Law Practice Management Asked and Answered Blog

Category: Accounts

Dec 06, 2014


Law Firm Collections – Reducing Accounts Receivable Writeoffs for Family Law Matters

Question:

I am the managing partner in a eight attorney firm in Nashville, Tennessee. We are exclusively a family law practice and while we charge a few client on a flat fee basis – most clients are time billed. We ask for a $5000.00 security retainer up front. After the retainer is used we invoice clients for additional time spent on a monthly basis. We are having problems getting paid and are having to write off a large amount of accounts receivable. I would appreciate your thoughts.

Response:

This is a common problem that I hear from family law as well as other firms representing individuals. The law firm collects the initial retainer, the retainer is used up, additional work is done, – often to the conclusion of the matter – the client is invoiced for the remainder of the time expended, and the bill either does not get paid or is paid partially. The law firm ends up writing off the balance.

The best solution is to require the retainer be replenished at a certain point and, within your state's ethical parameters, not perform additional work until the additional retainer is received. Recently a client told me that his office manager's number one responsibility is a daily review of unbilled time compared to unused retainer. When the unbilled time get to 90% used the client is invoiced for additional retainer. When 100% is reach work is stopped until the additional retainer is received.

With today's client billing systems that have integrated trust accounting, assuming that timesheets are entered directly and daily, an office manager or bookkeeper can simply print or review on screen a summary work in process report that shows for each matter the unbilled values for fees and costs, unpaid receivable, and retainer balances in the trust account. Matters with unbilled fees and costs approaching the retainer balance can then be invoiced for additional retainer. The key to making this work:

  1. All timekeepers must enter their own time via direct time entry and daily.
  2. Someone must be assigned the responsibility for daily monitoring and daily invoicing for additional retainer replenishment and help accountable.

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John W. Olmstead, MBA, Ph.D, CMC

  

 

Sep 30, 2014


Law Firm Capitalization – What is the Proper Level for Partner Capital Accounts

Question:

I am the chair of the finance committee for our firm – 17 attorney firm in Chicago. We have 6 equity partners in the firm. We are in the process of admitting a new equity partner and are reviewing our capital accounts and trying to determine our capital needs. I would appreciate your ideas and thoughts.

Response:

There are two categories of capital – short-term or working capital which is used to fund daily operations and long term capital which is used to pay for capital assets such as furniture and fixtures, computers and other office equipment. I guess I am old school but I believe that short term working capital should be funded as much as possible with partner capital and long term capital funded with bank borrowing or leases. I have more and more clients that are funding working capital with partner capital and have no bank debt at all. I have other clients that finance all working capital with their bank line of credit – these firms could find themselves in dire straits if bank credit should tighten in the future.

The amount of working capital needed by a firm depends upon your practice, billing and collection cycles, whether you do contingency fee work, and whether the firm is growing and adding attorneys and staff. As a rule of thumb I suggest that a firm have three times one month's expenses excluding draws in working capital. This would need to be increased if the firm has lengthy billing and collection cycles, does contingency fee work, and is in a growth mode.

Partner capital contributions are usually made proportionately based on partner earnings or ownership percentages.

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John W. Olmstead, MBA, Ph.D, CMC

Jun 11, 2014


Law Firm Accounting – Structure of General Ledger Chart of Accounts

Question:

I am the newly elected managing partner of a twelve attorney business transactional firm in St. Louis. The firm is trying to implement a more disciplined approach to financial management. I have been charged with developing our first budget and I am having difficulties due to the overall structure of our general ledger. Our system was setup by our outside accountant and the expense accounts lump too many expenses into too few categories. Do you have any suggestions?

Response:

This is a typical problem that I see in many firms. Accountants often setup law firm accounting systems to facilitate preparation of income tax returns as opposed to systems designed to facilitate internal management accounting, budgeting, etc. Often too many expenses are lumped into single categories or are not assigned to categories based up cost behavior. The attached sample general ledger chart of accounts has been a standard recommended for use in law firms for many years by law firm management consultants, the Association of Legal Administrators, and others. Click here for a sample general ledger chart of accounts

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John W. Olmstead, MBA, Ph.D, CMC

 

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