The last three months of the year, or Q4, often represents the time of year when firms scramble to get clients to complete payment of outstanding invoices. The mad dash to settle invoices by December 31 isn’t just crucial for ensuring a strong financial performance at the year-end review. It’s also vital because having outstanding invoices when you close your books in Q4 can create accounting headaches when you try to reconcile them.
Even though you started a law firm to practice law, running a practice still means running a business. That involves managing your firm’s books and conducting end-of-year finances to facilitate your accountant’s review, help you understand your firm’s financial health and performance, and prepare your firm’s tax returns.
Compared to other businesses and industries, law firm accounting can be more complicated due to unique requirements, such as the necessity to maintain compliance with their state bars. Law firms and law partners can help reduce some of the headaches associated with closing out the books at the end of the fiscal year by utilizing processes and tools that ensure the money your firm has earned gets through the door by the end of the year.
Conducting End-of-Year Financials
Conducting a law firm’s end-of-year financials largely proceeds in two steps. The first step occurs throughout the fiscal year, as firms should be closing out financials each month to freeze the ledger. The second step takes place at the end of the fiscal year, or shortly thereafter.
For the end-of-year financials to be completed, the last month of the fiscal year must be closed, a firm’s bank accounts must be reconciled, all adjustments must be entered, and financial statements must be compared. It often helps to keep the end-of-month records and end-of-year records in the same report to ensure no information is inadvertently left off.
Some important steps on an end-of-year law firm accounting checklist include:
– Conducting a final client billing and review outstanding accounts receivable
– Finalizing reconciliation of all accounts, including client trust accounts and firm operating accounts
– Checking retainer balances and ensuring the accuracy of client trust account records
– Making entries for any end-of-year client payments or costs
– Reviewing profit/loss statements and ensuring that write-offs are correctly handled
– Making any needed adjustments and officially closing out your books to ensure no further edits are made
Law firms have a number of tools at their disposal to help them with their financials, including practice management software, accounting software, and online payment solutions, many of which can integrate with one another to help firm managers avoid having to transfer data from one platform to another and avoid information accidentally being left off.
These tools also can help firms to more efficiently bill and invoice clients and ensure they are paid the full income they’ve earned from their work.
Main components of law firm accounting
Law firms and practices typically conduct accounting taking into account three primary considerations: business account, retainer account, and matter cost accounting. Each component must be handled properly to ensure that a firm’s books reconcile at the end of the year, so firm managers should understand what each component entails:
- Business accounting – includes anything involving accounts payable and bills; managing bills often includes keeping track of bill amounts and due dates along with monitoring check and credit card activity for the firm.
- Retainer accounting – involves trust and IOLTA account management; regular reconciliation of trust and client accounts with the firm’s operating accounts must be performed to ensure that all client funds are accounted for and to avoid trust accounts from being over-drafted.
- Matter cost accounting – involves accounting between the two types of client costs, hard costs and soft costs; hard costs include expenses directly attributable to a client matter, like court filing fees or expert witness costs, while soft costs include expenses related to firm operations, like mailing and photocopying.
How online payments help firms keep their books in order and money coming through the door
For over a decade, LawPay has helped law firms manage their cash flow and get more client payments through the door by giving firms the freedom to take their payments online, from credit cards to eChecks. Vetted and approved by all 50 state bars and more than 60 local and specialty bars, LawPay specializes in easy, compliant online payments.
See for yourself how LawPay can help your firm get more money in the door in Q4 and boost your end-of-year financials. Contact LawPay today to schedule a demo to learn more about their features and solutions for smarter law firm accounting.