Best Of: Bookkeeping Strategies for Small Law Firms

Welcome to Accountants Law Pod, where accounting professionals and law firms converge, hosted by Lynda Artesani, Sarah Prevost, and Steven Libhart.

We've got a topic today about strategies. It's really bookkeeping strategies for small law firms. And there are so many, there's so many things that we could discuss, like I was having a very wonderful conversation on the drive back yesterday about just business strategy in general, how most people don't have their exit strategies planned out, or circumstances that— so this is an interesting topic that we have today.

Which is pretty important with a small firm, because if you're on the firm, yeah, it's you, right?

Like, you're one and only. It's about you. So.

It's amazing how many small firms just hang with, you know how they say to hang the shingle, they take the shingle down and it's done and they don't really do anything with the way they close and they don't really sell anything, which is interesting how—

They get displaced.

Yeah.

Clients get displaced. I think you and I, Lynda, have seen more and more as we've worked together for now 8 years.

Haha. I know, 8 years. I can't believe it went by so fast. It did.

It's gone by fast. We've seen a lot of people and Steve, you can tell us if you feel this way, but folks start their firms, it's all exciting. And then here you are, we're meeting people that are ready to retire. And there's obviously no one in the family legacy-wise to give it to. So who's next? How's it going to be passed on or not at all? And that's been an interesting dialogue.

Well, the thing with accounting too is in bookkeeping is that there are no tangible assets per se. to speak of. And so you're selling a service, and so the service— you're selling your client list, your book of business, and your systems, and how organized it is and all of that. It's to your point, what does your exit strategy say? How do you go about doing that? How do you plan for it?

Yeah, and then you've got the process with the trust. You have a process, right? So there's a lot to really factor in, I guess, if you were gonna close. And I know this isn't just about Yeah. Close business. But if you're going to close, you got to let the matters come to an end or hand them off. And we see that a lot with firms. I see that a lot with somebody coming to me and they want to work with us. And then they came from a big firm and then somehow the big firm gave them some of their client list to let them go off on their own. We see that sometimes. It's always amazing to me that they do that. And then sometimes it's like an interim period where they're sharing Some of the costs and they have, maybe the other firm paid some advanced client costs and the new firm doesn't have any money. So they make a deal on a percentage of the income coming back to the original firm. It's interesting how, and it's really the deal, whatever deal that they've made, but it's fascinating because then they start out on their own and before you know it, it's like a snowball going down the hill. They get bigger and they start to really, we see them really blossom pretty quickly.

Yeah.

Where they end up hiring by the end of the year, they might be hiring a paralegal because they need that help or an admin slash paralegal, however it works. So we do see that. And then all of a sudden now they have an employee that changes the picture of everything.

Yeah, it's that stair-step style thing that happens, but it can happen kind of skipping 3 steps, right? You start here and you're up here. And it's, I think the biggest part too that we find with law firms is If you don't have the structure set up correctly for your accounting, whether your intention is to hire, to your point, Lynda, I mean, there's some essential pieces that you need to put in place to understand how you're going to do those.

You mean spreadsheets not going to work anymore?

Oh man.

We see that. We see that where people have a spreadsheet and they do spreadsheet accounting. And then all of a sudden it starts to get a little bit out of hand and they're doing a spreadsheet for the trust and spreadsheet for the, their bills. Oh, my tax guy takes this. And then all of a sudden it's not a viable solution anymore. And it's not, if you're going to do that and you're starting out in long-term, you expect to grow and be in business for a while, don't start with a spreadsheet. It's just not a good practice. It's not a good practice. Get yourself in a software that you can grow in and grow with, basically. It might be a little bit overkill in the beginning, and then you're going to find that you really will grow with it.

What do you think are the most essential pieces, like your tip, top tips to, for the bookkeeping part of it? For a small—

invest in the software for sure. Get your GL product, whether it's Xero, which we've been really recommending now, or QuickBooks. Get your— I would say get your practice management software in place or your billing software in place too. Even though it's extra, it is going to save you time. You'll get that back in the time that you save and you'll open up bigger, more time to be there. Because when you're the solo, you're the marketer, you're this, you're that, you've got everything.

You're everywhere.

