How to Run a Law Firm | Who to Hire: Accountant

Colleen Williams
Wed, 01 May 2024 22:21:17 +0000
Learning

As an attorney, you went to school and trained to “practice law,” but have you considered the importance of running your law firm like a business? Failing to recognize that your firm is a business and should run like one could get you in trouble. After all, your firm is required to oversee its operations, personnel, and finances.

Should your law firm hire an accountant? One great solution is to hire someone on staff or outsource the role so you can focus on serving clients, not crunching numbers.

Running Your Law Firm Like a Business

For law firms to survive and prosper in today’s highly competitive market, they must be run like a business. Unfortunately, many law schools fail to teach their students vital business skills.

According to Martindale Avvo’s latest “The Business of Your Practice” report, many attorneys enter the profession to pursue a passion for helping others. However, up to 25% of their workweek is spent dealing with non-legal matters.

Over 75% of respondents reported that business skills are “very important” to running their firm, but balancing running the business with life and practicing law is challenging. At the same time, someone needs to handle essential functions like legal marketing, administration, lead intake, and accounting.

Why Law Firm Accounting is Important

If you run a small law firm, you want it to be as profitable as possible. At the same time, you need to remain compliant with certain rules and pay your bills on time. This can be challenging to accomplish on your own when your main focus is on delivering a positive client experience. Here are several reasons why law firm accounting must be one of your priorities.

Compliance

Every law firm has a responsibility to comply with specific ethics regulations. For example, Rule 1.15 of the ABA’s Model Rules of Professional Conduct details lawyers’ critical responsibilities regarding recordkeeping, holding funds in trust, and keeping clients informed about the status of funds.

Mishandling client funds or other violations of regulations can lead to serious consequences. For example, violating legal accounting rules could result in penalties, license suspension, and even disbarment.

Business Growth

In addition to being a law firm, your legal practice is also a business. To survive and thrive, your business needs to have the proper financial planning and management necessary to support growth.

When you pay proper attention to your law firm’s accounting, you’ll pay your bills and get paid on time. Everything will get recorded as it should, and you’ll have the information you need to make more informed business decisions as you expand.

Brand Reputation

Your law firm’s reputation is critical. Any financial mistakes you make will reflect poorly on your brand and make you appear unprofessional. Having the support of a financial professional can help you avoid costly errors that could lead to penalties and the loss of future clients.

Should You Hire a Law Firm Accountant?

Now that you understand the benefits and necessity of law firm accounting, you might be considering your options for hiring a law firm accountant. Budgeting and managing your books using accounting software can get you started as a sole practitioner. But, if you want to focus more of your time practicing law than tallying figures, you’ll likely need to consider hiring help.

Several options are available for law firm accounting for small firms.

Bookkeeper

A bookkeeper records your law firm’s daily transactions. They can also send and process invoices, manage your accounts payable, handle payroll, and produce routine financial reports.

Controller

A controller’s role is more in-depth. They can keep your firm’s day-to-day financial data updated and accurate, oversee your financial system, and handle account reconciliation.

Accountant or CPA

An accountant or CPA is who you want to use to oversee a controller or bookkeeper’s activities. A legal accountant will add value to your firm by analyzing, interpreting, and summarizing your financial data to help you understand trends and build a strong financial plan for the future.

In-House vs. Outsource

No matter which option you choose, you can also decide whether you will bring on a new employee in-house or outsource the work. When your business is busy and large enough to justify it, you’ll probably want to put a full-time financial person on your payroll. Otherwise, you can start by outsourcing this function of your business to a reputable resource so you can focus on other areas of your business.

Managing and Growing Your Law Firm Using Proper Accounting

While keeping your law firm’s books in order may not sound enjoyable, it’s a necessary component of running a business. There are several factors to balance if you want to ensure efficient operations and create an environment that supports growth.

Creating a Clear Bookkeeping System

When it comes to your law firm’s accounting, you need to develop a clear and concise system that will reduce errors and ensure the bills are getting paid and recorded.

Having the Right Bank Accounts

Your law firm probably already has a business bank account. Most firms will require at least three accounts to maintain accurate bookkeeping and avoid compliance violations. These include a business checking account, a savings account, and an Interest on Lawyers Trust Account (IOLTA).

Filing Taxes Correctly

A critical part of running your law firm properly is filing taxes on time and correctly. Your accountant can make sure this happens and maximize your tax deductions so you don’t overpay.

Keeping Law Firm Records

Every business, including law firms, must keep proper financial records. Your bookkeeper or accountant can assemble and organize documents related to:

Bills and invoices

Time logs and billing data

Bank and credit card statements

Invoices and bills

Previous tax returns

Once you understand why your law firm needs proper financial management, the decision about whether to hire an accountant becomes simple. While using technology can ease the burden of many manual tasks, you may still wish to bring on outside help to ensure compliance, stay organized, and avoid costly errors.