Financial Aspects of Law Office Management

Managing the financial aspects of a law office is a major task that needs to be taken on with a great deal of care. Mismanagement of a law office's money can lead to disaster, both on a business level and on a legal level. As part of law office management, managing the different aspects of a firm's financials is going to be a daunting task. It requires tracking financial records, ensuring employees are paid, monitoring task information, and knowledge of the firm's billing process.

This article is designed to provide the necessary information on the financial portion of law office management. Each firm is going to be different and their financial responsibilities are going to vary based on factors such as their size, activity, specialty, and location. The following is applicable to all law offices, and the information in this article can be modified to fit the specific financial needs of a law office.

What Financial Roles Do Managers Take?

Most of the finances in a law office is going to be handled by an accounting division that is dedicated solely to managing the firm's money. However, that's not always going to be the case as not all law offices are going to be big enough or wealthy enough to warrant a permanent position dedicated to accounting. In those instances, the finances will fall under the responsibility of the managerial staff of a law office.

What financial responsibilities and roles that a law office manager may take on is going to depend on the financial needs of the office. Bigger offices, obviously, are going to have bigger financial needs than that of a smaller office. Managers may share some of their financial responsibilities with other members of the law office, such as senior staff. Some of the basic financial tasks that a law office manager may take on or be a part of can include the following.

Making and Managing A Budget-Every business needs a budget in order to plan and prepare for costs. Budgets act as financial guides, presenting the office with organized layout denoting what cost limits and goals they have. 1 Even the most financially well-off law office needs a budget to make sure that they don't waste money on unnecessary things. Creating a budget for a law office tends to be the responsibility of its administration. Those individuals know what needs to be regularly done for the office to continue, whether it's paying employees, rent, taxes, or how many clients are needed each month to make a profit. Budgets can be used to outline a strategy for those things to be accomplished. Planning things out on a scheduled basis-weekly, monthly, quarterly, etc.-allows the firm to track costs and be prepared for any financial emergencies.

Financial Records-On a professional level, it is wise to have a bank account and records system dedicated to the firm's financials. Solo firms may be able to get away with not having a separate account, but it's soon unavoidable. Management of the law office's financial records often is a major responsibility. Those records are used for many purposes within the office that the absence or misplacement of a single record can be problematic. Those records are often how a law office is able to check if payments are being made (office rent, employee paychecks, client billing, etc.), if the firm is staying within budget, and for tax purposes. Financial records are also loaded with valuable information. For example, they can also be used to determine if the office is making a profit, breaking even, or is failing.

Using Software For Tracking-Tech solutions are going to be present and available for almost every part of law office management. For finances, there are software options to help firms track their costs and profits, document their budget, and keep everything neatly organized. Amongst all of the options out there, there is accounting software that is strictly designed for usage in a legal setting. 2 General accounting software needs to be heavily customized for law offices, so such an option can save a firm a lot of time and energy (and frustration). Using software in general to track a law firm's finances can help ensure that things are not misplaced and decrease errors. Tracking things like client billing on paper only can be problematic; if a paid invoice is missing or is damaged in some way, a client could be penalized for not paying even when they have.

The Billing Process

The billing process carries a lot of importance within a law office. It is how the firm receives its payment for services rendered and any flaws within the process itself can prove to be detrimental to the firm. A law office will usually include an explanation of how their billing process is set up within their client contracts. The standard billing system that most law offices use is based on a price per block of time. There is usually a set price and specifics that identify what counts as a "billable" time frame, typically an hour. Some lawyers or law offices may have a fee that clients need to pay in order to retain their services and it often needs to be paid at the time those services are retained.

There is more to the billing process than simply a client handing over a check to their attorney at the conclusion of their case. It usually requires documentation of what was done, when it was done, and any costs on the behalf of the law office. Everything that a law office charges their clients for need to be present on the invoice given to the client. An invoice is like a receipt for services rather than items. It should include information about what was done, the corresponding cost for each item, the payment total, payment due date, and contact and identifying information for both the client and the law office. The invoices should include some detail as to why a certain charge was included, and law offices should not get too overzealous in charging for every single thing they offer a client. 3

Certain details need to be taken into consideration when a law office sets up their billing process:

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What Payment Options Are Available?-The means of payment is one thing that some clients-and law offices-are going to be concerned about. How a payment is delivered needs to be accessible to both the client and the law office. Some methods can be problematic or worrisome, especially if they come through third party routes that may or may not include processing fees.