Yeah, you wear every hat in the business. So it's hard to— I think sometimes it's hard to conceptualize how much money you're going to need and how the software— people try to cut that corner. I don't think it's a corner you should cut. I really don't. I think you need to keep that corner covered because in the long run, even if you don't, if you can get by with a spreadsheet right now, it's really not worth it. Because then if it's a whole year has gone by and now you're behind on it because you had to do such a manual process.

Yeah.

And then you're gonna have to put all that into some kind of other product. Why not have it there for in the beginning? We see a lot of people come to us and they're like, look, I just got Clio and I got QuickBooks and I don't know what I'm doing and I need you to help me set it up and help me learn how to do this.

Yeah.

I don't really need you right now. I might want you to look at what I'm doing in every quarter to make sure I'm on the right path. And then eventually the goal is that I'll need you to help me. But sometimes just that kind of starting off I'm always impressed when clients come to us like that and they say they would like our help with getting— because they don't know how to set up a chart of accounts. They didn't learn that in law school. They have no clue what that is. They have a clue of what it is, but they don't know how to really put it in a good order.

Yeah.

So that way they can get good data. Because it's really about what's the, what's the end game where you're looking for at the end of the day to be able to analyze, even in the beginning growth, analyze, find out what, how you're doing, what's working, what's not working. So you can start to formulate a path.

I don't know how you do that in a spreadsheet. For every—

you don't. How many spreadsheets have we been given that the attorneys are using, and then we find out the formulas are wrong, and then that means that the math isn't working right?

Yeah.

And it's just— it's— and then when you're dealing with trust, when you're dealing with trust, you're dealing with other people's money. Do you really want to hang your hat on something that is going to be— you're going to be protected By— you got $1,000, you're not going to give back $1,300 because you weren't tracking it properly. And then that comes out of your pocket because you gave the money back. You never had it to begin with. And that's where we see it happen, where they're with such manual processes, things get broken because you forget to add a piece or do a step. And that can be a recipe for disaster.

Steve?

I've got a little checklist of things.

I saw you writing. I was like, you're writing stuff down. He was writing stuff down. I'm like, Okay, he's like me. I write my notes down too.

Yeah, I write my notes down. And you guys have heard me talk about this before. I've used this phrase, it's not plug and play. It takes some effort and some thinking. To me, the very first thing when you're going into bookkeeping and accounting for law firms is come up with a good solid contract. That may not be the contract that you're going to use forever, but you start with something that outlines what you're going to provide as a service to the client. And you can talk to other people in the industry. You can talk to attorneys. You'll find your client attorney might help you with a contract for future contracts with other attorneys.

Oh, you're talking from the accountant side?

Yes, ma'am.

Okay.

Got it.

Okay.

And then the second thing to do is start working on your standard operating procedures. Now, again, just like the contract, that's going to be a work in progress, but start an SOP sheet or record or however you track all of this for each thing that you do and have that document there so it can grow with you. And then Lynda's favorite thing that I I say start a scope creep file for every client so you can keep track of all of the additional things.

Oh, that spreadsheet. Yeah.

So that you can keep track of all of the additional things they ask you to do. And especially when you're new to this type of work, there's a lot of scope creep because you don't think of those things and it settles itself out later. But it's always good to have that scope creep file on hand. Set up your budget. What do you want your business to do and what are the numbers that make it go that direction? And what happens if it doesn't go that direction? that direction, what's your cushion? So build all that into your budget. To Lynda's point, the software.

Yeah.

Don't skimp on the software, but don't go buy every app that promises to have rainbows and unicorns either. There's no one-size-fits-all. So maybe you can't afford all of the different softwares you want, but find logically which one's going to serve you the best in the beginning and grow from there. And what we talked about a few minutes ago, what's your exit strategy?

Yeah.

What happens if you get sick, if you get old, if you get whatever it is? What's your exit strategy? Yeah. And that falls in line with your budget.

Yeah. Yeah. Yeah.

