Cash vs. Accrual

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

Welcome back everyone. We have a fun addition to this podcast moment as Lynda and I are just getting back from Carbon Next, so we're going to, prior to us getting into our topic, we're going to Kind of have a light discussion about what it is that we learned. And it was a lot of fun. I can tell you that.

It was. I think for me, I didn't really have a big expectation of what we were gonna get other than smaller conference. You get way more out of the smaller conferences at this point. For us, we're past the stage of the big ones. And I think for me, being with a lot of firm owners that were either At our level of, you know, 11 plus, and, you know, we have 2 out, 3 teams offshore, but we also have physically the 11 people that work for us. We were in a lot of similar space with them, and we met also with a lot of people who were above us. So you get to hear good feedback on what they wish they had known. Now that they're in the space that they're in, maybe they have 50 employees now and Having those conversations were good. Obviously, it was about the software because it's a software conference, right? So, and it's the software we haven't really used yet. So I felt a little lost in that respect. Not their fault. It's just that we're new. We're just new. But very well done. Very, very, very well done, which kind of expected with Ian being the top dog. And they had so many great people. I mean, it was nice meeting their team because they're— I don't think there was one person that you go, ooh, that person works for Carbon. Everybody from Carbon was fantastic.

They're very caring, and they're really very caring. They really enjoy being part of the company.

Yeah, yeah, they they're really happy where they work, and you know meeting some old friends that now work there. Meeting Jordan, he's so fun.

Oh my God, the golden girl lapel. I loved the different one that was.

I loved his energy is infectious. It was nice being around somebody that was so happy, and so he was. Funny, quick on his feet. So being the emcee on some of that was really— you know, when you're starting to get a little tired at a conference. I think that I just felt for that poor girl that had to do it. Sarah had to do—

Oh, Sarah without the H. Yeah.

A 90-minute demo of the new stuff in Carbon. I was like, she's going to do a live demo for 90 minutes? Bless her heart. I told her that when I sat at breakfast. I'm like, I just was like, my heart was like, please don't break. And she said, I know. I was so nervous. And you, I said, you couldn't tell because you do get nervous when you're having that.

Well, in the, in the live feedback, which was really good, you know, or the interest, I thought Sarah did a great job pivoting some of that conversation to, uh, what, okay, now that we've brought this up, would you like to see that?

Yep. They wanted to hear, what do you want? What else do you want? And why? Why? You know, because you can't be that software person that's going to make software Customize for everybody. It's not possible. So what do you like about it and why do you want this? And when multiple people— I like that part about when we went in that room and sat at the table with them and talked to them about— I forgot what we were talking about at that table because we were at different tables, but we were—

Oh, the payments and billing. Yeah, yeah, yeah.

And did the billing and timing and tracking time. I think that was good to get after having that long, heavy meeting to come out and be able to do interactive stuff. Which is kind of like what Hector does a lot of. You know, you, you have someone up on stage talking to you, and then we brainstorm it, and you're writing, and you've got pads, and he gives you a topic to work on. I think that that shift keeps you involved, and you're not being just talked at for hours, which was good.

More engaging.

Really, really good. And I— the AI, to hear what other people are doing with AI and where they're going with AI and hearing about AI agents and I don't know why Get Smart always goes in my brain when I hear about an AI agent. I just think of Get Smart and that you probably aren't old enough. Do you know who Get Smart is in the film The Silence? Okay. Oh, I just aged myself.

We're not that far. Google it. But there are moments of— I mean, my thing I felt was we could see opportunities within this. This space that feels so— I feel like we're on a bullet train, and it's hard to know where to pause, where to support, where to create new ideas, where to work in. I mean, you're leading, you know, there's right now when you think of the sensitivity of a leader in so many ways, you run a business, you have so much on your plate, we're leading. And I'm okay with— I'll lead, but I'm fine if you want to surpass me and look at it through a new lens and show me that new lens. I just felt like it was an opportunity to understand a little bit more from people that have been on the platform for a while, why they like it. Learned that 90% of the things, sometimes they're like, oh my God, I just learned something new. I've been on this platform forever.

I had no idea. There were people that have been on it since the beginning. That was crazy, right?

Because it's been a while. Wasn't it nice too, the global perspective?

That was pretty cool that we were in a room, especially when they did the awards. Like, this one was from Ireland, and this one was from Australia, and this was New Zealand. There was a lot of Aussies there and New Zealand people there, and the accents were like all over the room. I'm like, oh my goodness, I could listen to this accent all day. It sounded so cool. Had mine made fun of. But yeah, it was— and then of course we ended our trip at the Four Seasons, which kind of flows into when they were talking about giving your client good customer service. Could you pick a better place for customer service?

