LAW PRACTICE MANAGEMENT: Charting a New Financial Course with QuickBooks

Vol. 30 No. 6

By

Daniel J. Siegel (dan@danieljsiegel.com), principal of the Law Offices of Daniel J. Siegel LLC, and president of Integrated Technology Services LLC, is a litigator and technology consultant licensed to practice in Pennsylvania and New Jersey.

For solo and small firm lawyers, handling finances can be a daunting task. Think about it. You just started your own firm. You have few, if any, clients, and you are using your savings and credit cards to finance the business. Sure, you may, like me, have an accountant who handles your taxes, but because accountants and other financial professionals charge for their time, just as we do, you tend to do anything you can to avoid incurring that expense until tax season rolls around. You could hire a bookkeeper to handle the financial aspects of your firm, but a secretary, paralegal, or even another attorney is more likely to be the first person hired when a solo or small firm attorney decides to take on employees.

Few law schools offer any classes on practice management, and virtually none of these focus on the financial aspects of running a firm. Consequently, many lawyers handle their finances using whatever they may have learned in a college accounting class or by reading magazines like this one. In other words, they handle their financial issues by the seat of their pants. Fortunately, many often use QuickBooks, which, according to many reports, has captured nearly 90 percent of the small business financial accounting software market.

Opting for QuickBooks. What is QuickBooks? Intuit QuickBooks (quickbooks.com) is a double-entry accounting system in which all transactions are recorded as either debits or credits and organized into accounts. Every credit transaction must have a corresponding debit transaction, and every debit must have a corresponding credit. This way, the firm’s books remain in balance.

So how can QuickBooks help solo and small firm lawyers who want to have a better sense of how their firms are performing financially? First, QuickBooks organizes your finances by putting all the information about your firm’s income, expenses, and even your receivables in one place. Second, if you have employees, the QuickBooks payroll service is easy to use, inexpensive, and allows you to handle payroll far more efficiently and accurately than the traditional manual methods. Third, QuickBooks compiles the information your accountant needs to prepare your tax returns, so the process isn’t a chore—and it costs less than providing only paper records. In our office, for example, all I have to do is create and provide to my accountant an “accountant’s copy” of my firm’s QuickBooks file, along with a few reports, and he has all the information he needs to prepare my taxes. As an added benefit, if you scan all your receipts, checks, and bills, your accountant’s job is even easier because you can provide the accountant with that data on a CD or flash drive. Finally, the biggest benefit for law firms that don’t regularly rely on an accountant may be QuickBooks’ ability to generate reports allowing you to easily analyze your firm’s financial status.

What reports can do for you. The reports are available from the Reports drop-down menu on the main toolbar in the program. Clicking on that menu displays reports on a wide range of subjects. Lawyers will frequently use the Company Snapshot as well as reports available on the Company & Financial, Customers & Receivables, and Vendors & Payables submenus. Although there may be times when you need to create a custom report, most of the standard reports can be easily tweaked from the specific report screens.

Profit & Loss. Let’s look at a few reports that are particularly helpful. First, there are the Profit & Loss (P&L) reports, including the Standard and Prev Year Comparison reports. Also called an “income statement,” a P&L shows (1) the firm’s revenues and expenses and (2) whether the firm made a profit or operated at a loss during a specific time period. All standard P&L reports display subtotals for each income or expense account in QuickBooks’ Chart of Accounts. Consequently, a P&L is a critical report that a firm can use when making business decisions.

Another helpful related report is the Profit & Loss Prev Year Comparison, which allows a firm to compare its current performance with its performance during a previous year. The last line shows the firm’s net income or net loss for the current time period and for the same time period during the prior year. This helps you analyze how well the firm is doing and can be a great resource when planning for the future.

Company Snapshot. The Company Snapshot provides a graphic display of real-time firm data and lets you perform numerous tasks from one place. The Company Snapshot has three tabs—Company, Payments, and Customer—the last really being the client tab. The Company tab essentially displays information about the firm’s profitability, including income and expense trends, previous year income comparisons, top customers or clients, account balances, previous year expense comparisons, and so on. The Payments tab displays information about firm receivables, including who owes you money, payment reminders, recent transactions, and similar data. Finally, the Customer tab provides information about clients, such as recent payments, sales history, and expenses attributable to that client. Thus, in a couple of mouse clicks, you can learn about every aspect of your firm’s financial performance. One of the nice features of the Company Snapshot is that you can double-click and get more information about whatever data you are reviewing. This makes it easy to analyze your data and, when necessary, to drill down further to get answers.

Classes. Another helpful report is the Profit & Loss by Class report. This report allows you to determine, for example, which practice areas are profitable and which are dragging down your bottom line. But for this report to be most valuable, you need to take a step back and make certain that you enter your data accurately and completely. You do this by creating “classes” that you assign to transactions. By using the Class feature, you can define the aspects of your firm and practice that you want to track, along with their associated account balances on invoices, bills, and other documents. After creating the classes, you can create class reports for whatever time period or periods you want, and determine, for example, which practice areas are profitable or which may not be justifying their costs.

Payroll. QuickBooks includes many payroll reports so that you can view and analyze the total cost for your employees. Another feature that many law firms use is the QuickBooks payroll service. Although you can use QuickBooks merely to calculate the amount of every paycheck, you can also use the company’s assisted payroll service, and it will deduct and pay all the taxes and other items withheld from each paycheck. The company will also prepare your quarterly tax returns, issue W-2 forms, and even handle your workers’ compensation insurance. The cost is reasonable, and it eliminates the complications that arise when you handle your taxes yourself. Plus, if you use the QuickBooks payroll service and are contacted by any of the entities to which you pay taxes, such as the IRS, QuickBooks handles those inquiries at no expense—and no hassle—to you.

Closing thoughts. There are numerous other reports and reasons why using QuickBooks makes sense, particularly for small law firms that cannot afford to employ accountants or bookkeepers year-round. The bottom line is that QuickBooks offers easy ways for even the most finance-challenged attorneys to analyze their firm’s financial performance.

ABA Law Practice Division

This article is an abridged and edited version of one that originally appeared on page 44 of Law Practice, September/October 2012 (38:5).

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