is billable expenses unrecovered on the books. So you wanna make sure you track it that way. That's going to affect the attorney and the law firm's profitability. So that's why it's critical for us to track these things. We need to know. Don't just let the expenses fly in and you don't know if they're for a particular client. You need to ask the deep questions to be able to be an effective bookkeeper working with law firms. It's really important. So if you found this topic interesting and you want to learn more about legal bookkeeping, join us at the Accountant's Law Lab. It's a place where we get together. We have a mastermind group. We have a ton of content in the website. And we meet every week to discuss topics just like this. And this topic is this week's— this week's topic is expense management and how we actually use tools and software to make that happen in the books. I hope you join us. And on that note, hit the subscribe button if you want to learn more. We'll see you all next week. Bye now.