Oh my—

I mean, they couldn't do enough for you. Sarah's hooked. It was her first experience at a Four Seasons, and now we've set the bar.

Yes.

Now you know why when I said, let's put the team over here, but you and I should go to the Four Seasons. I don't think you'll ever say no to that again. Because I was like, we— and you're like, no, we should be with them. But I'm like, no, we should be here. You can see why. It's just that they— that place has nailed down how to treat people like they're special. With everybody.

Yeah, even the little touches. It's the small touch, like, and that's what I think of when our client experiences is, you know, we hear a lot about this and we know this is to be true of, you know, clients' lives get busy and it feels like you're ghosted. You may not be. It's just prioritizing your world, right, as a business owner. And so I felt like Just in the subtle changes after coming out of the conference and staying there, those small subtle changes of, would you like us to have your, your breakfast items and your coffee ready? And would you like your car pulled up? And I'm like, oh my God, that's one less thing for me to do.

Did you see how they did it too?

And they met me in the elevator and took my bags. Oh my God. This was just so— it just, it was just so thoughtful. And that's What clients are wanting. And it's hard to be that way when a client wants transactional.

It's hard to do that at scale. But the little things that make it memorable like that. How about when they brought your bags and they said, oh, you're in the room with the large bathtub. Would you like bubbles? And I was like, are you kidding me? Sarah had bubbles and bath salts. You should have both. Yeah. It was just the stuff like that. And never mind the view we had, but it's just those are the little things. And see how some Something so small. I mean, some of those things are actually small, tiny things. And how can we incorporate that in our business?

Yeah.

To make the client feel special. And I know I've done that in the past where, um, I've reached out like to a client that I haven't heard from, which happens. And then I reach out and I'm just hoping you're okay. And that usually gets a response over, gee, you haven't sent me documents and I've asked 17 times. You know, you get it. It's like, I'm just concerned, are you okay? That message is a better way of approaching the problem.

Yeah.

He probably would fall back off the cliff of disappearing, which that's exactly what happens. But it's interesting. So that was a great trip.

It's a great trip. It was good for us, for you and I to spend time in a way like we were working on the business, we had things to do, but we got to think differently.

Yeah.

How to approach AI, how we wanted to interact with it, which gave us so many ideas. And yes, I get a lot of conferences do want to separate I'm— I would hope that at some point—

I know, I'm—

and I'm fine with it, but to a point where if you are wanting to work on your business with your business partner, there would be a conference that would consider that in the thought process of a journey.

Especially for us, because we're always separate by where we live. Yeah, to put us together, because we like being together. Yeah, everybody wants to separate us for some reason, and it is nice that we were able to, you know, kind of traipse through the place together, and we really had no distractions, which was nice. As far as—

I'm gonna be honest with you, at this stage in the game of my life and my world and what you and I are doing, you know, when I pay to go somewhere, I'm intentional about it. I respect your time when you're out as a client. It's the same thing would come to us.

So I know, and that's it. That doesn't though, which I had that conversation this morning where I was like, you know, you're like my clients, you want I mean, whatever I'm doing, I gotta drop it just to do something for you that is not a fire.

Mm-hmm.

You know, it's just not an emergency. I, I know he looks at it— I'm talking about my husband— I know he looks at it as like, I spend so much time working, and he's looking for attention. But it's like, don't do that to me. I have that done to me all day long with clients. I don't need you to— everything is not a fire. Everything is not an emergency.

Mm-hmm.

And the fact that everybody always thinks that way— and I hope I don't do the emergency thing to other people because I don't I try not to because I don't like it done to me.

Yes.

That's the thing. We have a right to be away and we have a right to be on vacation as well. Meaning that this is an important trip because we're looking into how AI can be used. One of my favorite lines from the conference was, it's not just a thing to clean up your email, which is what 90% of the people are using it for. fascinating was I sat at a table with dinner with somebody that was probably about 32 years old. And he said to me, it's the first time hearing about this AI stuff and how important it must be in the business because he was a— he's a chief technology officer. And I'm like, aren't you? That's what, you know, and he was out there to decide what software to use. I said, yeah, you better get down deep and dirty in that because—

Yeah.

You know, and it very much parallels when you think about it.

Yeah.

Parallel AI right now is paralleling where we were when the cloud came out.

Mm-hmm.

