The Next Step: Reviewing the File and Determining Pricing

Congratulations on surviving that first meeting with your potential first attorney-client. The next step is to price out the work. As a seasoned bookkeeping professional, you already know where to look. Law firms are businesses like your other clients. There are usually undeposited funds hanging from the past, uncategorized account balances and other accounts on the balance sheet, and profit and loss that have gone awry.

 But what makes legal accounting different from other businesses? Trust Accounting and the Advanced Client Cost account.

Proadvisor tip - In the briefcase at the top of the screen, select 'report options.' Here you can define the parameters of the report. You can also specify the year and scope of the job. Are you looking for a cash basis or an accrual report?

---

Balance Sheet

The balance sheet is a key financial document that provides an overview of a company's assets, liabilities, and shareholders' equity at a specific time. It's important to review your balance sheet regularly to reflect your company's financial health accurately. We often find that the chart of accounts used by attorneys needs to be adjusted to reflect the needs of law firms better.

Equity Accounts, Loans, and Reconciliation Status

Keep a few things in mind when evaluating a company's equity accounts. First, is the entity structure adequately set up? If not, that could impact how the equity is accounted for each partner. 

Second, take a look at the loans on the books. Make sure you ask for loan statements to ensure the loans are correctly stated. 

And lastly, check to see when the last time the banking and credit cards were reconciled. Knowing these things will give you a better picture of the company's financial health.

Trust bank vs. Trust Liabilities

The best way to see if your trust bank and trust liability accounts are equal is to compare the totals. If they balance, it is rare but wonderful. Take the balance sheet and look at a date range for the year of the scope of your work.  

If not, group that report by month—is demonstrated in the video above. Grouping by month will give you a better idea of when the accounts may have become unbalanced. Once you've done that, you can close down most accounts on the chart of accounts so you only see the Trust bank and liability accounts and the total trust accounting liability account. Grouping the report will give you a high-level view of when the imbalance may have occurred.

Having a balance sheet that includes both the parent trust account and sub-liability accounts will make it much easier to understand how the balances are distributed. Look at the individual trust ledgers and see if there are any negative account balances. If so, this will need to be addressed, as no one's trust account should be negative. You will need to sort the parent account by customer name to get the same visibility if you use the customer method.

Managing client fees and expenses

An advanced Client cost account is a place to look at the client's expenses and advanced client cost account. If there isn't one, remember to look for that in the profit and loss report; some firms, especially those established for many years, will use the income/expense method of tracking client expenses. That is different from how the IRS looks at client expenses, but it's an old method you may see in someone's books.

Payroll and Credit Cards

When it comes to payroll liabilities, you'll want to look at the payroll entries to see any discrepancies. If they're using a payroll service, you'll need to validate the balances and request some reports while in the discovery phase.  

As for credit cards, please look at their accounts and see when they were reconciled last time. Have these balances been trued up with their sub-accounts? Or do you see large negative balances along with positive balances overall?

Reconciliation Status

Under the report options, you can review the last time the accounts were reconciled. Going into each account's reconciliation screen will help you see how many hanging transactions there are and how many things still need to be reconciled. It would be best to look at how many old transactions there are that never cleared the bank. Hanging or never cleared transactions is an issue that must be addressed and considered when pricing your cleanup service.

Profit and Loss

Profit and loss accounts give you a high-level view of a company's financial health. If anything on the profit and loss report looks unorderly, it could indicate sloppy recordkeeping. For example, you may see employee or vendor names on the chart of accounts. Another common error is seeing a loan expense on the profit and loss account. "Loan expense" is because attorneys are doing their books themselves and must be aware of proper accounting rules. 

Uncategorized accounts

When taking a look at your books, be sure to check the uncategorized accounts. Uncategorized assets or income is where you'll find transactions that have been booked because the bank feed "suggested that," or you may see reconciliation discrepancy balances. These are two areas where you should avoid seeing any transactions, but it's a common mistake for beginners who manage their books.

Books Review

The books review tab on the left side of the QuickBooks Online Accountant toolbar is a great way to overview the law firm's books as outlined above quickly. This tab will show you much helpful information to help you determine what needs to be done to clean up the file.

Undeposited Funds Account

The last step is to check the account for any undeposited funds or payments to deposit account, as many of the newer QuickBooks files call it. If the company uses legal billing technology (i.e., Clio), sometimes there will be duplicated transactions in this account. They can also be transactions from a forgotten day that have just been left in place--like in limbo. The undeposited fund account is an area you want to look at, as it may require time to clean up this account. Make sure you see how many pages of undeposited funds are hanging. There are 50 line items on one page, but it is easy to miss the additional pages.

Pricing

After getting a better idea of what the books entail and the amount of work needed to fix them, you can start considering pricing. Pricing can be tricky, and many experts, like Mark Wickersham and Ron Baker, can teach you how to price effectively. 

The job is to consider looking at the job every month and then multiplying that number by 12. Sometimes it's easier to think and look at the transactions in place and the amount of trust accounts that would need to be balanced, and Looking at it from a monthly view is more manageable than figuring out the whole project pricing.

Examining the books as a monthly price for a client will also be helpful for you if you are providing that potential client with ongoing monthly accounting services. From experience, I've often looked at a number, slept on that number, woke up the next day, and raised it. If you are new to bookkeeping or just starting your practice, know that working with a smaller firm or the solos might be your best entry point into working in the legal industry. When you work one-on-one with the owner, they will guide you, and you'll learn much from them. They'll learn from you as well. We all start by not pricing enough when we are beginning.

Conclusion

My last tip on pricing is that you should only win some jobs you put a price together. If you're winning every job, you're pricing too low. And it would help if you only got about 50% of acceptance on your engagement letter.

I hope this article helps guide you to a successful legal accounting practice. The nuance of legal bookkeeping is that layer of complexity that requires our brains to figure out.

If you're interested in learning more about legal accounting, we offer a course called Fast Track Legal Accounting. We also have a private group for accountants called the Accountants' Lab, which is a valuable resource for anyone starting out or even a seasoned professional. We meet every Friday at 9 AM Pacific and noon Eastern. We would love to have you join us!