Year End Collections: Tips for Getting Paid Before Year-end

Collection Box Fund Raising Drive Donation Support Money HelpOctober 2016 (revised from original post) Peggy Gruenke | Originally published in Attorney at Work.

The year end is right around the corner, along with the holiday season. So, what do you really want for a holiday gift? How about getting paid for the work you did during the year and focus on year-end collections.

The holidays can be extra hectic for lawyers with the scramble to get money from clients before year-end and tax planning with your accoutant. Most law firms operate on a calendar year and are run on a cash basis, meaning work isn’t counted as revenue until clients pay. If you are a partner or even an associate, your compensation may be tied to the amount of money your firm collects on the work you billed. If you are a solo, you know all too well your compensation is directly tied to how much you collect on invoices.

Also during these last few months of the year, there’s typically a slowdown in the number of new cases for many practice areas — divorce, bankruptcy, estate planning, real estate — as people begin to prepare for the holidays and put certain personal and business matters on hold.

The result? A collections sprint as the year closes. Law firms deal with it every year — a large percent of revenue is collected in the last three months of the year. Could better collection procedures be put in place to avoid this year-end ritual? Of course! But let’s focus on tips to help you get more money in now.

The Collections Plan: Start With Over-Ripe Accounts

Now is the time to look at past-due accounts and figure out where you are leaving money on the table. The tool you will need to assist you is your “aged accounts receivable” report. I suspect this might generate one of the following reactions from you:

  • Confusion, as in “Crap, do I even have this kind of report?” (Add “buy accounting and practice management software” to your holiday shopping list!)
  • Panic when you see how very few past-due amounts await collection, and how little cash you have on hand. (Be happy the clients you have actually paid you. Next year, get more clients.)
  • Frustration when you realize how much time collecting past-due money is going to take.
  • More frustration because you haven’t set up the ability to accept credit cards for client payments. (Eliminate this frustration now and setup credit cards: Here is the link to LawPay.)
  • Disappointment that you let past-due accounts get to this point.
  • Relief that you have money to collect!

Putting emotion aside, here are a few things you can start on — this week — to boost your year-end revenue number. Continue reading

The 6 Month Financial Checkup: Are you making money yet?

Law firm ProfitabilityThis article was originally written for Attorney at Work in 2014. It has been re-written and updated for this blog post.

So it’s July and you will be sitting down to reconcile your bank accounts for June’s activity. This is an exercise you do (should be doing) every month. As long as there’s money in the checking account, life must be good – right? Maybe, but it begs the question – How profitable is your law firm and can it be doing better?

Six months are in the books and now is a good time to evaluate a few of your firm’s financial metrics and law firm profitability before you plow through the next 6 months of the year. Step back and review where you are in relation to your 2016 budget you created in January. Are you profitable and making money yet? If you never created that budget, no worries, this article will help you plan for the next six months with a budget and a system in place. I have included a sample budget tracker spreadsheet for you to start with now.

While looking at the financial data and key metrics you should be tracking and measuring, let’s ask a few questions to get you in the mindset of looking at your firm as a business and preparing for a more successful next six months.

  1. Are you paying yourself a monthly salary and is it enough to cover your personal expenses? Or are you randomly taking money out of the business when the bank account looks healthy enough to do so?Payroll

Goal: Build you salary into your budget along with payroll taxes. It is tempting to just randomly take out money but the tax implications for this habit will catch up with you the next year. This task also requires you to create a personal budget so you know how much salary you and your family need in order to pay the monthly bills and save for your kids college!

  1. Do you know what you have to bill and collect every month to cover your firm’s monthly expenses, which includes your salary? This is your monthly “nut” – the money you will need very month to pay fixed expenses. Know your “nut” assumes you know your monthly fixed expense.

Goal: Calculate your “monthly nut.” Put this number in a very visible place so you look at it every month as a reminder that once you hit this number, you are making profit for your family and your future retirement.

  1. Does your budgeted income number reflect your collection realization rate?

If you budget to bill 1500 hours/year at $200/hour, your budgeted revenue is $300,000. But it’s not a perfect world and this is not what will be collected. Knowing your collection realization rates will help you set a realistic revenue number to drive your budget.

