Law firm billing and accounting requirements are inherently different from other service businesses. Even among legal practices, billing requirements can vary greatly from one area of practice to another.
Because time spent on billing and accounting is administrative and not billable, a law firm’s profitability depends on capturing all billable time and expenses, generating invoices in a timely manner and managing collection efforts proactively. Another highly important aspect that sets law firm billing apart from that of other businesses is that law firm billing and trust bookkeeping come under the purview of state ethics guidelines.
Law firms today cannot function without a legal billing software that fulfills the firm’s practice-specific billing needs and helps them avoid common billing pitfalls. The top ten most prevalent mistakes law firms make, when it comes to billing and accounting are:
Pitfall #10 Not Using Matter-Based Recordkeeping
Many service businesses perform multiple types of jobs for a customer and generate one invoice that covers everything. The same billing process does not work for law firms.
Matter based recordkeeping is unique to law firms. All transaction details must be kept at a matter level rather than client level. Law firms are usually required to keep each task (called “matter”) completely separate from other matters for the same client or other clients. For law firms, matter-based recordkeeping is critical because it allows them to produce proper records with ease for client billing inquires, billing disputes or state audits.
Pitfall #9 Not Accounting for Varied Types of Legal Matters
Accounting for retainers, time and expenses, etc. will vary depending upon the nature of the matter in question. Most law firms handle a variety of cases and use an assortment of client billing arrangements , such as hourly, retainer based hourly, fixed and contingency. A firm’s billing system must be able to handle all types of billing arrangements and the intricacies of each case.
Pitfall #8 Missing Flexibility in Setting Billing Rates
Professionals (or Timekeepers) at law firms are likely to have standard hourly rates for different tasks. An attorney billing software must be able to set Timekeeper rates accordingly, support discounted rates or a previous year’s rates for old matters, without much manual intervention.
Pitfall #7 Failure to Track and Allocate Disbursements
While law firms focus on capturing all billable hours, they often neglect to properly track and allocate expenses for billable matters. Expense tracking is just as important as time tracking. If you do not allocate expenses to a matter as expenses are incurred, you might never collect them. Matter expenses you forget to allocate are lost profits.
Expenses are typically paid in variety of ways (checks, credit cards and cash), adding another layer of difficulty. A trust account disbursement, however, is not an issue because the expense will come out of client funds.
Pitfall #6 Not Preparing Customized Professional Quality Bills & Reminders
The billing process is a direct reflection of your firm and is a vital part of your client communication. While law firms are conscious of providing top quality legal services, their high standards often fall short when it comes to client communications such as invoice and payment reminders. Not only is it important to generate invoices on a fixed billing cycle, but it also equally important to prepare professional quality invoices. Cluttered and hard to understand invoices are a recipe for late payments and client questions and are aspects of legal billing that become even more important when payments are in arrears.
Pitfall # 5 Not Utilizing Built-in Software Collection Support
Many law firms let unpaid bills pile up and end up with a collection problem. Take a proactive approach to debt collection rather than grappling with the issue after the fact. An efficient law office billing software will provide built-in collection support. Don’t wait for a billing cycle, if a matter’s unbilled balance has reached a low threshold point. Remember, bill collection is an on-going and vital practice management process.
Pitfall # 4 Not Checking for Client Conflict of Interest
For most law firms, conflict checking is a must. Your firm’s roster of clients is already available in your billing system. Instead of duplicating work, make every attempt to use the same system as a conflict checker. While developing a bulletproof conflict of interest system is challenging, development in today’s computer software makes it easy to build an integrated database that quickly identifies conflicts of interest.
Pitfall #3 Not Handling Client Advances Properly
Pitfall # 3 involves a host of potential problem areas. A law firm’s cash flow and profitability depend upon client advances (or retainers). However, from an accounting/bookkeeping perspective, client advances (retainers) need special treatment and must be handled carefully. The varied nature of client advances, an initial deposit to a trust and/or operating account, and reducing balances, as fees are earned, can significantly complicate your back office operation, if your billing system is not capable of processing retainer transactions systematically.
And, apart from itemizing legal fees and expenses, a legal time & billing software must always display remaining retainer balances on your client invoices.
Pitfall # 2 Loosing Track of Trust Funds
Every law firm endeavors to keep trust books clean and accurate, but most either fail or spend significant time and resources trying to do so. Ninety percent of the trust fund tracking battle is won, if your system provides integrated billing and trust bookkeeping . The trust bookkeeping portion of the system must prevent common trust errors (e.g. ledger card overdraft), provide a bank reconciliation tool and three-way reconciliation reports.
Pitfall # 1 Choosing Complex Software and Failure to Protect Data Integrity and Security
The most common and the most dangerous of all legal billing pitfalls include trying to cope with complex software, failure to protect data integrity and implement secure measures. Technological tools are more hindrance than help, if the tools are too complex to use. Software that isn’t user friendly and requires external consultants or trainers consumes valuable time and eats profits.
Data integrity and security are a matter of taking precautions to protect data from unauthorized access and use. You can minimize threats and easily avoid Pitfall #1, if your billing system has built-in features for controlling access to data, has checks in place for error detection and a regular data back-up function.
Reap the Benefits of Legal Billing Software Development
Computers and software have changed how companies everywhere do business. Technology today allows law firms and other businesses to compete with their larger counterparts on many levels.
Choose software with care and reap the benefits of technological developments in legal billing systems. Before you purchase legal billing software, analyze program features to ensure that the software’s design can help you avoid the ten common legal billing pitfalls. The right software will not only enhance your firm’s in-house capabilities and productivity, but will also help you comply with state ethics guidelines and increase profitability.