As with any business, your law firm depends on sound billing and accounting practices. With the end of the year in sight (trust us, we can’t believe it’s Q4 either), you want to be sure you’ve caught up on reconciling your trust accounts, accounted for all unbilled time, collected your outstanding balances, and prepared for the upcoming year.
Hopefully, your end-of-year legal finances don’t bring any surprises. Proper law firm financial management means regularly monitoring both your operating and trust accounts to ensure compliance with state bar rules and prevent mismanagement. Plus, you don’t want to be shocked by the status of your accounts receivable and find yourself chasing down uncollected invoices.
If you often find yourself scrambling at the end of the year, this law firm accounting guide covers key steps to help you stay on top of your finances, including how legal billing and practice management software can keep you organized and compliant with regulations.
- Analyze Your Legal Billing
- How to Handle Law Firm Collections
- Review Your Legal Trust Accounting
- Get a Full Picture of Your Law Firm’s Finances
- How to Simplify Year-End Accounting for a Law Firm
- Plan Your Law Firm Accounting Ahead for a Successful End-of-Year
Analyze Your Legal Billing
Generate an annual financial report to check the vitals of your legal billing. Your law firm’s financial statements could include the following:
1. Profit/Loss Statements
A profit/loss statement reflects your revenue and expenses. Review these monthly reports to see your bottom line at a glance. Here, you can learn more about financial trends, like periods of high client activity or when cases are slow to close.
2. Accounts Receivable Report
An accounts receivable report highlights which client invoices remain unpaid. At year-end, you should review your aged receivables and identify any overdue balances. If a significant portion of your receivables is 90 days or older, the likelihood of collecting is only 69.6%, versus 89.9% if you collect within 30 days.
Make sure your responsible attorneys are actively pursuing collections and consider writing off any uncollectible accounts by December 31. This helps clean up your books before the new year and allows for a fresh start with manageable receivables.
3. Cash Flow Projection
Cash flow is a key sign of your law firm’s financial health. Your monthly cash flow shows the cash you have on hand after your invoices are fulfilled and your expenses are paid. So, if your firm is taking longer to bill and collect payments, this issue may appear in a cash flow report.
In your end-of-year checklist, include a cash flow projection. It’s a good time to estimate your cash on hand as of December 31 after accounting for staff bonuses, tax payments, or payments to equity partners.
How to Handle Law Firm Collections
For many law firms, collections are one of the most challenging aspects of maintaining a healthy cash flow. The average firm collects only 85% of its invoices, and uncollected balances can significantly impact profitability. Addressing outstanding balances efficiently — especially before year-end — is important.
Start by reviewing your accounts receivable and identifying any aging balances. Focus on balances that are 60, 90, or 120+ days overdue, as these are the least likely to be collected. Prioritize these clients and assess each situation. In cases where you’ve already exhausted your usual collection efforts, direct follow-ups with the responsible attorney are often more effective than a generic notice.
For clients genuinely struggling to pay, consider offering structured payment plans or settlements. Document these arrangements clearly in writing and comply with your firm’s collection policies to avoid misunderstandings down the line. In certain situations, discounting an overdue invoice may make more sense than continuing to chase a client who won’t pay the full amount.
In some jurisdictions, state bar rules may limit your collection methods or require specific client notifications before escalating collection efforts. Be sure your collection practices align with these ethical guidelines.
Timely billing can also prevent collection issues down the line. Invoices sent soon after services are rendered tend to have a higher likelihood of being paid. Bills delayed beyond 60 days are statistically less likely to be collected in full, so staying on top of billing is essential for reducing outstanding receivables.
Review Your Legal Trust Accounting
Legal trust accounting is a critical responsibility for law firms, as it directly involves the management of client funds. Proper handling ensures compliance with legal and ethical obligations, particularly regarding the separation of client funds from the firm’s operating accounts. Mishandling trust accounts can result in serious consequences, including disciplinary action or even disbarment.
In nearly all states, attorneys are required to regularly reconcile their trust accounts. This involves comparing your trust bank statements with internal records, including the client ledger and trust ledger, to ensure accuracy.
You should conduct reconciliations monthly to promptly identify and correct any discrepancies, and an independent review of these reconciliations at least annually is a good practice to add another layer of oversight. If any inconsistencies arise, you must address them immediately, and self-reporting may be necessary to demonstrate good faith efforts to comply.
The American Bar Association provides strict guidelines regarding the management of trust accounting. Some of the most commonly overlooked regulatory issues include:
- Falling into the negative on your trust account balances
- Recording your trust account balances as revenue
- Charging your clients for processing fees, which may be prohibited based on your state
- Commingling client funds with firm funds
For large firms, managing multiple trust accounts across various locations can be particularly challenging. Having formal processes in place for opening, managing, and closing trust accounts, and limiting the number of signers on each account, can reduce errors.
