If you’re opening your own law firm, one of the first things you’ll need to focus on – apart from your services – is how you’ll manage your finances. Practicing law is your passion, but at the end of the day, your firm is still a business.
Managing your firm’s finances is complex, but there are three basic and foundational things you should focus on initially: your accounting method, your bookkeeping system and your payroll.
Of course, we recommend working with an accounting professional, but if you’re like many other new firm owners, you may be handling the financial management for the time being.
1. Your Accounting Method
One of the first things you need to consider is your accounting method. You have two options: accrual accounting or cash accounting.
Before you can file your first tax return, you must choose an accounting method and continue to use that method on all subsequent returns. For this reason, it’s important to choose your method carefully.
Apart from your tax filing, your accounting method will also affect your cash flow and bookkeeping.
Here’s what you need to know about each method:
Accrual Accounting
With the accrual accounting method, revenues and expenses are recorded when they occur, regardless of whether they were received. For example, if you invoice a client today, you will record the revenue today, even though your client hasn’t paid the invoice yet.
One advantage of the accrual accounting method is that it provides a more realistic idea of your income and expenses during a period of time. On the other hand, the accrual method doesn’t provide a clear view of your business’s true cash flow.
Take the example above. If you record the revenue from your invoice today, it may look like you already have the cash on hand. In reality, the client hasn’t paid the invoice.
On paper, a business may look like it’s flush with cash, but its bank account may be empty.
To offset this risk, it’s important to monitor your accounts receivable (AR) and accounts payable (AP) carefully.
Cash Accounting
With the cash accounting method, expenses are recorded when they are paid and revenues when they are received.
So, if you sent an invoice to a client today, you would not record the revenue today. You would wait until the client paid the invoice – whenever that may be.
Typically, law firms use the cash accounting method. Not only is this a simpler method to maintain, but it also makes it easier to determine when the transaction occurred. Cash accounting also eliminates the need to track AR and AP.
2. Your Bookkeeping System
Managing your own bookkeeping seems simple, right? When you’re a small firm, it’s not uncommon to manage your own books because things are “simple.” As your firm grows, your bookkeeping will become more complex and time-consuming.
You’ll need to manage:
- All financial transactions
- Debits and credits
- Reconciling your bank accounts
- Financial reports
- Payroll
- So much more
Your books need to be accurate and up-to-date. When your books become too complex, you can hire an in-house bookkeeper and consider outsourced bookkeepers. Utilizing QuickBooks Online is our go-to solution to help law firms get their books in order in one central location.
3. Your Payroll
Paying employees comes with a lot of requirements. You might need to hire independent contractors and classify them properly, but once you have your first employee, it’s crucial to have a proven system in place.
We prefer Gusto because it automates much of the nuances of payroll, and while the platform is intuitive, errors can lead to:
- Fines
- Penalties
- Bad press
Nearly 50% of all small businesses pay $850 in fines each year for missing payroll tax filings. One in three of all businesses (not just SMBs) are penalized for payroll mistakes, and this is where working with a specialist can help.
You’re responsible for keeping:
- Proof of former payments
- Cancelled checks
- Tax documents
- Timesheets
You’ll also need to pay payroll tax and ensure that your withholdings are accurate. Employment tax and law are always changing, so you must be up-to-date on workers’ compensation laws, disability and classification – among many others.
Put Accounting Mistakes Behind You
Small mistakes can have significant consequences for business owners. In the 2023 proxy season, accounting flaws and result reinstatements grew 150%. One key finding of the report that stands out is that these companies – many in the IPO stages – lacked strong internal controls.
In the early stages of business, lax controls can cause significant accounting issues.
Whether you need help with bookkeeping or professional software setup services, we have years of experience with setting up accounting for law firms. Our team believes in automating tasks that allow you to focus more of your time on growing your firm.
If you need help with getting your firm’s accounting systems in place, schedule a consultation now!
