After opening your law practice, one of the most important decisions you need to make is deciding on your firm’s financial structure. The financial structure of your law practice will determine how you will accept payments and set up trust accounts.
As a lawyer, your time is valuable. That’s why having accurate records of all your spending is essential. This will help you track where your money is going and help you budget appropriately for future expenses. An effective financial structure can save you time and money, helping reduce stress. With the right financial structure, you can monitor the financial performance of your law practice and make critical decisions in a timely manner.
Here are some simple yet effective tips for creating your law firm’s financial structure.
It is imperative that you keep track of all business expenses. Be sure to keep an accurate ledger in which to track your transactions and an accrual diary to record the dates and amounts of each expense.
To ensure that you maintain a separate account for your personal and business expenses, you will need to open a bank account which means selecting the best bank for your firm.
Keep in mind all banks are not created equal. When selecting a bank, consider your needs. Check if the bank you are considering offers the services you need. Find out the types of fees you will be charged. Take the time to understand the banks’ processes to prevent fraud. Look for a bank that offers business saving accounts that account holders can use to keep earnings for future use.
Once you have selected a bank, open three bank accounts with them – a business checking account, interest on Lawyers’ Trust Account, and a business savings account. Deposit revenue generated by your law practice in your business checking account and transfer excess funds to your business savings account.
Businesses should choose between two accounting methods – cash accounting and accrual accounting. Under cash accounting, revenue and expenses are recorded when actually received or paid. There are several benefits of this method. Cash-only transactions are simpler to track. Cash basis accounting allows you to accurately determine the amount of cash your law practice has at any time.
Accrual accounting, on the other hand, records earnings and expenses when earned or incurred, regardless of whether the money has been received or paid.
An accountant for lawyers can help you choose the right accounting method to offer a more accurate picture of your law firm’s financial health.
Consult your bank, CPA, and bar association about different payment methods to determine the right method for you. Once you have chosen a payment method, the next step involves selecting a payment provider. Take the time to understand the fee structure of the payment processor you are considering. Remember that many payment processors charge a percentage per transaction. Using one of them can result in a violation of trust accounting laws.
Bookkeeping involves recording and organizing a business’s financial transactions. You can outsource your bookkeeping or do it in-house with a software service such as Quickbooks. There are pros and cons to each.
For example, outsourcing can reduce the time you have to spend on bookkeeping, but it may not take time for an external team to ramp up on the ins and outs of your practice.
In-house bookkeeping can be efficient but may require more effort and skill. So, it really comes down to what is best for your law firm. Do some research and see which option works best for you.
Depending on its bookkeeping needs, a law firm may keep its books daily, weekly, or monthly.
Accolade Accounting offers a wide range of accounting services. Whether you want to build a new accounting system or streamline an existing one, our accountants for attorneys can help. To talk to one of them, call 470-646-2663.
Until next time my friends,
Cheers!
JD Longino, CPA
