Why Legal Billing Software Is Crucial To A Successful Practice
Your law firm’s profitability will depend heavily on your billing system, and by that we mean everything from your fee structure to your invoicing procedures to the software you use. If you handle your bookkeeping by the seat of your pants then you are not going to have the cash flow or the financial security that a better organized firm will.
This article will explore the importance of law firm billing software to the modern legal practice, why manual methods or the wrong computerized billing software are going to hurt your firm and how high quality software is an investment in future profitability.
The Legal Industry’s Unique Billing Need
The first thing to understand is that you are an attorney. You aren’t a doctor, a tax accountant or a pet groomer, nor can your practice’s needs be satisfied with billing software aimed at generic service businesses. You have specific needs that come from tradition and practicality as well as government and bar association rules. Here are some of the most important billing practices common to law firms:
1) Matter-Based Billing
This is the single biggest difference between a law firm and another service business. You don’t bill by client; you bill by matter. If you are handling both a divorce and an estate settlement for a single client — it’s been a tough year for him! — then you have to keep both matters separate on your books. To the client it may seem like one big invoice, but to you and to your state bar these are separate issues. You can’t apply a payment for his estate settlement to his divorce charges.
Matter-based billing can’t be done in generic billing software. You might be able to fake something using dummy accounts, but it’s never going to be as efficient as the actual matter-based billing you’ll find only in specialized billing software for attorneys.
2) Varied Billing Structures
A solo firm might handle only cases of one type with one billing structure, such as a bankruptcy attorney who handles filings on a flat fee. However most firms, even solo firms, often need to offer a range of fee structures to cover the different cases they handle, and those practices need time and billing software flexible enough to accommodate their billing models.
- Hourly Billing – The traditional billable hour is still the most common legal billing method in areas such as estate planning, commercial litigation and family law. You must be able to track the hours spent on a matter as well as any addition expenses such as court fees. Periodically, usually monthly, you will generate an invoice that shows an itemized list of all expenses charged and hours incurred.
- Retainer–Based Hourly Billing – This is similar to the above but the client gives an advance to cover the expected hours to be spent on the case. The law firm takes payments from this retainer fund. If the fund gets low, the firm must request replenishment as quickly as possible. At the end of the case, any unspent funds are returned to the client.
- Flat Fee Billing – Simple, predictable cases such as bankruptcy, traffic violations and real estate transactions often operate on a fixed fee. Clients prefer knowing how much they will need to spend before going into a case, and lawyers like having a predictable source of income.
- Contingency Billing – Cases where a settlement is expected, such as debt collection or personal injury, are often handled on contingency. If the case is decided in the client’s favor the attorney takes an amount to cover expenses as well as a percentage of the remainder. The rest is passed onto the client. If the case goes against the client, the firm typically receives no payment at all.
3) Client Retainer Management
Although mentioned briefly in the last section, retainers deserve some specialized attention. Most firms insist on advance payments to ensure they will get reimbursed even if the case is decided unfavorably. However it’s important to understand that advances, also known as security retainers, belong to the client until the money is earned through legal fees. Law firms deposit these funds in trust accounts, sometimes called IOLTA accounts, until the funds are earned and can be transferred to the firm’s operating account.
Retainer management is too complicated to handle with manual methods. Law firms need dedicated trust accounting software, preferable integrated with their billing software, to be able to track every penny of retainers accurately. Not only that, but when the audit comes — and it will! — the law firm can produce reports demonstrating they handled all client funds ethically and correctly.
Attorneys must also be careful to request retainer replenishment long before the funds run out. By staying on top of their retainers, they can ensure regular cash flow for the practice.
4) Government And Bar Association Rules
Attorneys are one of the most closely-scrutinized industries in the country. Clients trust lawyers with their futures and a web of regulations exist to protect the clients and to ensure attorneys bill fairly and don’t mismanage any monies they are trusted to administer. This can affect procedures from invoice preparation to trust account management. These rules don’t protect only the clients. Attorneys on the receiving end of billing complaints are thankful that they can produce the audit trail required by billing regulations, proving their billing was correct in the first place.
What’s An Attorney To Do?
Now that we’ve established some of the specialized billing needs of a law practice, how should you handle the job?
- Paper Ledgers – Attorneys kept their books on paper for centuries and what was good enough for your grandfather is good enough for you, right? Not really. That’s like saying we don’t need cars, electric lights and the internet. Paper bookkeeping is slow, sloppy and prone to error. You have better things to do than spend hours poring over your accounts.
- Spreadsheets – Solo firms sometimes try to cheap out on software. Practically every computer comes with Microsoft Office, so you might be tempted to just set something up in Excel. However that gives you no way to generate bills, interface with your bank, or easily manage trust accounts. You end up creating complicated methods to track matters, and you simply waste lots of time that could be better spent on being an attorney.
- Generic Billing Software – Why invest in a dedicated legal billing system when there are so many other billing software options? These other software packages are terrific for most business, but don’t have the features like matter-based billing or trust account management that law firms need. You again end up building a complicated system that doesn’t quite do the job.
All of these methods are slow, inefficient and prone to error. What’s worse is that errors can accumulate for years until discovered by an auditor. It’s kind of like discovering your house’s entire framework has been weakened by termites, and the only choice is to tear it down and rebuild anew.
The less time you have to spend fighting with your billing, the more time you have to handle clients and generate revenue. That means you need the right tools. The conclusion is simple: dedicated legal billing software, preferably with integrated trust account software, is a necessity for a modern legal practice. The return on your software investment is the extra time you have once you don’t have to fight with your accounting system anymore.
Infographic courtesy of Freepik.