Starting your own law firm is exciting. You create your own practice. You set your own rules (within the confines of the ethical rules in your jurisdiction, of course). You decide which clients to accept. You decide your rates. Could life get any better?
There’s just one tiny thing, well, one big thing that we must point out. You’re running a business. You’re running a business that relies on finances. Managing law firm finances is quite different from managing finances in other industries. There are trust accounts. There are earned fees and unearned fees. There are jurisdictions that require partial or full refunds of unearned fees at the end of a matter, even if the matter concluded was charged a flat rate. Oh, and then, you know, there’s payroll for your staff, overhead (including rent, utilities, and supplies), marketing expenses, malpractice insurance, discretionary costs, professional fees, legal tech fees, other technology fees (think computers and printers), and more. Every amount that comes into and goes out of your law firm must be accounted for in the name of knowing whether you’re turning a profit as well as knowing what you can do to improve profitability.
Managing Law Firm Finances If You’re Not a Money Person
As individuals, we all have strengths and weaknesses. Not every lawyer is great with money. That doesn’t make them some sort of spendaholic. They may be just fine handling a basic personal budget. It could just be that they’re uncomfortable when it comes to dealing with business financials. And that’s okay. The good news is that if you fall into that category (if managing law firm finances just doesn’t interest you), you have options.
If you’re interested, you can learn. We believe that it is important for lawyers who own law firms to have, at the very least, a basic understanding of what’s involved in the process of managing law firm finances even if a professional is hired to take care of it. Why? Because knowledge is important. You should understand what a KPI (key performance indicator) is and why it matters. You should understand the basic terminology involved in law finances. You should be able to look at the basic reports and report summaries provided to you by your CPA or CFO and understand the financial health of your law firm. You should be able to ask questions and understand the answers. You should be able to spot if there is something that could require further investigation.
You can hire an office manager, accountant, CFO, or CPA. Depending on the size of your law firm and how much you can afford to pay to have someone handle your law firm finances, you can hire someone to do it for you. Again, though, you should still learn the basics about managing law firm finances so that you do understand what’s happening. Do your research and ensure that whomever you hire really does have the experience and the abilities to take on your books and handle them to keep you out of trouble with the bar. They should also be able to prepare reports on time for you to review. Also, if you’re new to owning your own law firm, be very careful about your law firm’s checkbook and debit or credit card(s). Require two signatures on checks to help protect your law firm from embezzlement. Keep debit and credit cards secured. Ensure that you first discuss vendor purchases and limits before turning over any sort of financial information. Embezzlement can and does happen…and we don’t want it to happen to you!
Use legal tech to make managing law firm finances easier. Legal tech options, such as Clio, make managing law firm finances easier. In addition to assisting you with timekeeping, secure document and case management, and CRM features, it can also help you manage your law firm finances. And, to make it even easier, LawDroid recently partnered with Palace Law, and SNS to create Money Moji. Money Moji can be integrated with Clio to pull your billing data out of Clio (which helps avoid duplicate data). It helps you better understand the overall financial health of your law firm by providing visual representations that are easy to follow and understand (including an emoji that provides you an overall score of the firm’s financial health). One unique feature of Money Moji is found in your ability to configure it to match the actual size of your law firm. Then, it compares your numbers to averages of law firms likes yours. For example, if your law firm has three lawyers and two paralegals, it would be compared to other law firms with three lawyers and two paralegals as opposed to law firms with 15 lawyers and nine paralegals. Money Moji uses a concept known as gamification to help your law firm easily become more data driven so that it is easier to see where changes need to be made to become more profitable.
Ready to learn more about Money Moji? You can sign up for our beta program here!
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