Collection Rate

Goal: Calculate your YTD 2016 collection realization rate. Shocked at how low it might be? A collection realization rate of 90% should be an attainable goal for you. If it seems daunting based on how low your current collection rate is, don’t worry. This is one area of your financial dashboard that you can improve upon by changing billing habits and tracking accounts receivable.

  1. Do you know your year-to-date profit or lose? How are your actual numbers compared to what you budgeted for? A profit and lose statement is sometimes referred to as an income statement. It is simply an accounting report comparing revenue/income to expenses, usually shown monthly compared to last month for the same time period.

Income is based on a few things discussed above: billing and collections. Expenses are something that can surprise you if you are not tracking them monthly. Having the prepared budget you review each month is invaluable for tracking expenses. You may not think you are spending a lot of money until you see it in writing.

Profit lose

Goal: Make sure your accounting system is setup with a chart of accounts that segregates expenses by categories that you wish to track. Then every month enter the actual amounts spent and watch for any unusual trends. If one month was higher than usual, adjust for the remaining months so you don’t overspend.

  1. Do you have a cash flow report that you can look at every month?

A cash flow report is simply a way for you to keep an eye on your actual checking account balance. If you are reconciling every month and updating your budget/financial tracker spreadsheet, then you will know how much you are starting with every month – with enough money in the checking account or not enough. Once again, it gives you data to make decisions about your business so you can be proactive and not reactive.

In the sample budget tracker/financial spreadsheet, the beginning cash balance for the next month is calculated this way:

2016-07-13_21-21-03

 

 

 

 

Goal: Commit to reconciling your bank accounts within the first few days of each month and updating your budget/financial tracker spreadsheet with the reconciled amount. Having correct and current data is essential for making good business decisions.

Cash Flow

  1. How many hours and dollars are you billing each month and what is your average hourly rate?

You can’t get paid unless you are billing every month. Knowing how much you are billing every month and what the trends are will help you see your financial future, not through rosy glasses but actual numbers.

Goal: Track your billable hours and bill promptly and regularly. Train your clients to expect to pay monthly for their legal services.

Hours billed

  1. How many new matters are you setting up each month and what has been the trend? Is the pipeline full for continued cash flow? Do you have an even balance of hourly vs. flat fee vs. contingent?

Goal: Track the number of new matters per month and visualize the growth. A month with a low number of new matters can signal less income in the coming months. Especially combined with a low beginning check register balance. Knowing this ahead of time can help you prepare. Maybe look at expenses closely over these upcoming months and defer expenses if possible.

Matters

  1. What is your six-month collection realization rate? Is this a weak spot and a reason for low revenue numbers? Your collection realization rate is the percentage of your billed fees that is actually collected. Pretty simple stuff. Collection realization rates are often overstated because lawyers tend to leave uncollectible receivables in the system for an unrealistic time period, rather than admit the money will never be collected.

Goal: Commit to calculating your six-month collection realization rate and for the remainder of the year, set a goal to increase this by 2%. An increase of 2% can yield additional money without doing more work.

Collection reallization

  1. What are your outstanding accounts receivable 30, 60, 90 and over 90 days? This is an area that can yield additional profit for your firm, without putting in longer hours, by simply tighten up or putting in place good receivable management practices. You are not in the business to extend credit and make loans. Set expectations with your clients’ early on regarding payment of invoices. You are a small business owner and cash flow is important. They should understand and respect your business needs. If they don’t, fire them.

Goal: Implement monthly billing procedures and collect all payments before they hit 90 days past due. Create a procedure to send letters requesting payments once account hits 60 days past due and then follow-up regularly. Analysis past due accounts in excess of 1 year. They have little chance of being collected. So don’t count on this money coming in. Write if off and move on.

AR

  1. Don’t have a budget or method to track your firm’s financial data? Use the summer month of July to build yourself a nice spreadsheet so you are ready for the next six months in 2016. This is an invaluable exercise and once done, it easily converts to an annual worksheet.

Improved understanding of these financial metrics will assist you greatly with strategic business development initiatives–all of which are critical to remaining competitive and profitable as a solo and small firm attorney.

Written by Peggy Gruenke with CPN-Legal, a company whose mission is to help solo and small-firm lawyers build better businesses. She is active in the ABA GPSolo Division and a frequent speaker at bar associations and ABA TechShow.

