Learn Lean Law Hard Costs Soft Costs

Hi there, Linda Artesani, Artesani Bookkeeping. This week is all about hard cost and soft cost and what that means, and how it's applicable in a law firm. And really how the workflow around it works inside of LeanLaw and QuickBooks Online Advanced. So this is something that has come up multiple times with clients just recently, because it's affecting the books in a different way when we do a migration and a rebuild of data than it does in your typical daily work flow with the 2 apps. So I'm going to take you inside of QuickBooks and inside of LeanLaw, show you the workflow of the transactions. But on a short note, I just want to mention that. So if you look at soft costs, are like indirect costs. So if you paid for postage for the firm, and then you needed some stamps to send something out to a client because they had to have it snail mailed, those stamps would be considered soft costs. You're not going to go count each stamp. And when you made the purchase, you're not going to go back to the check that paid for all the stamps and break it out by client. It wouldn't make any sense to do that. It's also something you can use if somebody has to make copies. So it's something that if the, you know, the admin had to make copies for the file, most firms have like a copy fee and they use that for just applying that back to get some of the cost back involved in creating the copies for clients. There's plenty of other ones I've listed inside my blog that kind of fall in the soft cost category. For hard costs, thinking in terms of like a filing fee, a witness fee, some of those direct costs that are applicable right to the client or the matter. Those are hard costs. They're just flat out, this is what you paid for this client. And don't forget, the attorney's prepaying for this. So the attorney gets a retainer, holds that money in an account, and then pays out of the law firm's operating account for these expenses. And we have to book them in properly, especially with IRS rules. We have to really account for them in the right way so they don't affect the income or expense side of the law firm's books. Unless— and there's always a but, right? Unless if something is billed and somebody pays, we pay for an expense, say a small expense. It could be anything, something tiny like a filing fee. And then The matter is already closed and it's a small amount of money and you go to the attorney and say, this is still here. It came in after the matter is closed. What do you want me to do? A lot of times a lawyer will say, look, we're not going to chase for that. The matter's closed. We're not going to just send a bill out for that. Let's just write it down. When you write it down, you're taking it out of advanced client costs and now it's become an expense for the firm because they'll never get reimbursed for it. That's kind of the short way of describing those 2 fees and how to understand them. I'm going to take you now into QuickBooks. I'm going to show you the transactions, how LeanLaw handles both. And then we'll talk a little bit about migration at the end of the video. So let me share my screen. So here we are recording a soft cost. So postage, if you think in terms of postage, US Postal Service, you're paying for stamps. For example, the stamps are purchased, maybe you use some to write some bills and, you know, send some checks out to pay for some bills. God forbid you're still writing checks, but you're not using bill pay. But if you are, lots of law firms still write checks, use the stamps. They're a firm expense. The stamps were used to pay the firm's bills. Perfect. But say you had to send something to a client, they didn't have the internet, or they want— or they need a hard copy to sign or whatever, and you're not using DocuSign. You had to mail that to the client. You use some of those same stamps, you're not going to count each stamp and apply it, go back to the entry that this was and break it down by client. That just does not make sense. So what you'll do is you'll enter it as a soft cost. So I'm going to come up here and in LeanLaw, I'm going to go to my Expense tab. I'm going to hit a new expense. And then I'm just going to pick my client here, which is Chris Hemsworth. He has a couple of matters. So it's an estate planning. I had to send them something with stamps. So I'm just hitting postage and most firms will put just one price on it. So you're not going like, oh, that envelope weighed a pound and a half and this one was just a regular stamp, just Just a fee of $10 to cover all the expenses of the postage. I'm going to hit Save. So that's it. Now what happened there? Nothing happened in QuickBooks. You've already accounted for the entire expense and nothing happened in QuickBooks at all. It is like a holding place here. I could actually just take it off. I could click on the expense for him for postage, and I could just delete it. Because it has no effect in the accounting at all. Now, on the other hand, cancel here, I'm going to come over to this one. Here's a check to the Lee County Clerk's Office. And it's to advance client costs because I paid a filing fee for my, for my client. We upfronted the money for him, we're doing estate planning, we had to file something at the court. And I'm booking it right to him as the customer, as you can see here. And here's the attorney, Alicia Florick. Now, if I go back to LeanLaw, you will see that this cost is booked to him. And it is also A check and it's— you can come back here and hit this QB and it's going to bring me right to that check, which is one of the features I love about LeanLaw, one of the many. So now this is all here. I've got time booked, I've got a soft cost, I've got a hard cost. How did that hard cost get booked inside of QuickBooks? Because it's there, we booked it, but it went to Advanced Client Cost Account. What the heck is that, right? Let me take you back to QuickBooks. Let's go to balance sheet so I can show you. And on the balance sheet, you can see he's got his check to the Lee County Clerk's Office for $6,845. So you can see up here with this disorderly conduct case, I had a $1,000 fee and then I've already invoiced the client. So you can see that the money went in and the money went out. So I invoiced him. I paid for this fee. I had a bill for $1,000 and I booked it to the client and then I invoiced the client for the $1,000. So it went up into this account and it came down. If I go back to a balance sheet, so you can see where this is on the account, doesn't affect the income or expenses at all. Here's advanced client cost. You can make subaccounts in LeanLaw if you want to track these separately. Some firms do. Maybe they had it in an old software. Don't recommend it because you really only go in and out on this account. You should reconcile advanced client cost account. That's how you'll know you've got things hanging. The easiest way to see what's left up there is just to come to the Expense tab to see what do you have hanging that