All the anxiety over the cloud. We need to know about the cloud. We need to know what it exactly is and to be on the forefront of it. And we're in the same space here, but to be able to creatively do and use it in unique ways— and we're fortunate to be in these elite groups where we got these bright minds that are already navigating. And being able to— at a conference like this and talking to people and how they're using it and sharing what we know, that's what it's all about. That's what the power behind these conferences, for sure.

Yeah, definitely. Well, and so it's interesting too, is in, in the service industry in general, like what we learned to, to have somebody so quickly learn us.

Mm-hmm.

And we're learning about the service industry in general, right? It's nice to refreshingly look back and go, wow, it's nice that you remembered my name, that you could meet me at the elevator, that you asked for a follow-up. Did I need my second wake-up call if necessary? Like that they knew these little intricate details. And it goes the same for us too. When we do—

I had to wait for them to bring me my coffee at 4 AM, mind you.

Yeah.

The gentleman goes, let me go get your coffee. I didn't want to pour it too soon and it would be hot. And I made sure I brewed you a fresh pot. That was at Four Seasons.

That's, that's, you know, yeah. And, and so I know that, um, for us, it's, it's like there are things about you and I that we do so similar. That are slight differences, but we do so similar, and it's nice to not have to remind and remind. And that, and that's the case with, with clients too. When you see it, when you're having a conversation about, oh yeah, well, that's right, you told me about this little piece, so I need to remember to make sure. Even if you say it out loud, it's just that you're honoring them, right?

Yeah.

Yeah. So interesting enough too, I think our topic is cash and accrual, and Talk about differences there. I was on with a prospect call a couple of weeks ago and it was an individual that was saying, oh, I want to move them to accrual. And I was like, what? Wait, why would you want to do that? For a long-term service industry. Yeah. And they gave me some logic and I said, you know, at some point I understand. I think that we should talk it through and really kind of really explore why you see the benefit of this, right?

Like, When you think about— I'm all about throwing my records on accrual to take a look and analyze them because that's real-world, real-life. Yeah. And for us, I mean, we, we don't even— we really live in a cash world because you don't— you pay us before we do the work.

Yeah.

So we don't work in that invoice and get a payment, but the lawyers do. Yeah. And I think when you think of accrual-based businesses, where do they all land? Well, somebody's got inventory, accrual business. Um, some of the contractors, accrual-based. Uh, it's more complexity. Nonprofits are accrual-based, more complexity. You got to deal with accruals and deal with moving money. The payroll happened here, but the, you know, the hours happened here and, you know, they worked and they didn't get paid until the following year. And you got to do all sorts of adjusting with that and journal entries. And you understand that and have a hard-working knowledge of it. Most people, especially law firms, are in the cash basis realm, although we've had it happen where the client, you know, found out somewhere along when we first got to meet the tax person that they were an accrual basis.

Yeah.

Even know that.

Yeah, well, it's just even understanding. So cash is recognition immediately, right? It's cash on that moment. You create the bill, you receive the cash, it's that moment. Accrual lies where you're recording these things and you receive— whether you receive the money or not.

Yeah, so you have an invoice, the invoice date is your recognition of revenue, paid or not, paid or not, that's your amount.

Yeah.

In a cash basis, it's when the payment happens. Yeah. If there's a lot of open AR at the end of the year, it's disregarded. There's no AR.

Yeah.

Cash basis world, which gets you into that sticky wicket of unapplied cash payment income.

Yeah.

If you've been doing this online, right? It's always, um, and that happens a lot when you've got payments without invoices or the payment is dated before the invoice. How can you have the cart before the horse? Um, and it's the same with accounts payable. There's no accounts payable in cash basis. Yeah, usually when it's— when the bill is paid, the bill payment date, or a lot of times with our clients, they— I throw it all on the credit card. So it's at the time of the transaction, basically, uh, when that's recognized in the books.

Yeah. So, and accrual is typically— typically we see that accrual method get adopted at a certain higher tier, like a larger law firm that is going to have— a much larger one will have, or if you're publicly traded, obviously that's an accrual method. And so there's always these conversations. And a lot of us, like you said, Lynda, we work to the accrual method, we explore it that way. But ultimately, it's really important for us to have our eye on the ball with the cash method because we want to make sure it's recorded correctly so we don't have these loose ends hanging out there.

And it's beneficial to the client that they're being paid— they're paying their taxes based on what the money they actually got and money that's going to be future earned, because it's a whole different ballpark. Just think of sales tax. It's a whole different ballpark. That's usually accrual-based. So you really have to track the timing of the invoice and the payment, and the tax event happens at the time of the invoice. And then if the person got a credit memo in the following month, there's a lot of movement of the— or an adjusting to be done. So yeah, I mean, that's part of it.