Is 2015 going to be a profitable year? Key Metrics to Track

January 2015 | Peggy Gruenke | Clio and Law Practice Management Consultant

Business Plans for Solos

Key Metrics to Review for Profitability

Now let’s look at different key metrics you may want to review and have in place for 2015. Understanding which key metrics you should be tracking and measuring is critical to remaining profitable as a solo and small firm attorney.

Using the below chart as a reference, here are six key metrics you should track for 2015. If you think six is too many to identify and track, then pick three. If you have never setup a way to track and review these key metrics, this spreadsheet will help you get started.

  1. Track the number of new matters you are getting by type: flat fee, hourly, contingent and pro bono
  2. Track number of hours you are billing on hourly cases and flat fee cases
  3. Your average hourly rate on billed matters
  4. How much you collected each month (revenue from cash flow worksheet)
  5. Your collection realization rate: what % of billed revenue did you collect
  6. Money not coming in: How much money are you leaving on the table every month

Money In Money Out - Preparing for 2015 Image Key Metrics

  1. New matter tracking. How many new matters did you set up each month and what has been the trend? Did the pipeline stay full for continued cash flow? If you have good law practice management software, this information will be right at your fingertips by running reports.

One thing you want to look at is the balance between your types of cases. Too many contingent cases will create very uneven collections since these cases have a long life. They also have expenses related to them. Hourly cases should be generating a nice flow of income as long as you are billing regularly. If you do a number of flat fee cases, it’s important to make sure you are not only profitable but you are profitable at a decent hourly billing rate. Flat fees also mean you may have to manage the flow of this money between your trust account and your operating account, creating invoices and paying yourself at certain milestones. Pro bono cases should be one of you yearly goals as part of your business development plan.

Tip: If you do a lot of contingent cases and find your monthly cash flow having too many valleys, open up a firm savings account and deposit a portion of your next contingent fee in this account. Move it over to your checking account as needed to cover your monthly “nut.” Continue reading

Is 2015 going to be a profitable year? Part One

January 2015 | Peggy Gruenke | Clio and Law Practice Management Consultant

Business Plans for Solos

Law firms are profitable businesses

Let’s set the stage with a very positive image: Law firm business models are very profitable models. According to a Fortune magazine article, in 2014law firms ranked second as a profitable business model with an average profit margin on 17.8%. So, yes, you can make money running a solo law firm! That doesn’t mean it’s easy to do but with the right tools in place at least you will now if you are being profitable.

So it’s January and you will be sitting down to reconcile your bank accounts for December’s activity and looking at your year revenue and expenses. This is an exercise you do (should be doing) every month. As long as there’s money in the checking account, life must be good – right? Maybe, but it begs the question, “Was your business profitable in 2014 and can it be doing better?”

January is a good time to step back and review the financial health of your solo or small firm business. While there are many areas to look at as you prepare for 2015, this article will discuss two areas:

  1. Reports you should have in place and reviewing at the end of the year and monthly to help you better understand the financials of your firm.
  2. Key metrics should you be reviewing to reveal weaknesses in your business. Or identify strengths and give yourself a pat on the back.

Preparing for 2015: Reports for reviewing Money In, Money Out

Money Out: Review your budget tracking worksheet which has been tracking expenses by month: actual vs. budget. This report provides a birds’ eye view of how you spent money in 2014 and compares it to your budget. For 2015, it will be your data for creating your 2015 budget.

The key thing to look at on this report:

  • Where did you overspend? Maybe the extra expenditures are justified.
  • What accounts never had expenses applied to them? This would be for 2 reasons:
    • Maybe you created expense categories but never used them. If so, remove these accounts so the report is less cluttered and easier to read
    • Maybe you have expenses allocated to the wrong accounts. You will want to fix this so you have a true picture of actual expenses.

Added bonus: If you are not currently using accounting software, this worksheet can be setup to reflect the proper way to organize your chart of accounts for that accounting system. The chart of accounts is simply a way to categorize firm expenses and income.

Money In Money Out - Preparing for 2015 Image #1 Continue reading

Year-end planning for lawyers: Focus on your financial data

December 22, 2014 | Peggy Gruenke | Law Practice Management Consultant

Year-end planning: Focus on current clients

So what can you focus on in December to help evaluate your 2014 numbers and plan for a stronger 2015?