needs to be billed. And you can, you can look at the ones with the QB to see those are the things that are inside as hard costs that will be in your Advanced Client Cost account. You can kind of graze through here to see, okay, these are all still open. I'm good. But you really should just come over and just do a reconciliation of this account. You can reconcile an asset account. So you can come right over here, pick Advanced Client Cost Account. I'm going to pick the parent. This is, you know, I haven't done this in a while. I can come over here, do zero, and do today's date, and then reconcile it. And because I had deleted something earlier, it's not— it's going to be there, not be there. So you can see that I can pick the transactions that are here. So here's the $75 and here's the $75. You want to make sure they're with the same matter. One of the ways that I will do that is I will actually come over, and I think this is a great report to have. I will actually come into the Advanced Client Cost Account. And what I'll do is I will actually group this by the client. And that way, when I run the report, you're going to see that in and out, which is what I had open on the screen. This is a great way to kind of track your Advanced Client Cost Accounts, see which ones should be removed off of The reconciliation, I would normally just do like all dates and run the report from there and really track all the ins and the outs of, of the matter to see what things are still kind of lingering as I go through and do— I would do a reconciliation on a second tab. So that's how those are accounted for. Now let's go back to LeanLaw. I'm going to invoice Chris Helmsworth. So I'm back in the billing tab. I'm actually going to do an invoice for him just to show you how this is going to be removed from his account. So I'm just going to come over here, create a draft. Just take you through the steps. Once that's over there, you can see the draft invoice was created. So this is what I do with attorneys all the time. I'll come in and I'll tell them, okay, the draft is there, the attorney will approve it. He'll say, hey Linda, I've approved the bills. You can now do the billing. And I can come over here and submit it to QuickBooks. Once I submit it to QuickBooks, if we come back over here and just hit a little refresh, because this is cloud accounting, so you have to make sure that you refresh the screen if you've had a tab open. You're now going to see that that money for Chris is in and out. So if we go back to All dates. Well, actually, he should be in here anyway. Let me group it again by the customer because it lost that setting. And I would make this— actually would make this as a memorized report so it's easy to grasp and get into it. So you'll see that Chris now has— he was— we had a fee, a legal fee, a witness fee, not a witness fee, a filing fee for him for $6,845, and we've now invoiced it. So it's not sitting in client advanced cost account anymore. It's gone. We now have an invoice for him. And the invoice, if you want to see the back end of this, it's basically— you're going to see you've got here, you've got the— this is the time I billed. This is the check for $68.45. Here's the postage that I billed. And here is an administrative fee. And then if you come into the transaction journal, you can see the backside of how this invoice was addressed. So remember, the $68.45, not going to affect the client's books at all in any, any way. When I run a profit and loss, you're not even going to see that as any part of profit or loss. So no income, no expense. You will see this as billable expense income. There's my postage. So I paid for the postage in full for $50. I've now invoiced out $10 to my client and they've reimbursed me for that expense for $10. And then this is how LeanLaw handles it. It actually puts it into an income account as I've got billable expense income for $10. That's just how it's worked. That's how it's shown. We're not going to go in and make it go to postage. There's really no way to do that. It would be hard to kind of affect every expense account. So it just affects that one blanket income account. You know, it's not your legal income. Your legal fee income is just income recouped. for soft costs. So hopefully that makes sense. And hopefully this video will kind of take you through— takes you through the backside in QuickBooks, how that works. You will see postage for $50, you will see $10 in income. So your postage really nets out at $40 in the example that I just showed today. When it comes to data migration, I said I'd touch upon this a little bit. So data migration, we bring in all the data from the prior software, we have a cutoff date. We start at the beginning of the year, fiscal year, and we rebuild data. As we're rebuilding data, there'll be invoices that we're recreating along with payments as well. But then there's things that should have populated in advanced client costs, should have come back down. But rebuilding data, when you have to rebuild, you know, thousands of invoices, we don't do it through LeanLaw. They've been billed and they've been paid. We'll end up putting things into that billable expense income for client costs not incurred. So these are— it's a place that we'll put those expenses to show that they've been in and they've been out. So this is a case where we will show the income and the expense account. There, there are 2 accounts on the balance sheet, on the profit and loss, that you will see the money in and the money out. So every expense will be booked into the expense, one blanket expense, billable expense account, and the other will be the billable expense income account. So those are the 2 offsets. It's still going to net out to zero on the books, but we have to put it somewhere when we do a rebuild. We're not rebuilding all the invoices through LeanLaw. So this is the way we do that in a, in a rebuild or migration. So still a little bit different workflow, sometimes gets the clients like, what is this money that's in here? But you have to take them through the steps of explaining how the rebuild works. And then once you understand that, it's, it's just a temporary thing. So as you start to work forward, you'll see that the regular workflow, the normal workflow, the typical workflow in LeanLaw with hard costs and soft costs are exactly the way I mentioned they flowed through— direct and indirect. It's really simple. So hopefully this explains it. I'm going to have a really cool graphic inside the blog and a lot of explanations. So I hope this makes it a little bit easier to understand. As always, if you need us for anything, you can reach out to me in our Facebook group, QB Community Live. There'll be a link in the post to join our group. If you need help, we're there to help you. If you are an attorney or a law firm and you have books that are messy or need help with your trust accounting or you need to get off of a bad software, reach out. I'm here to help. Thank you so much. See you next week. Bye now.