And then if you can get a, a rhythm of your year, you know that at the beginning of the year, you're going to be crazy busy doing all the year-end books and the 1099s and all those sorts of things that you do for the clients. Right after January, hopefully you've got all of your reports out to the clients, and then you start getting peppered with all the questions, and then it doesn't really settle till March. So that's the first part of the year, that's your first quarter, and you're catching up everything you fell behind on. Then it's in the summer season, depending— attorneys like to take a lot of time off in the summer, so sometimes we get a little bit of breathing space in the summer and into the fall.

Nice. Yeah, August.

Speak for yourself.

Exactly.

And then, you know me, I hit the road and work from the road. So, and then it's budget time and then it's back into the cycle again. So those are some of the pointers I have.

Those are good.

You wrote all that while I was talking?

Oh wait, there's more.

No, I don't.

But all of those strategies actually can cross over to bookkeeping strategies for law firms, right?

Yeah.

So when you're looking at a law firm, they need to really make sure they get their engagement letter with their client nailed down. I think that's some— I think that's easy stuff for them because that's what they do. I think those are the things that they have in place. But having the knowledge of how to get their accounting work, I think that's where they might fall a little bit short. Hire somebody that does know what they're doing to help you. I think that's a key one too. And then the billing, Sarah, we can talk for hours about billing and strategies on billing because—

Yeah.

When you start out, you might have Crappy cash flow. And maybe you want to do the billing not the standard beginning of the month, once a month cycle. Maybe you want to do it a couple of times a month, or maybe you want to look at the type of billing you're doing. And maybe the billing that you're doing is not going to just— won't fit you with hourly. Maybe you want to do some fixed fee billing or some subscription billing depending on your practice area. Those are things. Sign up for merchant services. Get a good merchant provider in place because I think A lot of times law firms are like, I don't want to pay that fee, and you get paid faster. So maybe in the beginning it's just you talking to the client directly. A lot of that happens, which doesn't happen in bigger firms. They're usually people, intermediaries that are in between. But when you're the collector too, like Sarah mentioned, all the hats, you're going to wear all the hats. You want to have an easy, frictionless way to get paid.

Yeah.

And if you don't, that's going to be a problem because it can add up quickly. Where you're not getting paid, and then you start to look at your metrics, right, your KPIs, you're going to find that maybe when you're looking at that realization rate is not great. And you're not going to bill 40 hours if you do an hourly billing, you're not going to bill out 40 hours. Even if you work Saturday and Sunday, it's still very difficult to bill out 40 hours. Yeah, we see that a lot with the smaller firms. They write a lot of stuff down.

They write a lot of stuff down. We see in our recent conversation with someone, A lovely individual, really thought that she had the time to put the effort into a particular software and thought she had the principles and the understanding. She realized she got in, it wasn't her forte. She did her best. She had to restart it. It got to the point where, okay, now it's crunch time. I've restarted it multiple times. I really got to get myself filed because maybe we're looking at an entity structure change.

Yeah.

Maybe there's We're in professional services. So a lot of times in our industry, we have to think of these things. And like you said, Lynda, it comes at you pretty quick. And then Steve, you're also, you look at it multifaceted sometimes. You're, I know you look at workflows and all these other things, but it's also what's your intention? Do you expect to bring on other practice areas? How do you want to track those things? And so a lot of these layered pieces, I feel like it's like a lasagna. You're just gonna layer.

They don't know. They don't know. Like, they know their practice, maybe they have multi-practice area, but they don't know which one they really want to focus in. And then that first year might be just determining that and seeing which one fits them, which one's the most profitable. But if you don't have— if you're in a spreadsheet, that's hard for anybody to figure that out. So if you get yourself in some kind of software, you're going to be able to track that. And I think basically knowing your financial statements is key. Understanding what a balance sheet is, what, you know, cash flow report is. You pull it out of QuickBooks, it's going to show you, it'll pull the data from your trust account. And that's not really necessary. That's not cash you have.

That's right.

It's really got to be eliminated. So sometimes knowing that alone, as you're going through looking at reports, learn what they're for. I think it's basic, the basics of accounting they should know, or if they hire somebody, ask the questions. Can you help me understand this?

And how do I—

So don't be afraid.