  1. Run the accounts receivable report and spend time on collections.

Looking at this past due invoice report, there may be another “oh crap” moment but also a sense of hope. This money, if collected, could be in your next paycheck before year-end and the holiday spending season.

December can be a tough month to do collections and you may be kicking yourself for not having been doing this all year or at least starting earlier. In December, clients are focused on the holidays and upcoming expenses related to gifts and parties. But it is also the time of year when companies give out bonuses. So your client may have an additional source of revenue in December to pay your invoice. Provide a small incentive and consider offering a discount if paid before year-end. If you represent businesses, they are usually looking to pay all their expenses before year-end, so do them a favor and send their bills frequently during December.

Tip: On active cases, bill every two weeks in December but include a letter explaining why the change in your billing process. You are a small business owner. They should understand and respect the fact that you are being proactive and working on your business’ year-end.

Here is an article that contains many more tips about year-end collections. (I can give you a link to an article I wrote about year end collections)

  1. Review what is in your Trust account.

This is a great time of year to make sure you have been diligent about moving money from your trust account to operating account as fees were earned. It also great time to make sure all of your client ledgers are in balance.

Run your Work in Progress (WIP) report and see if there is any time or expenses sitting out there that you can invoice and pay yourself, transferring Trust funds to operating before year-end.

If you have money in client ledgers, run their individual client ledger report and send them a copy so they have a current record of all the transactions during 2014. This is also a great opportunity to stay in touch with your current clients and show them you are on top of things. Continue reading

Collection Realization Rates: Have you looked at yours lately?

Excel showing by Practice areasOctober 14, 2014 | By Peggy Gruenke,  Law Firm Management Consultant for Solos

 

 

 

 

The financial health of your law firm or any business is ultimately dependent on three simple concepts:

  1. Getting the work (selling your product – yes, you are a salesperson disguised as a lawyer))
  2. Doing the work (building the product)
  3. Getting paid for the work (collecting the money)

You need to keep a steady flow in all three components and monitor your results to make sure your business is financially healthy. Envision a pipeline with a steady flow of water. At any point in the pipe when the source of the water slows down, a clog occurs in the pipe or even a leak, the output will be affected. All 3 have to work together in order to keep a steady flow.

Keeping an eye on the flow is essential to making sure you are maintaining a profitable business. But in addition to keeping an eye on things, the ability to measure the flow is an important metric for profitability. For law firms, one key metric is something referred to as realization and there are two types of realization rates that come into play in the financial management of a law firm: Billing Realization and Collection Realization. Both of these metrics affect the amount of water that is getting through your pipeline.

Gwynne Monahan recently published an article that discussed the concept of Big Data and how the accessibility and collection of data has evolved with the growth of cloud based technology. The truth of the matter is that five years ago a solo or small firm attorney simply did not have the products that are available today. So the concept of producing realization and profitability reports was simply out of the question due to the lack of data collected to compile meaningful reports and the amount of time it would take to sift through the data if it was being collected.

Collection Realization Rates

I am going to start with the end in mind and talk about collection realization rates and how to mine this data to track and measure your firm’s collection realization rates, revenue and profitability. Your ability to collect what you billed is not only a financial indicator but quite often it is a measurement of your client’s satisfaction with the work product. So at the heart of it, the collection realization rate and the rate of payment is a direct correlation to your client’s level of satisfaction and your profitability. Happy clients pay their bills.

A side note: you can increase your revenue but if you are spending at the same rate you are increasing, the increase in profitability will not be there. Focus on the overall health of your firm by increasing realization rates and monitoring expenses.

The collection realization rate is the simplest of realization rates to calculate. Just what is it and how do you use Clio to calculate and track this rate?

Your collection realization rate is the percentage of your billed fees which are actually collected.

Billed Fees/Collected Fees = Collection Realization

Once a bill is sent out using Clio’s new billing workflow, there are three possible outcomes:

  • The bills gets paid in full in one payment or over time (100% collection realization)
  • The bill gets partially paid with eventually a write off of the unpaid balance (Less than 100% collection realization)
  • The bill never gets paid and it is a total write off (0% collection realization rate)

Continue reading

Would You Pass a Trust Account Audit?

