Why Mid sized Law Firms Should Outsource their Legal Accounting

Hi there, Linda Artesani, Artesani Accounting and the Proper Trust. Happy 2023, everyone, and it is January, obviously, and I wanted to talk a little bit about why mid-sized law firms should really consider outsourcing their legal accounting. And a lot of them, quite frankly, do, but sometimes they don't actually go towards a bookkeeper that specializes working in the legal industry, and I think that's a mistake that can be costly as far as their records not being correct and accurate. Legal accounting is definitely its own animal. I think that's the best way to describe it. And it's important to keep those accurate financial records because if you're that mid-sized firm, you really want to be sure that you're getting good data out. One of our favorite lines at our firm is garbage in, garbage out. We want to make sure that your records are accurate and that you are tracking things that you should be tracking in that mid-market space. So that not the small firm, but the mid-sized firm, which is the firms that we tend to work with, although we do have other clients in the smaller space. And a lot of the things I'm going to talk about today will apply to not only the larger firms, 5 to 50 employees, but also the smaller ones as well. It's just that we tend to work in the space of mid-market. So a couple of reasons why you should consider outsourcing is really the topic today and some of the things you need to do for cleanup. I think my number one reason for, uh, why I think all law firms should outsource and take their accounting out of the office and out of the employees' hands and give it to a professional firm that does this work is that you've got a lot of sensitive data there. I've seen it lots of times where one of our clients will mask what they make because they don't want the, the in-house bookkeeper to know their, their pay or their draw. And so they'll rename the account something that's not exactly wages or officer wages or partner wages or partner draw, actually not wages. But if you, if you think about it, it's kind of a great place to have delineation in the workflow and to really separate the workflow so that you keep that outside. The second reason you really want to work with a legal accounting bookkeeper or accountant is trust compliance. We know what that means. We know the importance of it. We know the value to you for it. If you've ever had an audit or had to sit through an audit, you want great data. And if your trust books aren't balanced, you know, it's going to be hard to pull that data. I'm going to give you a little trick to show you if you want to check it. If you're sitting here today, middle of January, thinking about closing your records for 2022, and you're like, I don't even know if my books are balanced. I mean, I know the balance sheet, the, the reconciliations have been done, but how do I know that it's actually been balanced? And that's the thing, there's a 3-way reconciliation. So if you use an external software, which most mid-sized firms do, you want to be able to validate what's in that software. For example, Clio. I have a listing of every single penny that I have in trust in inside that, and I want to make sure that that total equals the total that's in the bank, and that's reconciled with the bank. So there might be transactions in transit. You want to make sure that those transactions in transit are accounted for as well. So that means anything that's not deposited— maybe you put a deposit in at the very end of December, it doesn't hit the bank and, and clear the bank. And this year it'd be even later because of the holidays. It would be all the way up to January 3rd. So you're gonna see that, and those are gonna be a factor because maybe you booked the deposit in before you left on New Year's Eve, but it didn't actually process at the bank level until the next year. So those are the things that are kind of out there. Another thing that you want to think about is your advanced client costs. Has that account been reconciled ever? And I'll show you how easy it is to look to see in QuickBooks if it has been. Your bookkeeper should be reconciling that account. It's important to the ability to make sure that your account is balanced properly and that you don't have anything hanging loose there that's not supposed to be there. And really, it's something that may be a matter closed and that The account— the bill came in after you closed out the account, and you're like, oh, I'm not gonna bother the client for this expense. I've already returned their funds. I'm just gonna eat it. And when you eat it, it becomes a firm expense. So you want to get all those expenses in, especially at this time of the year. You want to lower your, your amount of money you're taxed on. You really want to clean that up because it's gonna sit in the balance sheet forever if you don't manage that and handle that. Another thing that you want to look at is you want to make sure that the year-end is clean. So a good way to look at that is to kind of run a profit and loss comparison. This past few years might be difficult because COVID might have affected your firm. Well, it really hasn't affected a lot of the law firms. Our law firms are growing, especially that mid-market space. They're growing. But you might find that you want to look and compare the accounts to make sure that things look like they're in the right buckets, basically, and that you don't have any problems that maybe an account got booked into professional services when it should have been an office supply. So those are things you want to take a look at in your own books. It's up to the firm owner, the business owner, to really make sure you check these things. Don't just rely on that