Work in progress too. So it comes— that will impact a lot of your trust compliance decisions as well as just in general. So you have a lot of work in progress. Congress, depending on your— how you're set up for billing purposes and what that engagement looks like. And, you know, I could— you know, some of the bigger lawsuits that— the name is escaping me, but when they have those big lawsuits where you can— you're part of a big case. What's the— I forget the term of that law.

Class action suit?

Class action suit. Those definitely have a whole different breadth of how that's going to get handled, how it Yeah. It's dispersed. There's like a whole piece to that that's completely different than your—

Sometimes a whole different bank account. It's a whole different animal.

Big account.

It's like its own little business within the business.

Within the business.

Yeah. I mean, it's interesting. And so a lot of times when you have conversations with the client, you need to have that time to explain to the client what cash basis is. They don't understand this stuff. This is not what they went to school for. So you have to help educate them on what that is. A lot of times they'll say, oh, write that down to bad debt. Well, there's no bad debt in cash basis. It's probably only in accrual. You can write it off and discount it down. That's what you do for them. But you don't put a bad debt expense on because there can't be bad debt if you're not recognizing the income at the time of the invoice. Yeah, yeah, it's an open invoice. You haven't been paid. It's not how it's booked in. And we see that a lot where people have bad debt expense and it's their cash basis.

The other thing too is it's not a decision that we would ever want to make Solo. Like, as people, we want that tax professional involved in this because there's criteria and specifics that go around this that really make sense for, for a move like that. And it is an election change. So yeah.

I was going to say, it's not a flip of the switch. Oh, this year I'm going to do this, this method. You can't just switch it.

Like your mileage. I'm— today I'm doing mileage and next year I'm doing— you know, you make one determination, right?

You stick with it.

You can change, but you really have to be diligent about that. And there needs to be a lot of conversation around what that looks like and why you would work to that.

Yes.

So, and it could be part of the planning session, I guess, is what I'm going for here, is like saying, like you were just mentioning before, where you have to think of all these other things. Well, okay, today you're this, your long, your 5-year plan is this, the KPIs and the metrics you want to make sure you're keeping your eyes on are X. Does that align with what it is that you're saying you want to be on a method?

Yeah.

Does it align with your corporate structure?

Does it—

or, you know, any entity structure at that point? And what's your growth? What's your exit plan? So there's a lot that goes into just switching it over, right?

Exactly. And it's, it's, it definitely is a moment to take with your client to explain it to them. Make sure the reporting is run that way. I've seen it, it's weird in QuickBooks. You can designate it in that settings area, but then sometimes I think we have that accountant tools and it can be changed there as well. I like to use those date sets there because I'm really working on last year. I want to pull up my reports that way.

Yeah.

But then sometimes I'll pull up just a general report and it will always come up in accrual and you have to watch your dates. I mean, I've had that happen where somebody will say to me, Your numbers are drastically different than mine and something's got to be wrong. I just pulled it down for the coach. I pulled those financials down for the coach and their reports in accrual basis. And I gave them cash basis reports because that's how they do their taxes. And then if I bring that up, they're like, oh, oh wow, oh, I didn't realize that. And what's— then you have to explain to them what the difference is. And you know, you have a lot of open invoices and that's another whole conversation.

That's a, that's a big one that we like to look at. And what's maybe A lot of times what we'll see is you've created these invoices and you created them after you received the money, so the timing doesn't line up. So your AR gets overinflated, or no one's cleared it out. Your payments to deposit are overinflated, and you found out that they were just sweeped right in directly into legal fees with no reference to who paid. That's another big problem because when you start to untangle that, And if we don't understand the method in which you're working under, are you a cash flow accrual company? Which for us, it's really easy to look at a tax return and understand that.

Yeah. But you're right. I mean, we've seen that a lot where the client will be, well, I didn't connect Clio. I left it over here and the money's coming in, but I'm putting the invoices in to track the invoices and the payments. But I'm also booking it all in as cash in the bank feed as Yeah. Legal system. Yeah, they're double putting twice as much revenue into the file, and it's messy. It's real messy. Yeah, you gotta be careful with that.

I mean, well, and, and, you know, there, there has been moments where a cash-based person will look at their accounts receivable and say, I don't think I'm going to be even able to collect all of this. Yeah, there's a whole weight of handling that because a lot of times when you have deferred Or potential, you know, I had this conversation with a client and let's say it's to make it simple, it's $100,000 and they know they're only going to get a quarter of it.

Mm-hmm.

Well, but they don't know when. So the determination and conversations about what that looks like and the work has been completed. How do you handle it? What happens? And that's not something you want to just like, oh, willy-nilly, just go do this for me.

