Your Guide to Year-End Law Firm Accounting

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year-end law firm accounting

Needless to say, 2020 has been a trying year for legal professionals. Not only do you have to prepare your law firm for 2021 and the uncertainty it brings, you also have to get your year-end law firm accounting in order and close out the year. But the key is to start your year-end accounting process early. 

Reviewing your law firm’s finances before year-end is critical for setting up the practice for financial success. By taking the time now to methodically review your records, close on outstanding receivables, and budget for the year ahead, you’ll give your firm an advantage. You’ll also make planning for the coming year that much easier. Beyond that, gathering necessary firm financial information at year-end streamlines tax time for you and your accountant.

To help make year-end law firm accounting a little simpler this year, we’ve updated our guide to end-of-year law firm accounting. Read on to learn the steps you need to know to get your firm’s finances in shape for end-of-year—so that you can set your firm up to thrive in the new year.

What is law firm accounting?

Law firm accounting is often confused with law firm bookkeeping. To be clear, law firm bookkeeping refers to making sure every financial transaction in your law firm is accurately recorded, managing invoices, and team payroll. On the other hand, law firm accounting is a higher-level process that refers to getting essential business insights like key performance indicators (KPIs), financial trends, forecasting, and more to make critical financial decisions for your law firm. Accounting in a law firm also involves adjusting entries in your books that were previously missed, preparing your firm’s financial statements, tax planning, and completing tax returns. 

1. Identify and collect on outstanding balances

It’s best practice to collect on all accounts receivable in a timely manner (after all, the longer an invoice is outstanding, the less chance you have to collect the full value that your firm earned). But, for those clients that are slow to pay, making an effort to close them out in December will make things a lot less messy for your firm the following year.

Step 1: Ensure time entries and bills are current

Before you can look at your collections, it’s important to ensure that your firm has been on top of time tracking and billing. One way to achieve this is to require that everyone at your firm has tracked their hours worked through the end of November, so subsequent billing can take place at the beginning of December.

If you’re using the right software, this step should be painless. For example, Clio Manage’s legal time and expense tracking software makes it simple to effortlessly, accurately track hours, and send out bills.

Step 2: Run an accounts receivable report

An accounts receivable report will provide amounts outstanding on all open and past-due invoices. In Clio, this can be viewed on a per-user, per-client, and per-matter basis (see how to easily create an accounts receivable report in Clio Manage here).

Step 3: Identify large and/or old outstanding balances

Because your chances of collection decrease with time, it’s also a good idea to identify long-overdue balances before the end of the year. 

Why? As Saville’s David Epperson explains in his year-end financial law firm financial checklist, this leads to another important year-end action: “For any accounts deemed uncollectible, write them off as of December 31.”

You can see any overdue balances in Clio under Outstanding Balances (located within the main Billing tab of Clio Manage) and easily send payment reminders via Clio Connect or email to clients.

Step 4: Collect!

If you have several unpaid accounts, December can be a tough month to do collections—clients are focused on the holidays and are spending money on gifts, travel, and festivities. Again, it is best practice to stay on top of your collections all year round—but it’s not always possible to keep up.

However, there are a couple of positive reasons to collect in December:

  • Bonuses = extra funds to pay invoices. Many companies give out bonuses during the holidays. That means your client may have an additional source of revenue in December to pay your invoice. 
  • It’s everyone’s year-end. If you represent businesses, they are usually looking to pay all their expenses before year-end. It’s best to send bills early in December so that your clients can get on top of payments.

Tips for improving your year-end collections process

Still stuck on how to smooth the collections process for the end of the year? Try these year-end collections tips:

  • Give a discount. Consider giving a small discount for bills paid before year-end to encourage clients to pay you sooner.
  • Be clear and prompt when billing. There are many reasons why a bill may be going unpaid—be sure that you’re not one of them. Clio’s legal billing software makes it easy Clio’s to generate clear, readable bills quickly, with customized, branded templates, so you can send professional bills out on time. And, if you send bills out electronically with Clio, billing and collections are simpler and faster than ever before.
  • Bill more frequently. Try billing every two weeks in December instead of monthly, explaining the change in your billing process with a letter. Again, most clients will understand that you’re simply being proactive and working on your business’s year-end.
  • Send reminders. Your clients may not be holding off intentionally. Send a brief reminder to ensure your firm is top of mind (you can do this under Outstanding Balances in Clio).
  • Start accepting online credit card payments. When you make it easier for clients to pay, you’re more likely to get paid (and get paid faster). According to Clio’s 2017 Legal Trends Report, firms using Clio Payments get paid 39% faster than firms using check-based payments. In fact, the 2019 Legal Trends Report found that 57% of electronic payments get paid within the same day, and 85% get paid within a week. What’s more, according to the 2020 Legal Trends Report, the majority (65%) of consumers prefer to pay using electronic forms of payment, such as credit cards, debit cards, or online payment systems such as Clio Payments, PayPal, or Apple Pay over cash or check. 
  • Set up a payment plan. If your clients are unable to pay on time, consider setting up a payment plan to get them back on track, and collect what you’re owed within a mutually agreeable time-frame. Survey data from the 2020 Legal Trends Report show that the majority of consumers—72%, to be specific—would prefer to pay their legal fees on a payment plan.

Note: If you feel a bit lost when it comes to accounting specifics and want to review the essentials for legal professionals, check out this guide to essential accounting practices for law firms, featuring advice from Clio Cloud Conference speaker Amanda Aguillard, CPA.

2. Review your trust accounts

Quickbooks

Even if you’re careful and meticulous when dealing with your law firm’s trust accounts throughout the year (which you should be, in order to stay compliant), you should dedicate time at year-end to double-check that you’ve been diligent about moving money from your trust account to your operating account as fees were earned. Here’s how:

Ensure all of your client ledgers are balanced

Check that client ledgers are balanced by running a Work in Progress (WIP) report to look for any outstanding time or expenses. (Here’s how to do it in Clio.) 

Did you find anything outstanding? If so, invoice yourself, and pay yourself out of your trust accounts before year-end.

Reconcile your trust accounts before year-end

Next, you’ll also need to reconcile your trust accounts before December 31. That means checking your records against your bank statements to make sure that everything lines up.

In many states, lawyers are required to do this on a monthly basis, but some states also require annual reports—so check what’s required in your area.  

Use tech to simplify the process

By removing some of the manual work of managing trust accounting, you reduce the risk of error—which is why technology can simplify the process of checking and reconciling trust accounts at year-end.

  • Tools like Clio Manage’s trust accounting software make it easier to keep accurate records of trust funds and transactions—so you can stay compliant and be confident at the end of the year.
  • Accounting tools like QuickBooks or Xero help manage your accounting and recordkeeping year-round, and they integrate with Clio Manage.

3. Review your financials

The key to setting yourself up for success in the new year is to clearly see how you’ve done this year by properly tracking your firm’s financial information.

Review your law firm’s financial picture, including:

  • Actual prior year revenue/expenses: 
  • Current year revenue/expenses: 
    • Were you in the red or in the black THIS year (and by how much)?
  • Actual current year cash flow by month: 
    • How did you do in terms of cash flow on a month-to-month basis?
  • Current year-to-date (YTD) actual compared to YTD budget: 
  • Opening and ending operating account balance: 
    • Look at your account balances on a year-to-year and month-to-month basis.
    • How is your cash flow? 
    • Do you need to be more mindful of when expenses come up?
  • Profit/loss by month (which is different than the operating account balance): 
    • This is similar to the first two items on this list, but it isn’t quite the same: You’ll be looking at your bottom line each month, which is your revenues and gains minus your expenses and losses.
    • Look for any telling trends month-to-month. 
    • For example, November might always be a slower month, and March might always be busy.
    • For most lawyers, profit/loss will still be fairly similar to your revenue/expenses, but if you’ve made a big investment in technology or hardware for your firm, it’s worth taking a look at this number too.
  • Accounts receivable each month: 
    • How much were you owed each month? You’ll be able to see this under your accounts receivable report.
  • A cash flow projection
    • In addition to looking back on the past year, and forward into the future, you’ll also want to examine where you’ll be for the rest of the year with a cash flow projection. A cash flow projection can help estimate your firm’s cash on hand as of December 31. This should account for items such as:
      • December operating expenses
      • Staff bonuses
      • Quarterly tax payments
      • Paying down a firm line of credit
      • Profit distributions to equity partners

Putting it all together

Once you’ve got a bird’s-eye view of your firm’s finances, here’s what to look for:

  • Compare your current year’s revenue to last year’s revenue and your current year’s budget. This keeps you aware of areas where you may be overspending, underperforming, or doing great.
  • Look at the opening and ending balance of your operating account, and look for yearly trends or patterns to see if you are starting the month out with less in the bank than you thought you would be.
  • Look at your total accounts receivable, and keep an eye on whether this number is growing month-to-month. If it is, you need to be more diligent with your collections!

4. Get ready for tax season

6 Top Tax Deductions for Lawyers and Law Firms

Tax season can sneak up on you faster than you think. To make sure you’re prepared (and that you’ve taken advantage of all available tax deductions), take these steps at year-end:

  • Look at your “Owner’s Draw” account. Make sure the entries in this account are correct (These are expenses you ran through the business as non-business-related expenses.).
  • Clear the receipts. Clean out the pile of receipts in your drawer/purse/wallet/car and make sure you have properly reimbursed yourself for any business-related expenses you paid on your personal credit cards or from your personal checking account.
  • Check travel expenses. Review your calendar for appointments and places you’ve traveled that were business related and make sure you have prepared expense reports for mileage.
  • Consider tax-deductible expenses. If you’re running your business using the cash method of accounting in the US, invest in tax-deductible expenses to offset your 2020 revenues. For example, consider purchasing a yearly subscription to Clio Manage to save come tax time (you can try it for free first).
  • Ensure you’re paid up. Now is also a good time to check that you’re up to date with your tax obligations for the current year. For example, have you met and paid any quarterly tax payment obligations?
  • Key takeaways: Review, reconcile, record

5. Consider hiring a law firm accounting professional

Accounting for law firms can be an overwhelming and time-consuming process—especially at the end of the year when your firm is wrapping things up for the year, planning for 2021, and getting ready for the holiday season. By hiring a law firm accounting professional, especially a CPA (Certified Public Accountant), you will have more time to focus on other aspects of your law firm. In addition, an experienced accountant is also an expert on helping your firm’s financial strategy, tax planning, tax compliance, and more. For the best outcomes, we suggest working with accountants who specialize in working with law firms. Try asking fellow attorneys for recommendations, or check with your State Bar or any accountant referrals. You can also find the right accounting professional by checking out our Clio Certified Consultants.  

You’re ready to get your year-end law firm accounting in order

The truth is, there’s no need to be afraid when it comes to year-end law firm accounting. If you’re following best practices for law firm accounting and using the right tools to help year-round, then end-of-year is just a matter of reviewing your firm’s finances and making sure everything is in order before December 31.

To review, here are our key tips to help ensure your firm’s finances are in check at year-end:

  • Review your accounts receivable. Ensure your billing is up to date, and collect on outstanding accounts!
  • Review your trust accounts. Invoice and pay yourself for any outstanding amounts, reconcile your trust accounts, and report any unassigned fees if necessary.
  • Check in on your performance. Look at how you’ve done for the year in terms of revenue compared to your budget, and compared to last year’s revenue, to get an idea of your firm’s performance. Then, set goals and make them part of your business plan for the coming year.
  • Get your records in order. Look through your receipts and make sure you’ve reimbursed yourself for business expenses by year-end. You’ll thank yourself come tax time!
  • Consider hiring a law firm accountant. An experienced CPA can help with your law firm’s financial strategy, tax planning, tax compliance, and more.

Get your firm’s books in order for the year, and you’ll be that much more prepared to grow your law firm and enjoy more success in the year to come.

Note: The information in this article applies only to US practices. This post is provided for informational purposes only. It does not constitute legal, business, or tax advice.

Categorized in: Accounting

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