bookkeeper. I mean, it's nice to do, but you really should have eyes on it and look at your reports. Another place you want to look at, and your bookkeeper should be giving you this, is a list of the uncleared checks, especially when it comes to the trust side. Are those checks just sitting there uncleared from 2020, 2018, 2019? If they're sitting there, yes, you produce the check, you sent it to the client. But if it never cleared the bank, you need to make sure that it— that's attended to. You have to do your due diligence. You have to follow through, try to reach the client. If it didn't get cashed, it's probably stale. You need to find the client and send that money to them. It's not your money. Now, if you've exhausted all efforts, then you send it to unclaimed funds, and then, you know, you deal with it by giving it to the state, and then they have to figure out where that person is. But It's something you want to consider. And I think the last tip for today's video before I give you a little demonstration on how to check your trust is to look at your equity section on your balance sheet. If you've got multiple partners, it should be stated as such. And I had a really good post last month that explained how that should look. If you're a partnership at all, you want to have the partners broken out by the percentages, and you want to have that clearly stated on the balance sheet. I've seen it lots of times where it just says owner's investment, owner's disbursement, and it's not clearly written. And not their partnership, it shouldn't even say the owners. It's not a sole proprietorship or a single-member LLC. So you want to see that it's written that way. If you're an S corp, you want to have that, that language as well. You want to see, you know, due to shareholder or shareholder distribution, shareholder contribution. You want the correct terminology so your books look good. So let's dive in. I'm just going to give you a couple quick tips to see how you can look at if your trust is balanced properly. I am not going to take you into the third way, which would be lien law. I'm just going to take you at a very high level on the balance sheet to show you and how you can check to see if your accounts, if your advanced client cost is reconciled. So let me share my screen. This tip is just a quick one so you can check at a very high level of when it was last reconciled. Bringing you into my demo file. That one's kind of messy, so I know it's probably not balanced properly, and that way we can check. So you're going to come over and you're going to come into QuickBooks. You got to come over to your reports, and I just want you to run a balance sheet. And the easiest way— and I'm going to actually back it up. I'm going to do all dates, but because this has got some old data in it, but you would run it as of this year. So 2020, actually last year, 2022, you're going to run it as 2022. I'm just going to leave it. I'll leave it at 2021 because I know this is— oh, so you want to run your balance sheet as of last year so you can take a look. And then what I'm going to do here, because it's the whole year, I'm going to come up to where it says Total Only, and I'm going to run it by months. And then I'm going to hit Run Report. And then I'm going to take a look. And hopefully you've got your accounts looking like this where I've got the operating together and the trust. If you have multiple trusts, you really want to have it that way. And I'm just gonna collapse this down so we can get this at the top of the screen. And here's my balance, $43,129.37 in January. And I'm gonna come down to my trust. I'm just gonna collapse this trust account. You may only have one. $43,129.37. So that's a balanced month. You can see that the $43,129.37— I can get on the same page— is exact for what's in— maybe I can close this down. What is in the bank account? So you can see there the balances align beautifully. $43,129, $43,129, $138,125.45, $138,125.45. So you just want to check that. You want to come across $116. I've got a problem here. I've got a problem here. So now I know what month I need to kind of work in. It started in May that there was a problem. So if you're seeing this on your balance sheet, you know that your trust account, even if it's reconciled to the bank, is not balancing back to the amount of money in the trust liability accounts. So you want to make sure that that's the case. Go back to your bookkeeper or your accounting professional and say, hey, I need this fixed, it's not correct. Now another place to check I said I would tell you is how to go to reconciliation. So I'm going to hit reconcile, and instead of picking a bank account here, which this is where you'll see if your banks are reconciled, I'm going to go to Advanced Client Costs. As you can see, it has not been reconciled since 7/30/2020. That's a problem. So you want to look to see when was the last date it was reconciled. If you don't even get this line and you get some kind of commercial looking like it needs to be reconciled and let's start, let's get started, that means none of your records have been reconciled. So that's something to consider as well. So that's just a couple of quick tips. I hope that's helpful. We all want to have really clean books. We don't want to pay money on any Income that we haven't earned. We want to have all the expenses in place. We want to have the right amount at tax time when we hand those books over to the tax, to the tax professional. If this seems like a lot and you're like, wow, I didn't realize my books were this messy, I need to reach out, you please reach out to us. We're more than happy to help you. We're just a phone call, a Zoom meeting, or a click away. And on that note, I hope you all have a wonderful, wonderful week. Bye.