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This article will address issues that, unfortunately, may make lawyer eyes glaze over and thoughts wander. And yet these are some of the more challenging, and yet basic and fundamental, issues encountered by attorneys today. What, then, are these dreaded matters that can, if not properly handled, lead to a variety of difficulties including ethical violations? How to effectively manage finances, accounting systems and cash flow. Large corporate law firms can afford the luxury of a dedicated accounting and administrative staff, where billing and accounting procedures are intrinsically formal and the responsibility of specific employees. This discussion is thus primarily oriented towards the needs and requirements of those many attorneys who do not have an in-house army of accountants — small and medium size firms, as well as attorneys in solo practice. These will be referred to as a “practice.” Most practices have an outside accountant or financial advisor to file tax returns, prepare year-end statements and give general advice on financial matters. However, it is very important that the attorney(s) managing a practice understand sources of revenue, cash flow management and costs of operating the practice. You cannot manage what you do not understand, and performance cannot be measured unless there are policies and systems in place. The good news is that you do not have to do all of this work yourself; that’s where bookkeepers and other numbers professionals come in. But the other good news is that you can, indeed, understand enough of these matters to make the decisions that are necessary to set a practice on the right path towards financial well-being and professionalism. To start the discussion, it is important to understand that the foundation for the financial well-being of a practice is a strong billing/collection and accounting/bookkeeping system (see glossary of commonly used financial terms, below). Best billing practices and best accounting practices will be addressed in order. BEST BILLING PRACTICES A meaningful discussion of “best billing practices” touches upon two distinct areas of concern. Cash management is a primary objective from a business point of view, ensuring a solid income flow and the successful management of accounts receivable. Professionalism and public opinion are a primary objective from an ethical point of view, balancing pragmatic needs with the maintenance of fair and equitable billing practices. Once a practice has started down the road of questionable billing practices, the most serious challenges become damage control and avoiding an audit. The first step towards the implementation of a best billing practice is to acknowledge the need. It is not trivial or unprofessional to be concerned about billing and, accordingly, capturing all hours spent on a matter or getting paid on a timely basis for one’s services. In fact, it is quite the opposite. In an increasingly competitive environment, attorneys need to recognize the importance of cultivating and nurturing relationships that generate and sustain fee-paying legal business. Furthermore, the establishment of formal billing practices should be a priority to help ensure that clients believe that their matters are important, and that they are being treated fairly and considerately. Not only do haphazard billing practices make an attorney look sloppy, but they do not permit a client to anticipate, and perhaps adjust its own cash flow, in order to pay reasonable bills received on a regular basis. A practice needs to get paid on a timely basis for its services, but clients may also need to be able to plan on when, and approximately how much, they will need to allocate for payment of their legal bills. In developing guidelines for what to do, it may be helpful to first acknowledge what to avoid. Consider the implications of this negative scenario. Bills have not been sent out for several months. When the cash balance in the bank gets low, the practice panics and a mad scramble to generate some hastily constructed invoices ensues. An individual client that has not been billed for quite some time becomes angry upon receiving a disproportionately large bill for several months of services rendered. Previously, the client had made an informal “deal” with the practice, although there is no paperwork to substantiate what services the agreement was for. The bill the client receives is for a total amount due with little or no detail regarding the date and nature of services or expenses; upon inquiring, the client discovers that this information cannot be readily reconstructed. The client cannot be certain that all of these services and expenditures were on his behalf. After negotiating, the client grudgingly agrees to pay a portion of the invoice as a settlement for the full amount. The end result will be any or all of the following: The client is dissatisfied; the practice is diminished in the opinion of the client; the responsible attorney is indignant and disgruntled, the attorney appears unprofessional; entirely too much time and energy has been expended on a matter that should have been routine; and the client will probably not recommend the practice regardless of the outcome of his legal work. A best billing practice should be constructed to avoid this type of negativity and ill will. Successful billing for professional services is a combination of common sense, careful planning and skill, with the ultimate goals being to maximize billing potential and billing results at a minimum cost, to maximize the practice’s public relations quotient and to maintain the reality and perception of fair billing practices. The first step towards the realization of a successful billing and collections system is to develop a system of screening potential clients to avoid those who cannot afford the practice’s legal services or who have unrealistic expectations regarding the outcome of its efforts. The second step is to secure a well-constructed engagement letter (hourly billing) or fee agreement (contingency agreement). At a minimum, either agreement should include a clear understanding of who the client is; a detailed description of the legal work to be performed as part of the engagement; an itemization of each aspect of the matter that will or will not be included in the engagement; and a detailed description of the fee arrangement, including expenses for which the client will be responsible, when the client is expected to pay and any anticipated fee-sharing. The third step is to rely upon a billing system that has been implemented utilizing the following guidelines: � First and foremost, acknowledge the critical importance of billing and collections. That said, delegate the responsibility for billing to a bookkeeper, office manager or other appropriate staff member. Consider the possibility of hiring an experienced part-time employee (internal) or retaining a professional billing service (external). The pro and cons of both will be discussed later. � Develop a regular billing schedule, preferably monthly at a minimum. Although this is particularly true for practices that bill on an hourly basis, remember that there is a direct correlation between successful fee collection and sending bills on a frequent and milestone basis to avoid large, unexpected bills. � Coordinate your chosen billing schedule with the practice’s specific internal deadlines for submitting data for processing. This will include the submission of employee timesheets and the assembly of expenses to be reimbursed by the client. � Require uniformity within the staff with respect to billing matters, particularly with respect to the entry of information relative to the completion of daily timesheets. Some specific items that should be reduced to a common denominator include the identification of clients, matters, terminology, references, tasks and minimum billable time increments. � Never assume that a client will forego analyzing and reviewing the bill. Incorporate a specific detailed explanation about each charge, including the date and the employee who performed the service. Whenever feasible, copy clients