Yeah. And the smaller firms too don't have a lot of time. They're so busy. So then now it's our job to help bridge them to understanding this. And just, we got one, one of our clients, Sarah, my clients, he's very busy, sweet, sweet man. And I know I don't get, I don't get to see, I don't get to talk to him. I try. It's hard. I see that he's answering my questions during the weekends. That's the trigger to me that I'm just going to make him a video so he understands his books. He can read it at his leisure.

That's a great idea.

And then that way, yeah, because then he can ask questions after. And it's, I still think even then you should get a quarterly meeting so that we face to face so we can, for Sarah and I, it's to help us extrapolate where you're going.

Yeah.

What are you looking to do? What's your future plans? Because we don't know if we don't talk to them, we have to have some kind of dialogue with them so we can ask. to see how they're growing and how— what's in their mind. Maybe they've got a kid going to college and they're focused on getting as much money in the door as possible because college is so darn expensive. Or maybe, maybe they've got other things going on. And it's just nice to have that touchpoint moment where you can start to ask some of those questions. And I think sometimes a lot of bookkeepers that are generalists, they don't have the time or they don't have the knowledge. Like, we see all these companies and we could say, hey, I know this is something you probably haven't thought of, but we see this with this type of, with your practice area, and maybe you might wanna look at this product or this software because we see it's working really well for other clients. And that doesn't happen in, if you don't have that working knowledge and that viewpoint that we have, that high-level view of all these files.

To that point too, in, in this particular niche with catering to law firms, I'm going back to the accounting side. There's nothing wrong at all with having a niche within a niche. Maybe, yeah, you really thrive on doing personal injury work. You love what they do. I love civil rights attorneys. I just totally thrive. I totally thrive with civil rights attorneys, and I love the work that they do. I've got a real estate client that they do real estate transactions for low-income housing and grants and things like that. Love the work that they do, and they're doing some major projects here in our part of the country. Really cool. So there's nothing wrong with really getting to know the niche that you're in within the legal field, because there's— it's like doctors. There are so many different types of doctors out there. So you can find what you— what appeals to you and don't feel like you have to end up serving every single type of attorney there is out there. You can become a really good expert in— within that niche.

You know what's interesting too is in the last, I don't know, month or so, Lynda and I have having these Check-ins and conversations and stuff. And when clients really look at, this is how much time you spent on my file, this is the value, when there's no engagement, or maybe there's just an alignment, realignment of conversation, you don't know all the other pieces that we've had our guard up for you.

Yeah.

In our eyes and our— and what we're looking at, whether it be you're starting out, we're intentionally trying to help you. Structure your business so that whatever it is that's going to come your way happens, right? That we can help you, support you in. And a lot of times what we're doing now is just having the dialogue. You may not want this right now because it makes sense for you to do the billing, or it makes sense for you to do these things.

Yeah.

But this is something if you need support on, or bill pay or those things, just that dialogue. Also, just if we're cleaning up a file is okay. Let's— there's other capacities that we can do. We're going to center on what we're doing right now for you, but there can be a lot of things within that. We can— we often find poor workflows, poor entering, and poor notifications within the team to understand who's doing what and how they're going about it. So those are kind of like some common accounting things that we find. People think accounting is just the numbers and the data entry. No, it is so well beyond that. There is so much that we dive into and have to think through the process. We're not settling the cases with you, but we're taking the data after the fact and thinking through, does this name line up with this name? Does this happen with this? There's so many components to this process. And I do feel like what you're both saying is there's so many things that you can look at. Okay, but you went into business to do law, right? You wanted to open, hang your shingle to do, to practice law. Did you want to practice the marketing, the accounting, the compliance, all the other things that you have to do? Having your knowledge as a business owner is awesome. Having your knowledge in it, understanding it, having the right person to partner with, having somebody who can actually say, okay, yes, I see it this way. Let's talk about it. Let's build. This out together.

Lynda, you have, you have a really good example you've used before, and maybe you could share it again. When you were called into that one law firm and found that it was a software situation, and you found that the person was doing double work when they didn't need to. Does this ring a bell?

