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As a solo practitioner, you probably never had an interest in learning accounting. The magic of double-entry bookkeeping never thrilled you, and you never cared to know the difference between a debit and a credit. But as the owner of a business, you learn very quickly that you are just that � a business owner. Whether you sell time or tulips, a successful business � and the practice of law is a business � must set up an effective accounting system and have procedures and policies in place to protect its assets. Establishing an efficient accounting system is important for the solo practitioner, but few lawyers know how to do it. Some key points to keep in mind include the following: Keep it simple. The accounting cycle for a solo is not much different from a multilawyer office. Hours are recorded, fees are billed, cash is collected, and bills are paid. It does not have to be a complicated process. Organize the accounting process so that financial data can be easily recorded, tracked, and reported. Know how to use your system. The urge to turn the entire accounting function over to the secretary will be great as you focus on billable time. But if you personally do not know how to use the entire accounting system, you are putting the practice at risk. Office assistants arrive late, call in sick, go on vacations, and leave without notice. A solo must be able to handle the tasks of billing, collections, payables, payroll, bookkeeping, and office management, just to name a few. Learn how to use modern computer technology effectively. Set up appropriate controls. Protect accounting information as if it were your wallet or purse. Financial data can be damaged, lost, or misfiled. Honest employees have financial problems and are tempted to steal. No system can be safeguarded 100 percent, but control steps can minimize the risk of loss. One of the biggest sources of lost revenue for solo owners is forgetting to record the time spent on a legal matter for a client. Purchase some sort of timekeeping program and diligently record your hours. The program should provide the following essential information and controls: • Lawyer time utilization. This tracks billable and nonbillable hours expended for later comparison to monthly and yearly targets. • Unbilled work-in-progress. This tracks ongoing work performed for client for billing purposes and guards against excess time on certain matters. • Billing variances. This is a client-by-client difference between the value of time worked at standard rates compared to fees billed. Managing this “realization” percentage is key to a profitable practice. • Accounts receivable. Controlling your accounts receivable means knowing which clients have paid and which ones still owe money. A proper system allows a solo to generate customized invoices, reminder statements, and aging schedules to reflect the age of each unpaid bill. SELECTING SOFTWARE Like any business, a solo needs to set up the firm finances on a computer using a small business software package and track revenues and expenses diligently. The software chosen should be inexpensive, easy to set up, and easy to use. It should provide you with basic reports needed to track the profitability of the practice. Start with a basic package and expand later, if need be. The more-sophisticated systems integrate the time and billing function with the accounting process. While that may be something to explore down the road as a practice grows, it is not necessary for the solo practice. The basic accounting system should, at a minimum, help control financial operations and cash flow. It should provide information on any adverse trends such as fees collected below your projection or expenditures above your budget. Regardless of the software purchased, it is critical that the solo owner receive basic information on a timely basis to monitor the financial performance of the practice. While most timekeeping and accounting systems can generate an endless stream of reports, be aware of certain key reports to help you track your firm’s finances: • Balance sheet. Reports cash balances and firm’s financial position. • Income statement. Provides firm’s profitability and comparison to budget and prior year’s performance. • Attorney time analysis. Reports billable hours, billable fees, billed fees, and collected fees. • Billing realization. Reports profitability of individual clients/matters. • Aged work-in-process. Analyzes unbilled time by client. • Aged accounts receivable. Analyzes uncollected fees by client. • Aged accounts payable. Reports unpaid balances owed to vendors. • General ledger. Lists all financial transactions by account. • Bank reconciliation. Reconciles cash on hand with bank balance. • Interest on Lawyers’ Trust Accounts schedule. Provides running balance of IOLTA transactions to reconcile with firm books. MINDING THE MONEY The solo practitioner is just as vulnerable to financial loss as the big firms if key accounting controls are not in place. However, the solo firm normally does not have the ability to restrict access to accounting records, segregate cash functions or install time-consuming authorization procedures. There are a number of ways your employees can steal from your practice through check tampering, fictitious vendors, payroll fraud, cash skimming, or false expense reimbursements. One of the strongest deterrents to fraud is the perception that effective detection controls are in place. People who think they will be caught rarely commit fraud. If you use a secretary/bookkeeper to handle financial transactions, consider implementing several basic control procedures. The following are examples: • Be the first one to pick up and open the mail. Scan the mail for unfamiliar vendor names and unusual correspondence. • Keep a separate list of daily deposits for comparison with the firm books. • Open the monthly bank statements and review the deposit slips and checks for alterations and forged signatures; review the statements for unusual wire transfers and other debits. • Review the monthly bank reconciliation for old outstanding checks and unusual entries. • You should be the only authorized check signer on all bank accounts. • Ask for supporting documentation when signing checks. The fastest way to lose your law license is to ignore the rules for handling client funds. You are responsible for any loss of clients’ funds. If your bookkeeper decides to take early retirement to Brazil one Friday afternoon, you are responsible for the loss. Some accounting rules to consider include the following: • Maintain an IOLTA account for client funds you expect to hold for a short period of time. If the funds are in the account more than 90 days, there should be a good reason. • Never commingle your funds with client funds. • Never use IOLTA account to pay personal or office expenses. • Never let anyone else sign the client fund account. • You should be the only authorized signer. • Restrictively endorse and photocopy all checks as soon as you receive them. • Keep a separate accounting of client fund activity and reconcile the balance to the firm books and bank statement each month. To run a successful solo practice, think of your firm as a business. Preparing a budget, converting hours to cash, controlling expenses, and setting up proper accounting controls are critical to the success of the firm. Establishing an efficient accounting system with appropriate safeguards at the start will help you spend more time and make more money doing what you do best: practicing law. David Epperson, CPA, is a partner in the Dallas accounting firm of Saville, Dodgen & Co. and a principal in Leganomics LLC, a firm that provides financial and management advisory services to small and midsize law firms, including firm management issues, profit modeling, financial reporting, and compensation analysis. Hise-mail address is [email protected]. This article first appeared in Texas Lawyer, an American Lawyer Media newspaper published in Dallas.

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