Using legal-specific accounting software that automates trust account management can also greatly reduce the risk of human error. These systems ensure that all transactions are tracked, reconciled, and compliant with state and ABA rules, saving time and protecting the firm from potentially damaging mistakes.
Get a Full Picture of Your Law Firm’s Finances
Think about how you measure your firm’s success. It can vary by law firm, but you could identify success based on case volume, client retention, or revenue.
All of these could be key to building a great law firm. But what if your case volume is suffering, or your clients express more dissatisfaction than normal?
It could be time to get a big picture of your law firm’s finances. You can look at key performance indicators to measure the financial reality of your firm. In doing so, you may start to see patterns of wins and losses. Taken together, these patterns can tell you a story about where you have opportunities to be more efficient or make adjustments to your processes.
To make things a little easier, PracticePanther offers features like custom tags, enhanced reporting functionality, and expense tracking to assist you in accurately capturing your firm’s profits throughout the year.
Understand Your Performance
Performance indicators let you measure all the core functions of your business—which can help you better predict your future and navigate any challenges.
- Financials: Your financial data could include your monthly billed and collected revenue, your number of outstanding accounts, or the difference between your net income and your revenue.
- Productivity: Collect and review data on productivity indicators, which could include the ratio of your billable to non-billable hours, or the difference between the number of billable hours worked versus the number of hours invoiced.
- Client relationships: You can measure everything from client acquisition to satisfaction. Measure the revenue generation from new cases, your lead-to-client conversion rate, or your client retention rates.
Begin Tax Preparation
As the year ends, it’s important to start preparing for tax season well in advance. Law firms have unique tax obligations, especially when it comes to handling retainers, trust accounts, and client-related expenses. Proactive planning will help you avoid last-minute surprises and ensure that you’re well-positioned for the next tax year.
Here are some steps to help you get ahead on your tax preparation:
- Review Client Expenses: Make sure all reimbursable expenses (e.g., travel, filing fees, etc.) are properly recorded and billed. Write off any unrecoverable expenses.
- Check Quarterly Tax Payments: Confirm all quarterly estimated payments are current to avoid penalties or overpayments.
- Plan Partner Distributions and Bonuses: Document and time partner distributions and staff bonuses to avoid tax issues and ensure accurate reporting.
- Maximize Deductions: Identify deductions for business expenses, charitable contributions, health insurance, or retirement plan contributions.
- Track Retainers and Trust Accounts: Reconcile trust accounts and confirm that transfers are accurately recorded; retainers aren’t taxable until earned.
- Review Financial Statements: Examine year-end profit and loss statements for irregularities or adjustments.
- Consult a Legal Accountant: Work with a legal accounting expert to comply with IRS rules and identify tax-saving opportunities.
How to Simplify Year-End Accounting for a Law Firm
It bears repeating that most law firms aren’t collecting the revenue they deserve. But that doesn’t have to be the case for your firm.
A good way to collect revenue is to utilize legal technology and practice management software. According to Bloomberg Law, nearly 80% of firms use billing software — the top type of technology employed by firms.
Billing software can:
- Help you create uniform billing guidelines to ensure your clients and your staff understand your policies upfront.
- Create a billing system that helps you manage legal billing and get paid promptly.
- Give you access to ready-made billing templates.
- Allow your clients to access online payment systems.
- Run a solid accounting system that helps prevent audits.
With legal billing software, you’re storing your billing, accounting, and client data in one centralized location. This has the added benefit of allowing you to run custom reports with your entire firm’s data. For instance, you can quickly review your outstanding accounts or review the status of your trust accounts through an easy-to-read dashboard.
Of course, human help can also come in handy when you’re working to optimize your law firm’s finances. Hiring a legal accounting consultant can help you interpret your financial reports, comply with state bar or federal requirements, and grow your business. They can also guide you in implementing legal billing practices and software.
Plan Your Law Firm Accounting Ahead for a Successful End-of-Year
Your end-of-year accounting checklist can be crucial to setting yourself up for success by December 31 and for the year to come. By reviewing essential financial reports, like your expense and revenue statements or your accounts receivable, you can ensure your firm’s financial performance is where you think it should be.
Using legal software like PracticePanther allows you to review these financial reports quickly and easily. That means less time combing through the books and more time running your practice. With automated tools to help you invoice and manage transactions, you don’t have much more to do to start watching your cash flow.
If you want to see what billing software can do for your firm, get a free demo from PracticePanther today.