Yeah, the redundant work. We— yeah, I went— actually, it was— I flew out to Ohio for Intuit to do a commercial for them, and I got in there to— I was there to do the commercial, and then I got to talk and meet all the people, which is Not something we do a lot of. We try when we're, if we're in your city, we try to visit you. But we, I started looking at what they were doing. I'm like, oh my gosh, they were doing so many manual things. And we saw that this process can be improved. In fact, we're going down that same road with them again recently because they've grown quite a bit. And there's other things that we're seeing that, and they're on top of their software, but we're starting to work with them again to try to figure out there's better processes that are out there that we see. And we know, and they, they're trying to figure out. And when you see that somebody's doing, I mean, they were printing, they had a software that they were printing invoices because they couldn't get them to email unless they printed them. And remember, Sarah, they were, I remember stacks of paper they were wasting to make because they had to in this particular software and they changed to LeanLaw after that. But this other software they were using required them to print before they could email.

Yeah.

Yeah.

Wow.

Which is crazy if you're going to modernize. So going back to like our opening is when I was talking with my friend in the car, because there was some strategies behind this conversation and the dialogue we were having is if you're going to modernize and want to be somebody, maybe that you have the intention of being acquired or merging with another firm, your firm should be in a good place with good systems and not in just that owner's head.

For sure.

Your firm shouldn't be reliant unless that's what you wanna build and that's your intention and you know how you're gonna legacy this one out, or you know how your book of business is gonna move. But when you're going, and we see this all the time, Steve, you brought it up, you start your firm and then you get this co— like co-counsel case, you get this case and it's, you're like, ooh, that niche is more my style. I started in this niche and I want to go to this niche. And we see it with our accounting firms all the time. Oh, I'm going to try it. I'm going to give this a go and then I'm going to try this out. Okay. You got to be careful, kind of some— I'm not going to go drop myself into a large ERP system and go try it out because that's not me. But if you're doing it for law firms, you, you really got to think this through. And then how are you going to design it? And what are you going to do? And how are you going to track it?

Yeah.

That's a lot of extra effort and work. It's just like changing it, not just changing the hat, changing the role, changing the job in the firm. So there's a lot of accounting principles that get applied to all of these things, basically. Fundamentally.

A lot of new people start out— I can remember one marketing course I took with an accounting company several years ago, and their advice was, go get your first client. If they can fog a mirror, take them on. And I'm like, no. I would rather work at Dairy Queen on Saturday nights before I do that because I had to pay the rent, because I'd rather focus on what my dream is and which direction I want to go and really drive into that niche, if you will, and make a difference. And it's amazing how quickly it will build.

It's funny, I— in the beginning, you do take, as a bookkeeper, you take whatever you can get. Yeah, if they can pay you, you take them on no matter how bad it is. And part of the process of learning how to bill and what to bill and the amounts and stuff, and I'm sure it's the same way for lawyers Sure. When it comes to that, how do you— what's your hourly rate is lots of things they can do.

Don't spend a lot of time in there. Don't spend a lot of time in there. Yeah, I'm sorry I interrupted you, but I guess I'm passionate about that.

It's definitely something that they can figure out. Clio gives a great report every year about what, right down to like where and what city and your zip code and all that, what they charge your practice area. I mean, you don't not look at some of the resources that are available. But I think for them getting started, it's exciting when they first start. And I think enjoy that even though it gets overwhelming, enjoy the excitement and just get yourself set up properly so that you don't have to worry about this stuff really after you get growth.

Because it impacts your personal life. What you do in your business has a direct correlation and vice versa the other way around.

It's the first question we ask them when we meet with them and ask them about setting up like budgets and anything like that is what's your long-term goals? And you don't, you get the deer in headlights, but then if you ask about their family and what they're, where they're at in their life and they'll, they beam telling you about their kids and all of that. And those are the things you gotta get your insurances and all that. That's also part of it. But I think if you start to talk about personal and what their personal goals are, that'll help open the door for the other goals.

Yeah.

That's good advice.

Good topic.

Yeah.

Definitely. Definitely.

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Well, everybody stay warm. I'm sure this will drop somewhere around the time where it's still winter. We're in the thick of it right now, I guess.

We are. It's just pouring down rain today.

Oh, at least it's rain, Sarah.

You don't have to shovel it.

Yeah, we're not shoveling snow here. I'll take it.

Awesome.

Absolutely.

Bye, everybody.

Bye.

Bye-bye.