on all correspondence relating to their matters. � Use common sense to develop time entries with enough detail to be both accurate and convincing, without appearing to be boilerplate. Always leave yourself in a position to substantiate a charge in the event it is questioned or audited. � Accept or delegate responsibility for all aspects of decision-making with respect to billing matters. The attorney responsible for a matter or case should review all finalized bills for errors before they are mailed to the client. � Remember that appearance does count. It is not frivolous to concern yourself with choosing appropriate stationary and envelopes, the font style and the bill format. � To assist with billing and to be able to quickly and easily identify accounts that are in arrears, utilize a professional time and billing software package that will facilitate the objectives of the billing process. At a minimum, such software should include flexible billing formats, a variety of bill payment options, customizable features, accounts receivable functionality and extensive reporting capabilities. � If collecting fees becomes or continues to be a problem on an ongoing basis, require the payment of retainer fees in advance. Be prepared to accommodate the additional accounting requirements of retainer fees. BEST ACCOUNTING PRACTICES The “best accounting practice” always commences with the selection of an accounting system. It can be anything from manual, based upon written checks and the recording of deposits in a checkbook, to a fully automated system with integration of the various accounting modules, such as the general ledger, accounts payable and accounts receivable. When operating a manual system, the practice will need to involve a financial consulting service, such as its outside certified public accountant or a bookkeeping service, to take the manually recorded information and properly record it in an automated system. Typically, at the end of each month the practice’s receipts by client and coded disbursements would be sent out to these consultants. Various reports, which will be covered later, would then be produced and sent to the practice. In order to use an in-house automated computerized accounting system, initially the practice would need to involve its outside accountants to set up the appropriate chart of accounts and accounting systems. The bookkeeper, whether an experienced part-time employee (internal) or an independent outside professional from a reliable, reputable bookkeeping service (external), should work on this initial setup. It is imperative that the bookkeeper and accountant work as a cohesive team and produce information that the financial managers of the practice can rely upon and make informed decisions from. It is at this juncture that the bookkeeper and the accountant establish their professional relationship and responsibilities. The accountant will be able to assess the bookkeeper’s strengths and weaknesses, and the bookkeeper will develop a comfort level with the accountant and, hopefully, not hesitate to avail himself of the accountant’s help when necessary. In addition, it is at this time that the bookkeeper and the biller, with the coordination of the accountant, develop a framework for all of their responsibilities. Many times, the bookkeeper will also perform the billing function. The monthly responsibilities of an experienced bookkeeper, once it has been determined that he or she has a strong accounting background and in-depth knowledge of the accounting and billing software the practice is using, can be summarized as follows: � With the help of the outside accountant, establish a chart of accounts, which will become the basis for the general ledger and trial balance. Once the initial chart of accounts is established, the accountant should be notified of any modifications. � Review the accounts payable invoices for validity and substantiation. Many times the bookkeeper will need to make inquiries of key personnel to determine that the goods or services being paid for have been authorized by an appropriate individual at a predetermined amount. � Code the accounts payable invoices to the appropriate expense, liability or exchange account. If this function is not performed by an experienced bookkeeper, the potential arises for the underlying records that produce the various financial statements to not be accurate and, accordingly, financial and tax decisions will not be valid. � Generate a pre-check register for the responsible attorney of the practice to review and approve. The pre-check register will be based upon invoice due dates and cash flow. � Once the pre-check register has been duly authorized, generate and present computerized checks to the financial managing attorney for signature. � Mail the signed checks with the invoices attached and file all paperwork. The bookkeeper, when there is not a separate biller, is responsible for the billing and collection cycle previously discussed and maintenance of the accounts receivable client subsidiary ledger, which is a module in the billing software. It is common that the billing and accounting software are different programs. The bookkeeper’s accounting functions would be t � Prepare adjusting and recurring journal entries, including payroll, which in many cases is performed by an outside service bureau. � Prepare bank reconciliations. � Generate financial statements, including a balance sheet, income statement and statement of cash flows. The managing attorneys must make several initial key decisions regarding the bookkeeping and billing function: � Should the bookkeeping and billing responsibilities be handled by the same individual or service group, or should there be more than one? � Should the practice hire an employee or an outside bookkeeping/billing service? � In order to accomplish all the responsibilities, is this a part-time or full-time position? The advantages of developing members of the practice’s internal staff may be rather obvious — the appropriate individual is an integral part of the organization, presumably in a position to truly understand its needs and be completely familiar with its client base. This person is also within the direct control of the practice. These benefits must then be weighed against the issues of cost, continuity and flexibility. If cost is not an issue, does the nature of the practice’s requirements justify hiring one or more new employees? If cost is a concern but you are fortunate enough to have a suitable staff member who happens to be computer savvy, is it possible for this individual to assume additional responsibilities, and what will be the cost of technical training and time spent away from customary tasks? What precautions can be taken to help assure continuity if this employee leaves the practice? To realistically assess the advisability of handling all or part of your bookkeeping and billing systems internally, these questions must be answered. If a decision is ultimately made to contact an outside bookkeeping/billing group, the practice should be in a position to negotiate the terms of the service agreement. Consideration should be given to securing favorable payment terms for the contract, that is, hourly charges for services rendered versus monthly flat fees. In addition, the practice may request one individual who, upon approval, will become the main liaison between the practice and the outside service organization. In this way, the practice will have the benefit of the experience and expertise of one individual without the incidental costs associated with in-house personnel. The practice will also have the benefit of knowing that the billing and bookkeeping will always get done on a timely basis rather than being relegated to a future “To Do” list because something concerning an employee’s “first job” was more important. Lastly, the practice will have the security of knowing that the outside bookkeeper will have the support and backup of the entire professional service firm. By incorporating and considering the points discussed in this article, a practice should be able to effectively manage its finances, accounting systems and cash flows.
