Can QuickBooks Do My Timekeeping and Billing Plus My Accounting?

Although law firms are businesses, they have unique requirements. Law firms have concepts such as flat fee billing, contingency billing, and, most importantly, interest on lawyers trust accounts (IOLTA accounts), to name a few. This makes your software choice important. And about all those people who know QuickBooks—they also must understand the legal industry. Knowing QuickBooks and knowing how to use QuickBooks for a law firm are not the same.

Whether you are talking about QuickBooks or QuickBooks Online, the same considerations apply. (Still, it is important to recognize that the desktop version of QuickBooks—whether for Windows or Mac—and QuickBooks Online are different products. What you can do in one is not necessarily possible in the other, or may be possible in a different way. So when you talk to people or do evaluations, make sure you identify which program you are evaluating.)

Know Your Requirements

The first thing you need to do is define your requirements for billing and for accounting.

For billing you need to determine:

• What types of fee arrangements do you use?
• What reporting will you need against those fee arrangements?
• Do you need to do electronic billing—LEDES? LitigationAdvisor?
• What is your rate structure?
  • Different rates for different types of work?
  • Different rates charged by different individuals?
  • Different rates charged to different clients?
• Do you track time and round to the nearest six minutes?
• What information do you want to show on a bill?
  • Timekeeper?
  • Time spent?
  • Rate?
  • Totals for time and expenses?
  • Timekeeper summary?
  • Phases summary?
  • Trust activity?
  • Payments received?
  • Installment payments summary with remaining balance and overdue balance?
• What is your billing process—do you do draft bills?
• Do you use “no charge” time? How do you want to show this on the invoice?
• Do you use different bill layouts for each client?
• Do you generate bills for lots of clients at once or one at a time?
• Do you need consolidated billing or split billing (multiple matters for one client on one invoice or multiple invoices)?
• How often do you need to prepare a “bill” showing everything done to date, billed or unbilled, and what format does it need to be in?
• Do you bill for hard and soft costs? How do you track them?
• Do you need time or expenses approved before being billed to the client?
• Do you need to charge sales tax? What are the rules?

For accounting some important questions include:

• How do you account for costs?
• When a bill is partially paid, how should the payment be allocated?
• Are you reporting on a cash or accrual basis?
• If charging sales tax, do you pay sales tax on a cash or accrual basis?
• How do you measure performance and/or pay those in the firm?

And don’t forget security. An important overall question is what types of security do you need. If you will have multiple people accessing the software, do some people have more rights to view or change information than others? Do you need to limit which file’s data can be accessed by which people?

Areas of Concern for Law Firms

QuickBooks can work for law firms. But, depending on your answers to the questions above, it may require more effort than it is worth. Let’s look at some of the possible areas of concern in more depth.

The number-one area of concern for a law firm is the IOLTA account. With good procedures and reports you can use QuickBooks to track IOLTA accounts, and you can create reports for a three-way reconciliation as required to comply with IOLTA reconciliation requirements. But the burden is heavily on those managing the books. Unlike legal-specific billing software, which will prevent you from accidentally overdrawing a client’s IOLTA account, with QuickBooks you need to check the client balance before writing a check. Reports make this easy to do, but the burden is completely on you; there’s no backstop.

Billing considerations lead to another large group of questions. One of the most critical is how you account for client costs. It is easy to enter advanced client costs in QuickBooks and then pull them into a bill. The costs can be carried on the balance sheet for tracking, and you can run a report of what has been advanced and repaid by each client. However, if clients partially pay a bill that includes fees and costs, you may have an issue. Most law firms want first to account for the reimbursement of costs and then to receive fee income. With QuickBooks partial payments are allocated proportionately across the invoice. While in the long term taxes will be paid on income, proportional allocation may have an impact on income and taxes in the short term. Proportional allocation also means that you can’t apply payment to one timekeeper’s time before another.

How do you want your bills to look? If you want to show the timekeeper on a QuickBooks bill, you either will need to enter it manually or make it the first part of the description, as it will not pull in from the time entries. There’s also no way to show trust activity on the invoice, except by typing it in manually.

If you have flat fees, you will need to determine what you want to show on the bill. Hiding some information may be more difficult than you expect, and if you don’t put the time on the invoice, you will have a harder time getting “job costing” or profitability reports. Soft costs can be billed for, but it is difficult to enter them in advance and hold for later billing. Some firms make creative use of the mileage tracking to bill for soft costs.

