Cash rules. But cash flow management is truly a pain in the keister. You’ve got money coming in—which presents ethical issues, especially if you take credit cards. (Yes, you should take credit cards—it’s 2015.) You’ve got money on hand, some of which is yours and some of which is not yet yours. And you’ve got countless sums flowing out for business expenses, payroll, refunds of retainers, and happy hours to celebrate life and law’s little successes.
Personally, I went to law school to be a lawyer. I like to find answers to clients’ problems and reduce the inherent pain of divorce and custody disputes. I do not like to deal with billing, trust accounting, and “I’ll pay you when I get that massive check that is totally coming next month.”
But that’s life. Cash rules. And here are a few things to keep in mind if you need to rule your law firm cash flow. Because tracking your expenses in Excel spreadsheets or playing forensic accountant after January 1, 2016 is not how the books should be managed.
Accounting software to ease your pain: From free to OMG
There was a time, perhaps when dinosaurs roamed the Earth, that people tracked expenses in paper books. And then there was Quickbooks. Quickbooks hurt my soul. It was complicated, stuffed with too many features, and incredibly expensive. But it also works with everything, many firms and lawyers that you have worked with use it, and every CPA worth their fee can import your Quickbooks data and make quick work of your messy accounting.
And then they released QuickBooks Online, which looks like a damn fine product, has simple apps, and even has a cheaper self-employment tier for those of you who do mostly 1099 work. I’m going to have to give them a second look because, while their desktop software made me cry, their cloud platform has stellar reviews. It also integrates with Clio.
But Quickbooks isn’t your only option. An alternative, Xero, was recently recommended to me by a colleague. It integrates with Clio (of course), pulls your accounts and transactions from your bank, and is reportedly far quicker to learn. It also costs money, however. And personally, if I have to pay about as much as the market leader (QuickBooks), I’m going to go with the market leader.
What am I doing in the meantime? I’m still in the small firm startup stage. I like things that are cheap or free, as well as secure. I signed up with Wave, a freemium cloud-based accounting platform, earlier this year (and binge caught-up on classifying transactions earlier this week). It also connects to your bank accounts and credit cards, tracks your income and expenses, and gives you a great overview of just how much you’re bleeding into the red.
Whatever your system is, however, the key is to stick with it: Don’t binge catch-up on old receipts and transactions. It’s way easier to track as you go. Which bring me to my next point:
Tracking expenses: Of course there are apps
Quickbooks has lots of apps. Even Wave has a free app (albeit, one that is limited to receipt scanning, but still: free). Xero too. Use these to scan in receipts and track and classify account transactions as you go.
Even if you don’t use accounting software, you still probably carry a smartphone with you wherever you go. You can use Evernote to take pictures of receipts and add notes about what in the heck you spent $168 on Amazon for.
You get the point. Because spending a cold January weekend digging through old online invoices and matching them to uncategorized transactions will be as miserable as it sounds. And more tragically, it also means you’re likely to miss a few tax deductions.
Let’s get you something to track (credit cards)
My stepfather still uses cash and checks. He is pushing sixty. His mother, who is about to reach the big 8-0, also uses cash and checks.
My generation? We use plastic for everything. (And maybe soon, we’ll all be tapping our smartphones to pay for stuff. This, by the way, is as weird to me as my constant swiping of a debit card is to my forefathers.) You know who else uses plastic? Clients who want to pay you fast, and who may be looking to cash in on some extra rewards points.
You need to take credit cards.
But, as you’re probably aware, there are major ethical landmines that stand in your way. There is a great overview of those issues in this month’s Law Practice magazine so we won’t hit the specifics, but this is what you need to research about your state:
- Do unearned funds (on retainers) have to go into a trust account? (Believe it or not, some states do not require this.)
- Does your credit card processor take their customary processing fees out of that retainer amount (most do) or can you have them take it out of your operating account (the ethical approach)? Some of the easier alternatives, such as Square, aren’t trust account-friendly. LawPay, on the other hand, is (and, shockingly enough, integrates with Clio).
- Can you pass on the cost of credit card processing, via a surcharge, to the client? (Check ethics AND card processing agreements for this one.)
The good news is, once you have this set up properly, your accounting software should be able to automatically import the deposits and fees associated with credit card payment and classify them accordingly, which means more income, more tax deductions, and fewer administrative headaches.
Where you put all of this money (setting up your accounts)
You’ll need a business checking account—obviously. (Seriously, don’t even try to run a business out of your personal checking account.) You may also need an IOLTA trust account if you are handling client funds.
And here’s a really great idea, courtesy of this extensive law firm finances overview post over at Lawyerist: Get a savings account and stuff a third of your income into it for tax purposes, because Uncle Sam will likely take at least that much. You’ll likely have to estimate and pay taxes quarterly—or face penalties when you file at the end of the year—so setting aside a third of your receipts now will ensure that you have sufficient funds on hand for tax time.
Final tip: You might want to double-check that your bank works with your accounting software, especially if you use an online platform. That sort of convenience is invaluable.
Consult experts, not amateurs
I have a lot of friends who run their own firms. And many of them are up-and-down the California coast, which means they are familiar with our state’s particular requirements. Except, they aren’t. I can’t tell you how many conversations I’ve had with a friend where I ask them a question about ethical law firm accounting and they’ll either shrug or give me an answer that is simply wrong.
You only have to set all of this stuff up once. But if you set it up wrong, it could cost you: ethics violations, tax penalties, and angry clients all come to mind.
We’ve given you a jumping off point for considering your own office policies and procedures, based on the watercooler conversations that happen in my office. However, your state’s regulations and ethics rules are the landmines that you really need to avoid. Start strong by checking with your state bar and with an actual accountant.