3 Accounting Pitfalls Law Firms Must Avoid
There are many things that law firms must do well to succeed.
For example, they must work closely with their clients to provide exemplary service. They must also take care of their employees to combat the famously poor attrition rates within the legal field.
However, law firms, or more specifically, firm owners, must also ensure that they understand the fundamentals of law firm accounting, too. After all, this can support healthy cash flow and ensure that your finances are in order come tax season.
Of course, this can sometimes feel much easier said than done. Your team, after all, is built up of lawyers, not accountants, which means mistakes in this area feel almost inevitable.
With that in mind, we’ve compiled a list of some of the most common accounting pitfalls law firms must avoid!
1. Data entry mistakes.
According to a recent report, “human error accounts for 41% of inaccurate numbers in reporting.” As a result, you must keep a keen eye out for potential data entry mistakes that could lead to an accounting nightmare, such as:
- Incorrect fees listed on invoices
- Misallocated expenses
- Double entries or omitted transactions
- Out of balance accounts
You must minimize data-entry mistakes where possible, as this data often serves as the foundation for your financial reporting and tax planning. Law firms can minimize data-entry mistakes by:
- Establishing clear and standardized data entry procedures
- Using specialist accounting software
- Checking (and double-checking) financial reports
2. Mismanaging trust accounts.
Trust accounts are pools of client funds designated for specific purposes, such as settlements, court fees, or disbursements. If they are not managed correctly, this can lead to a variety of challenges within your law firm – not only your reputation in the industry but, worse, your bar license.
There are many ways in which you could be mismanaging trust funds (likely without even realizing you are doing so). This includes:
- Mixing client trust funds with the firm’s operating funds
- Poor record keeping
- Overdrafting Trust Accounts
As mentioned above, failure to properly manage your trust funds could damage your firm’s reputation, and clients may even take legal action against you. This could lead to a variety of financial challenges. After all, not only will you have to recuperate the money lost from clients jumping ship to work with other firms, but you’ll also face significant legal costs.
Law firms can avoid mismanaging client trust accounts by:
- Keeping client trust funds separate from the firm’s operating funds
- Maintaining detailed and accurate records of all transactions
3. Not hiring a professional.
As we all know, lawyers are not accountants. But, as they manage their clients’ cases, discovery processes, and (possible) trials – they do know when to hire an expert. And hiring a financial expert to support your law firm’s financial operations should be one expert at the top of your list.
What’s more, dealing with accounting duties on top of theIr usual workload can leave attorneys with little time to dedicate to the important tasks – running your legal practice and delivering exceptional care to your clients.
As such, one of the easiest ways to avoid accounting pitfalls is to hire a professional. At FinOp Group, we offer a range of law firm accounting services to our valued clients. This includes:
If you’d like to learn more, please do not hesitate to get in touch today.