The standard payment options for services rendered at a law office are going to be cash, check, or wire transfer. Paying with a credit card may also be an option, but there may be some restrictions involved-like fees the credit card company charges the business-that may make it unwanted. Some firms are adding additional options that are outside of the traditional payment methods. Companies like LawPay, PayPal, and QuickBooks offer payment programs that law firms can offer as an option for their clients. 4 Such programs do come with their pros and cons, and their usage is up to the management of the firm.

Using A Payment Plan-Setting up a payment plan for clients can make the billing process much easier for all those involved. Leaving payment until the end of a client's case can be incredibly problematic. Clients may not be able to pay the full amount in one go or refuse to pay. The law office can become responsible for the entirety of fees accumulated throughout a case, like filing fees, and even lose money with a case. Breaking payment down into several bills, stretched over time, alleviates the stress and ensures that the firm actually gets paid.

Everything about a client's case, including their payment method, should be established at the start of the law office's relationship with them. Discussing things beforehand can prepare a client for what to expect in terms of cost. 6 Also set up a billing cycle as part of their payment plan, sending a bill at a set interval with payment due throughout their case.

What Possible Issues Are There?-The main issue that will be present with the billing process is clients who do not pay on time. Late payments can be a result of misplaced invoices, poor record keeping, or an untrustworthy client. It's often the primary reason why keeping accurate and detailed financial records is so important for a law office.

There can also be problems in what a law office decides to bill their clients for. Nickel-and-diming a client will not only rack up a high bill that they might not be able to pay, but it will also leave you with a very unsatisfied client. Charging for every little thing can leave a law office with a reputation of being greedy, supporting the negative stereotypes about lawyers.

Paying Employees

Law offices are not always a single-person operation, and the employees who work there will need to be paid. It is the responsibility of the employer to make sure that their employees are being paid for their work, and that they are paid on time. Law offices that fail to pay their employees can face serious legal ramifications, including having their business shut down and being fined by the federal government.

A law office can set up a payroll system for their employee with relative ease. It does not need to be overly complex, but it should be compliant with all federal and state laws. The follow are some of the steps that a law office, as an employer, needs to take in order to set up a basic payroll system. 6

Get an Employer Identification Number (EIN)-An EIN is an ID number used by the IRS so businesses can report their taxes and other financial information. It can be easily applied for online through the IRS's website. Employees will need to know their employer's EIN for their own tax paperwork.

Choose a Payroll System Option-Set up how employees are going to be paid, and when. The method used needs to be trackable and should be well documented. Errors are bound to happen-nothing's perfect-so consider planning a back-up option.

Keep Records and Report-Failing to keep accurate records and report payroll to the federal government can be problematic. If the IRS thinks that an office is withholding the correct payment from their employees or are not making the correct deductions, they will take action. Records can prove an employer's compliance and also prevent things like an audit.

Taxes

As a part of being a business, law offices are responsible for paying their own taxes. 7 This means that they need to follow all of the appropriate laws laid out by the IRS, and truthfully report their expenses and profits. It is up to them-and their accountant(s), if they have them-to track their financial information and file the correct paperwork. Record keeping comes in handy the most when tax season rolls in, and it can help avoid problems from occurring.

Some law offices and lawyers get arrogant and cocky when it comes to paying their taxes. They think that so long as they are successfully making a consistent profit that they will have more than enough money to pay their taxes. However, many tend to miscalculate how much they actually have and how much they will need to pay. This can sometimes be prevented or fixed with effective budgeting, and law offices that have mastered their budget are able to have a little extra on hand after finishing their taxes. It's not uncommon for a law firm or an attorney to spend a little more when they get a big case, and then find that they've gone over their personal budget and can't pay their taxes in full. As a result, they are forced to make multiple installation payments to the IRS and can be at risk for audit.