As attorneys, you might be familiar with what it feels like for people to dread learning about your profession. Accounting, like legal practice, dredges up some not-so-great connotations: An imposing IRS, mounds of paperwork, and money slowly draining from our precious coffers. Amanda Aguillard, CPA and Xero Partner, wants to teach legal practitioners that accounting doesn’t have to be a dirty word. From the 2017 Clio Cloud Conference stage in New Orleans, Amanda broke down what lawyers need to know about accounting—nothing extra, just the basics.
Don’t think math; think laundry
Accounting is less Pythagorean Theorem and more Tide commercial, it turns out.
“Accounting is really about organization,” said Amanda. “Accounting is not unlike sorting laundry.”
Essentially, accounting requires you to sort all of your financial transactions into broad categories. The three most important for attorneys are assets (things we value like an office space or cash), liabilities (things we owe, like the mortgage on that office space), and the owner’s equity (what’s left over after liabilities are subtracted from assets).
Once those transactions are sorted, they each have two sides, which is called double entry accounting.
The gist, Amanda explains, is essentially, “if I give you something, you give me something back probably of equal value.”
You need financial data, and Excel isn’t giving it to you
Now that you know what accounting is, you need to be able to actually do it for your law firm. That’s where financial data comes in, and we’re talking more than just a tally of transactions.
“When we’re talking about the importance of solid accounting we are really talking about looking at financial data on a regular basis, and we can’t do that if we’re not gathering and sorting it on a regular basis,” said Amanda.
This means looking at how much money you’ve made, how much money you’ve paid out, and how much is owed to you more than just once a year at tax time.
“Imagine the power of paying attention to your financials on a regular, consistent basis, even if you did it for five minutes,” said Amanda.
Doing this kind of daily, weekly, or monthly dive into your firm’s accounting requires a bit of automation to sort all of your transactions into the correct buckets. (Remember: assets, liabilities, and owner’s equity.) For the newbie solo practitioner or small firm owner, this means looking beyond just who owes you money to evaluate the firm’s financials from top to bottom.
“When we use a package like Clio, which is fantastic, an accounting system on the back end can grab all those other costs,” said Amanda. “Imagine what difference that would make if you knew how much electricity cost you, how much you’re spending on mortgage interest.”
That’s where accounting software—i.e. not an Excel spreadsheet—comes in.
How to make the data count for your firm
We know we need data, and we know we need that data organized in a meaningful way. How do we get it?
There are two sets of financial data that can be helpful in your firm’s accounting:
- Balance sheet: A snapshot of your assets, liabilities, and owner’s equity at a period in time, usually the last day of the month, quarter, or year.
- Income statement: Revenue minus expenses over a period of time, usually a month.
With these essential documents, you can create helpful numbers that really tell you how you’re doing as a firm. Amanda uses KPIs, or key performance indicators, and dashboards, which show a variety of KPIs, to help her clients run their businesses. KPIs can be financial indicators, like profitability, collection (how much are you owed), revenue per full-time employee, etc. KPIs can also include non-financial indicators, like client satisfaction, new clients per month, website traffic, etc.
“The big question is, ‘What is important to your firm?’ Amanda asked. “Figure out what is your strategy for your firm and how can we measure that and track the performance.”
KPIs, created from your organized financial data, turn your firm’s financials into something you can look at on a monthly basis and determine if you’re going in the right direction.
Avoiding trust accounting nightmares is kind of easy
One of the most commonly prosecuted infractions against attorneys is trust account issues, said Amanda, but avoiding them is pretty simple.
“Remember one thing,” Amanda cautioned. “The trust account is not your money. It is your client’s money. You can’t mix them. No commingling of funds ever. Like never ever, never ever commingle client funds. You can’t do it not even for a second.”
Some attorneys are hung up by not knowing how much of a client’s settlement check is rightfully owed to the firm. This is an issue that goes back to good accounting data and keeping on top of your records.
Lastly, a two-book accounting system is key for avoiding trust account infractions, said Amanda.
“The great debate: one set of books or two,” said Amanda. “It means do the funds that belong to your clients go on the financial statements of your accounting of your law firm?”
“I adamantly say no. That is not your money and it should not go on the financial statements of your law firm, period,” she said.
Three-way reconciliation and why you should care
Three-way reconciliation is essentially three steps to checking and verifying your financial data each month.
- Bank account reconciliation: Checking the bank’s version of your balance against what you think your balance is. If there’s a discrepancy, documenting the differences.
- Trust reconciliation: How much money is owed to other people.
- Client trust ledger: A statement of activity about your trust accounts.
That’s it. And it exists in regular account software, too, not just trust-specific software.
Let the right tech make your life easier
Your firm is a treasure trove of financial data, but it’s easy to get lost. Here are the apps Amanda recommends to streamline your firm:
Watch Amanda’s full talk below: