Small law firms that are just starting out can find themselves in a critical position. In an industry that rests on consistency, you need to know that the practices you’re putting into place are ones that will carry you through this early period of growth.
This extends to every aspect of how you manage your firm, from effective staff hiring and retention to the way you network, build contacts and develop your professional sphere.
Bodies such as the Solicitors Regulation Authority are a good source of professional knowledge but, ultimately, best practice is up to you. Failure to get it right from the start means wasted time later on as you backtrack to revise the way you handle different aspects of the business.
Accounting for small law firms is one thing that sticks out in this part of the process. Depending on the area of law in which you specialise, accounting and its associated regulations might not be intimately familiar to you.
Even if it is your area, the difference between knowing the law and putting best practice into place can be quite a gap.
Accounting for small law firms
As a small firm setting procedures in place, you’ll need to decide between the two principal methods of tracking your finances. These are accrual and cash accounting respectively.
Accrual accounting tracks income pending along with income that has been physically received. It can include:
- Work in progress
- Accounts receivable
Cash accounting tracks only finances that have already entered or exited your account. Most smaller firms use this method as your main expenses at this point are going to be things such as staff, premises, insurance and other costs that remain relatively fixed and easy to plan for.
That being said, firms tend to transition towards accrual accounting as they grow in order to better forecast their finances over a more extended period. Therefore, it’s important to lay the foundations for this transition later on.
Your accounting system will also need to be as detailed as possible. In most cases, all time spent working on behalf of a client will count as billable time, so in the interests of transparency, you need to be able to account for exactly what you’re doing over this time.
In addition to this, you should take care to maintain full and separate records of the following:
- Accounts receivable: Funds billed for and not yet collected.
- Client ledgers: A detailed breakdown of serviced provided for each client.
- Case time records: Time spent on each individual case.
- Cases in progress: Ongoing work, at various stages.
- Overall summaries of time spent: A record of all billable time and expenses.
While on the surface there would appear to be some level of crossover between these, it pays to keep the records separate to facilitate more easily accessing in-depth specifics when needed.
There is a strong temptation among smaller firms to maintain one central set of records, updated periodically (even annually) from a sub-section of various notes and spreadsheets.
This method is not recommended. It stands to reason that entering data into an interim set of spreadsheets, to be transferred into your central system at a given date or time, suffers from various problems:
- Data can be lost, forgotten or inaccurately recorded.
- The task of entering data into your system is effectively doubled.
- Likewise, the resources required to maintain two systems make this method ineffective.
We cannot advocate strongly enough taking the time to select one centralised system of accounting that is easy to access and detailed enough to keep all your records in one place.
Accounting software for lawyers
If one theme remains constant when it comes to accounting for law firms of any size, it’s that you need to be recording a broad spectrum of rapidly changing information in such a way as to make it easily accessible and in great detail.
As a smaller firm, you’re in a good position insomuch as the choices you make now can be made with an eye towards sustainable growth. Investing in the right accounting software will both handle your immediate needs and also make future expansions as painless as possible as your client base and administrative requirements grow.
Using the right accounting software solution will mean it scales up with your firm, allowing you to easily track as many clients, staff and cases as you need, all with the same easy interface.
Being confident that you won’t need to switch software years down the line means no time wasted in painstakingly re-entering old data into a new system. Choose a solution that keeps your business fully compliant – after all, keeping track of your specialist area of law is challenge enough without also needing to be an expert in accountancy legislation.
And using a cloud-based solution means wherever you are, on any compatible device and for any client, you can easily access the same in-depth data or simply give a digestible overview to your clients.
10 things to look for in small business accounting software
Using the right technology can give you the time and space to make your business a success. This guide offers 10 points to consider when looking for the right accounting software for your company.