By Peggy Gruenke, Owner LegalBizSuccess | On Twitter

ChecklistRecently, there was an article in Attorney-at-Work regarding random trust account audits. We all know mismanaging a trust (IOLTA) account can have terrible consequences. However, while it seems to be discussed in theory, most attorneys receive little or no training on how to manage a trust account before opening one of their own. Law schools don’t address this in enough detail based on the blank look I get when I mention trust accounting to new grads. Only the enlightened the bar associations conduct a hands-on, mud up to your elbows, trust accounting class for all new lawyers. (I think they need to turn it up a notch and get a little muddier.) All of which begs the question, “Are your trust accounting practices sufficient?”

If you are in doubt as to whether you are at risk for disciplinary action regarding mishandling of client funds, here is a mini checklist and items you can start implementing today:

Do you maintain separate client ledger for each client’s money held in trust?

You better. Ethics rules require keeping an individual ledger for each client so specific funds can be identified. So make sure you have the ability to do this – even if it is a simple spreadsheet. If you are not good at accounting and QuickBooks, there are great practice management software packages available today to help you manage these funds and stay in ethical compliance.

Does your invoice include an accounting summary of your client’s trust funds?

This is simple and your practice management system should have this feature available. You have a duty to notify your client how and when you used their funds and keep detailed and accurate records. Below is a sample of what you should be including on an invoice where client trust funds were used.

  1. Invoice detail of work performed (time entries)
  2. Total amount due (new charges)
  3. Amount applied to pay the invoice (payment)
  4. Remaining client trust balance

If your invoicing software does not allow you to create a custom invoice template (like above), then you can include with the invoice a report called “client trust ledger report” which is basically a spreadsheet showing all deposits and withdraws and current trust balance.

Best practice tip: After applying the trust funds to the invoice, send the client an updated invoice, which includes the amount of retainer applied and the balance remaining in trust. If the balance is zero or approaching zero, you should also include a letter requesting additional retainer money be deposited (if you are anticipating more work to be done.)

Trust Accounting Statement Clio

Do you accept credit card payments for retainers deposited into your IOLTA account? And if so, how do you account for the credit card fees?

Does your credit card company allow for credit card fees to be deducted from your operating account? If not, are you keeping a reserve in your IOLTA account to cover these fees and then properly recording them when entering the deposit? (Side note: This is the one exception to the rule regarding lawyers depositing their own funds into IOLTA accounts: it is acceptable for a lawyer to deposit their own funds into the IOLTA account to cover the payment of bank fees, including credit card fees.)

Do you know what a 3-way trust account reconciliation is and how to do one?

A 3-Way Reconciliation means that your IOLTA Bank Balance matches your Checkbook Trust Balance and they both match the Sum of all Individual Client Ledger Balances. Most accountants do not understand 3-way reconciliations. That’s no excuse for your lack of understanding. You have fiduciary responsibilities and you cannot delegate this responsibility. Here is a simple spreadsheet to use for a 3-way reconciliation.

Where do you deposit flat fee payments? Not all flat fees are created equal.

This fee may be deposited in the trust account until earned or, upon full disclosure and client consent (in your fee agreement), may be treated as earned upon receipt and deposited in the operating account. This is a common practice for criminal cases. In some states, even litigation tasks billed as flat fee tasks and clearly communicated in your fee agreement can be earned upon receipt. Check you individual state ethics rules.

Best practice tip: Upon receipt of the money, create a flat fee invoice, apply the payment and provide the client with a copy of the invoice.

If your flat fee is for work that involves multiple steps, like bankruptcy filings, then it is better to deposit the flat fee into a client’s trust account and withdraw when reaching specific events or milestones. Again, as outlined in your fee agreement.

One last tip, something that actually came from an attorney who suffered through the Katrina disaster.

On each check you receive that will be deposited into your IOLTA account, write on the memo line of the check: Client Name and Matter. May seem obvious to you now, but if a disaster struck and you had to re-create your IOLTA accounting records, there is no way you will have remembered this information.

Thanks for reading and happy reconciling!

With over 30 years experience in the legal environment, as an entrepreneur/business owner and an IT consultant, Peggy has combined her experiences to bring results and a competitive advantage to law firms assisting solo and small firm attorneys in building their businesses. Peggy focuses on the solo/small firm lawyers with the delivery of practice operations services, including practice management, technology, marketing, financial services and business development.  Peggy is an avid cyclist for JDRF, Gold Certified Clio Consultant and Xero Certified. She serves on various industry associations.