Right.

Probably want to have a conversation with our tax person too, to be making sure that we're in compliance with a lot of the rules and guidance for that.

I think that's really important to do. Yeah. Having that conversation with the client, with the client's tax person.

Yeah.

Be that— be in the forefront of, as a legal bookkeeper, be in the forefront of initiating that conversation with your client. Ask for the, you know, ask for the intro and try to step into that space, especially now is a great time. When this recording comes out, not not January, you know, actually February, March. That's not a great time to have that conversation. You really want to get to some kind of relationship with them where it's a trusting relationship. I think that's important to have, especially especially if they have coaching too. You want to be involved in that coaching. Know where your client's looking to go because a lot of times they're in the coaching; they don't even understand this stuff. So they'll be like. They asked me for 15 reports. I don't know why. And you have to really sit with them and let them understand what the reports are about.

Yeah.

Have a few moments. And that might bring you right back to what we said earlier about the Four Seasons and giving that concierge service, that above and beyond time that you take with them to help them understand. And we've had that conversation with clients where they're like, no one's ever taken the time to explain it to me that way. It's so beneficial what you just said. I finally get it. I want to understand this stuff. And you hear that a lot with clients. I want to understand it. I want to know what I'm doing.

Between a coach and a tax person too, don't you feel, Lynda, like sometimes it gets lost in translation between profitability, cash flow, understanding it, where to draw your numbers? And it's not that other people aren't explaining it well. Sometimes you purely need, even though we serve that, we're in the accounting, a business owner to business owner conversation. And that's where it's— that's where like taking off that hat and figuring out how to Like, all right, let's— what— where is the real crux to this? What's the anxiety behind this? What are you most worried about? Why do you have 5 different platforms bringing in your funds to you? Why can't you just distill it down to one? What distrust occurred during that process? What merchant didn't do well, but you were, you know, it's a legacy merchant.

Mm-hmm.

So those are lots of little pieces that impact how, how profitable you could be. You know what I mean? Like, they have— there will be some big impact to it.

So, um, and for sure, if you're a legal bookkeeper and you see a lot of AR, that's a great open door to conversation with the client saying, you got a lot here that's not, not been taken care of, you know.

Or advanced client cost. Yeah, see that you have a lot booked.

Yes, you have a lot in here that's not been addressed.

But no one's addressed it. Are you sure you haven't billed for this? What do you mean by that? I'm like, okay, well, you advanced a filing fee. Oh no, I'm sure I collected on it. That case is closed. Well, we have a problem because now you've got this extra account sitting on one of your financial statements that doesn't reflect accurately.

Yeah.

That has to be handled. So there's like a whole plethora of a deeper conversation. And I mean, I know we just touched on it. I know we serve 2 audiences here. We serve both, you know, the, the business owner, the attorney, and we serve people that are in our profession that do this. And there's so much to go into this, but I would say I would take some key pieces, right? You would look at it and, and look at the— like you said, Lynda, what's the accounts receivable? Do you have accounts payable? What are things that are sitting in undeposited funds to start? Just, just to start to help.

And don't go by what your client says. Validate that with the tax return.

Yes.

They will. Sometimes they don't know and they're just going to say, oh, I'm accrual-based or I'm whatever. And then validate it because, yeah, yes, 90% of them are cash basis. We really don't have a lot of accrual-based ones, but like you said, bigger firm or God only knows what drove that decision. You know, your tax—

Our smaller firm. I mean, we, it's a, it's a smaller firm.

It's a small firm and why that was chosen, I don't know.

Yeah. Don't understand it.

But, and they don't know. Wow.

Yeah, that was a— that was an interesting segment that we did, but it was a good one. I feel like it's really important. It's one that gets skipped over and misunderstood. So yes, for sure, I talked about it. Yeah.

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Well, okay, so I really thought—

We forgot to say we miss Steve.

I know, we miss you, Steve.

Sorry.

Yeah, but I will say I really thought I put my blanket out. I really thought my cat would be in here because my husband did tell me he never showed up and came in the house on time until, like, the moment he heard my voice.

He's probably out there catching you a gift.

Oh, God. For yours. We had a whole cat over here. I can't hear either.

No, I don't know where they are.

I know, right?

Way too quiet. They're like 2-year-olds.

I probably should wash this thing now because—

Yeah, now that he's not there, and then he'll show up.

He'll show up, right? take over and make a mess. But well, this was good. I'm glad we could do this. And Steve, we did miss you.

We did miss you, Steve.

I promise.

Bye all. Bye everybody.