I'm frequently asked to provide best practices for workflows for a law firm. When asked this question, my response is always, "What area (or areas) of law does the firm practice?" The workflow changes significantly by the practice area.
How many possible practice areas are there? Good question; there are always new areas emerging and longtime areas expanding.
Some of the most recent emerging and fastest growing are driven by advances in technology like cybersecurity, intellectual property, and artificial intelligence. Social issues drive other new areas or may drive historic practice areas to expansion.
For example, cannabis law is a fast-growing area of law and will continue to grow fast as state and federal laws change. Another example is the expanding areas around food law which include food labeling, food safety, and foodstuff source tracking.
What questions should be asked to determine bookkeeping workflows for legal firms?
If you are a bookkeeping generalist serving all areas of law, you have many more nuances about the fields to learn. To begin building your workflows, you need to answer these questions which provide an overview of what needs to be done.
Does the firm take retainers or client deposits?
Depending on the state where the practice is located, retainers are handled differently. For example, in some states, retainers of a specific size must be booked as income when received. The legal fees are then booked against the ‘prepaid’ retainer.
Trust retainer deposits are handled differently – the firm is holding the client’s money in trust to bill against when the fees have been earned.
What reports are needed for attorney compensation purposes?
If there is more than one attorney in the firm, the sky is the limit on how the compensation agreement has been written. Here are a few examples of how compensation may be determined.
- By originating attorney. In this case, the originating attorney receives a percentage of all income received by the firm, regardless of if they did any work directly on the case or matter.
- By responsible attorney. The responsible attorney receives a percentage of the income for each case they are responsible for, even if other attorneys do all the billable time.
- By the billed hour. Each attorney receives a percentage of each hour billed.
- By hour for paid invoices. Attornies receive a percentage of billed hours, but only after the invoice for those hours has been paid.
What client costs are paid by the firm and later reimbursed by the client?
Some client costs are paid by the firm and then later reimbursed after the case is settled or during the monthly billing cycle. Depending on the amount of the expense, some firms secure loans to cover the advance client costs, so the firm does not absorb the expense. When this happens, the interest on those loans is charged back to those clients whose costs were paid by the loan.
What client costs are not charged back to the client?
Although it seems that all costs would be charged back to the client, that is not always the case. For example, if the firm bills on a flat fee basis, costs are typically factored into that fee. However, it is important to track those costs for regular analysis to determine if those costs are maintaining a fixed percent of the flat fee. In other words, cost tracking is necessary to maintain consistent profitability.
What is the difference in indirect cost workflow for law firms and other professional services firms?
The indirect cost workflow is not that different for law firms than other professional services firms. What differentiates law firm bookkeeping from other professional services firms is the client retainer tracking in compliance with their state bar association, client costs tracking, and compensation tracking, based on some very creative partner agreements that differentiate law firm bookkeeping.