INDEX OF FINANCIAL TERMS Accounting Period:A time frame for which financial statements that measure flows, such as the income statement and the statement of cash flows, are prepared. The accounting period should be clearly defined on the financial statements and, normally, be for no less than one month and no more than one year. Accounts Payable:A liability representing an amount owed to a creditor, usually arising from purchase of materials, supplies or services. Accounts Receivable:A claim against a debtor, usually arising from sales or services rendered. Accrual Basis of Accounting:Records all entries at the time business is transacted, whether or not cash has been transferred. Adjusting Entry:A journal recording made at the end of an accounting period to record a transaction or other accounting item that for some reason has not been recorded or has been improperly recorded during the accounting period. Usually an adjusting entry updates the accounts to the actual amounts. Aging Accounts Receivable:The process of classifying accounts receivable by the time elapsed since the obligation came into existence, for the purpose of estimating the amount of uncollectible accounts receivable as of a given date. It is essential that this schedule be reviewed in order to determine if an accounts receivable may not be collectible, or if special attention should be made towards its collection. Allocate:The spreading of a cost from one account to several accounts. An example would be a phone bill that breaks the total amount due down into separate costs for phone usage and an advertising charge, such as for an ad in the Yellow Pages. Amortization:The expensing of an intangible asset (defined below) over a determined time. Asset:The probable future economic benefit obtained as a result of past transactions. Examples are accounts receivable, furniture, fixtures and cash. Bad Debt:An uncollectible accounts receivable. Bad Debt Recovery:The collection of a specific accounts receivable previously written off as uncollectible. Balance Sheet:A statement of financial position as of a specific date that shows total assets equaling total liabilities plus owner’s equity. Bank Reconciliation:A schedule that explains the variance between the balance per the bank statement and the balance per the accounting records or checkbook. This schedule takes into account the amount of checks that have been issued but not cleared by the bank, commonly referred to as outstanding checks, or deposits that have been recorded on the books but not by the bank, commonly referred to as deposits in transit, as well as errors made by the bank or the practice. Cash Basis of Accounting:Recognizes transactions at the point cash is actually exchanged. The cash method is most common in service industries. No attempt is made to match revenues and expenses in determining net income. Check Register:A journal to record checks issued. Credit:An accounting entry on the right side of an account, which records increases in liabilities, owner’s equity and revenues. A credit records decreases in assets and expenses. Debit:An accounting entry on the left side of an account, which records increases in assets and expenses. A debit records decreases in liabilities, owners’ equity and revenues. Disbursement:A payment by cash or by check. Financial Statement:The Balance Sheet, Income Statement, Statement of Cash Flows and supplemental notes. General Ledger:The formal accounting book containing all of the financial statement accounts. Equity:A source of assets. Income Statement:The statement of revenue and expenses for a particular period of time, ending with net income for that period. Intangible Asset:A non-physical, non-current right that gives a business an exclusive or preferred position in the marketplace. Examples are copyrights, patents, goodwill, leasehold improvements, organization costs and mailing lists. Ledger:A book of accounts such as the general, accounts payable and accounts receivable ledgers. Liability:An obligation to pay a definite amount at a definite time for a past or current benefit. P & L:Profit and Loss Statement, synonymous with Income Statement. Retained Earnings:Net income over the life of the business. Revenue:The monetary measure of a service rendered. Trial Balance:A listing of account balances noting all accounts, with the debit balances being totaled separately from accounts with credit balances. The two totals must equal. Trial Balances are taken as a check of the mathematical accuracy of the entries previously made.

Joel E. Rosenberg, CPA, is a principal of Price & Rosenberg CPAs in Goldens Bridge and Bardonia, N.Y.

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