Aside from the information shown on the bill, the billing process offers additional challenges in QuickBooks. There is no mass billing where you can review all the time and expenses entered for clients, edit them, and then finalize the bill. Bills are done one client at a time. While there is some mass billing capability, it limits the ability to choose layouts and edit the bills. Does one client need a unique layout? You have to remember to make the change when creating the invoice and then change back for the next invoice.

Draft bills are common in law firms. If you include a time or expense item on the bill and save, and then decide to remove the entry from the bill, it will show in QuickBooks as billed and will not appear again unless you manually edit the item. This can easily lead to forgetting to bill time or expenses—often an expensive proposition. There is also no way automatically to sort and subtotal the fees and costs.

How are your rates set up? If each person in the firm has a single rate, or you charge a single rate to each client, QuickBooks can handle it. But if your rates are more complex, you may spend more time getting the right rates on the billing items than you would like.

Add-On Solutions

This sounds like a rant against QuickBooks. It’s not really. I love QuickBooks . . . with the right additions. QuickBooks offers lots of add-ons that give amazing power. Want to pay your bills directly or have clients go to a website and pay you? There’s an app for that. Want to enter time and have an approval structure or a rate setup that might not be available in QuickBooks? There’s an app for that. Want to take a picture of your expense receipt, load it into an expense report, and submit for payment and billing to the client? There’s an app for that. Want dashboards that compare your firm against industry standards? There’s an app for that.

Almost anything that is “missing” or not as you want it can probably be solved by an app or a program that interfaces with QuickBooks. The hard part is finding the right apps or outside programs to accomplish what you want. And, at some point, the number of apps may be more burdensome than an alternative solution. Linking programs from multiple vendors is always more complex.

There’s no single, magic combination. For some firms a separate billing program integrated with QuickBooks to do the accounting may be the answer. For other firms QuickBooks with a time-tracking app may fill the needs. Still other firms may decide that a single, integrated billing and accounting program better fits their needs. If you are considering apps or programs to integrate with QuickBooks, it is especially important that you identify whether you are talking about QuickBooks Online, QuickBooks desktop for Windows, or QuickBooks desktop for Mac. (There are really no add-ons to QuickBooks desktop for Mac owing to limitations in the interface availability.)

Creating Your Own QuickBooks Solution

How do you decide on your own QuickBooks solution? First, think about the questions asked at the beginning of this article. Identify what are your firm’s needs and wants. What is most important? If you feel that QuickBooks out of the box meets your needs, you might stop there.

If you need more or want to explore other options, then start talking. Talk to others to get a sense of what solutions are out there. Your colleagues are probably using lots of different solutions. Reviews and suggestions exist in many publications. There are consultants who can help as well.

When working with a consultant, it is important in the early stages to deal with someone who can review your needs independent of a specific product. Salespeople will often tell you their product can do everything you need, but look carefully to make sure it does it the way you want. Ask your accountant, but don’t pick a program just because the accountant likes it. You have to look at all the features. Carefully evaluate the products you are considering.

Also consider your long-term plans. If you expect to double in size in the next three to five years, choose a solution that will grow with you. By spending time reviewing your choices, you are more likely to pick a solution you can live with for a long time. Changing products is always more difficult and more expensive than making the right choice up front.

It is important to recognize that firms change and needs change, so you may need to make a change at some point. When that seems inevitable, go back to your checklist. Identify what is no longer working for you. But before you change, talk to someone who knows the product well. Often firms will decide to change because they think the product doesn’t do something they need or want. In reality the product may have the desired feature, but the firm never received training so doesn’t know the feature exists. Or the feature was added later, and an upgrade will provide the needed functionality without a conversion and extended training.

Getting Outside Help

One way to be more productive is to get someone to help so that you can focus on billable legal work. I mentioned at the beginning that, if using an outside bookkeeper or accountant, it is important to make sure they understand the legal industry. How can you tell? Ask questions!

Unless you are planning to train them, anyone you are considering should prove that they know bookkeeping, they know the software they will be using, and they know the legal industry. Find out what certifications and training the person has. Also find out how many law firms he or she has worked with. Again, make sure that you are clear whether you are talking about QuickBooks Online or a desktop version as the skill sets and training are different.

Questions about IOLTA and trust accounts are a good way to test knowledge. Although references can be important, we all know that there are limits to what someone can say when discussing an applicant, and candidates are unlikely to give you a reference that they expect will not give the highest praise. Interviewing a bookkeeper, whether a full-time or part-time employee or an independent consultant, is no different than interviewing any other staff member—it may even be more important.

Choose Wisely

Remember, your billing and accounting systems and your bookkeeper will be dealing with your money, your clients’ money, and possibly your career. Make wise choices up front and you are likely to be happier and more productive.