A Clio Workflow for Collecting on Past Due Accounts

Past Due and ClioWant to make sure the collections work on past due accounts gets delegated and completed?

Well, here is a way to do it – the Clio Way.

At a client meeting the other day, the discussion of past due accounts came up. How can we get paid faster on past due accounts and keep our collection realization rate higher? Two great questions for law firm owners to be thinking about and then find a way to automate and delegate.

Sending out collection letters and tracking this activity is a task that probably makes it to the monthly to-do-list but often times slips to the end of the list. Before you know it, it’s 30 days later and those past due accounts are now 60 days past due affecting your collection realization rates even more.

Let’s face it, it is a dreadful task. First, the effort of identifying the past due accounts and then writing the letters, mailing them, and creating a process to make sure the follow-up steps are completed. It you are lucky, maybe one letter is all they needed to remind them to pay. Most likely, the letter alone is not going to motivate a dead-beat client to pay the past due invoice. It will be the follow-up phone calls and subsequent letters that are sent that may get them to pay. That’s why you need a workflow in place.

Another reason this collection process is painful is because it forces you to face the fact that maybe your client selection process wasn’t so great, that you should have asked for and received a larger retainer, or that you should have stopped working before getting in so deep. Either way, what’s done is done and lessons learned can be applied moving forward.

Let’s get started: Setting up the process in Clio

  1. Using the Clio document template feature, convert your collection letters into Clio templates. Design 3 letters named:
    • Phase 1 Collections (gentle reminder),
    • Phase 2 Collections (a little harder nudge)
    • Phase 3 Collections (pay now or off to the collections agency you go)

  1. 2. Define your Task List using the new Task List feature in Clio.
    • Task 1 – Send Phase 1 letter
    • Task 2 – Call if no payment from letter 1
    • Task 3 – Send Phase 2 letter
    • Task 4 – Call if no payment from 2nd letter
    • Etc..


Now, using your new process

First, your firm should have a written collection policy in place that takes into account two functions: how to keep track of clients who are behind on their payments and how to contact clients when they are late paying their bills. The policy will include this workflow and designate who within the firm is responsible for each step.

Here is a sample workflow.

  1. Create a task for yourself to run the Clio Accounts Receivable report every Friday afternoon. Per you firm collection policy, you will have decided when a Phase 1 Collection Letter gets sent and if a certain amount past due triggers the collection letter process. I suggest sending one as soon as the account is ver 30 days. Export the report to Excel so you can easily sort it by due date and see amount due.
  2. Once the new past due accounts are identified, go to the Matter and assign the Collections Task List to the matter. This will automatically create a series of tasks for the matter, assigned to the person you designated when you built the task list.
  3. Now that the tasks are created, you will have to go to each task and assign the due date. (I suspect the ClioLab team is busy designing improvements to the task list feature to improve this step). When you created the task list, you set certain defaults, like who the task is assigned to and how reminders should be sent, which can be overridden.
  4. Below is a screen shot of the new collection workflow, the tasks set with the correct due dates scheduled for the periodic follow-up (which are defined in your collection policy).

Putting the process in action

The firm member who you assigned the tasks to will see these tasks on their task list. BTW, did you know you could set your Clio tasks to sync with Gmail Tasks?

Per your collection manual instructions, the person assigned to complete the collection tasks will upload the document templates, send off the letters, mark the task as complete and then monitor for payments. (This person will need to be set up in Clio to have access to the reports). If payments are made, subsequent tasks can be deleted since they will not be needed.

Suggestion: When marking tasks as complete, add a note about the payment made or conversation with client.

Additional features you can add to the workflow

If in your collection letter, you allow the client the opportunity to go on a payment plan, then add these as tasks to Clio to remind you to track the payments.

If you have any questions about how to create this workflow, please feel free to contact me. I’d be happy to help you out.

Peggy Gruenke | @PeggyGruenke | On LinkedIn

IOLTA Tip #3: Properly Maintaining IOLTA Accounting Records

 

checkbookEvery lawyer who holds money for clients must have a system in place for maintaining and properly recording all transactions related to these funds. There are many resources available to read and review. In this article, I offer a few tips to make sure you have proper accounting procedures in place for handling client funds held in your IOLTA account.

 

Here are a few basic facts before discussing accounting procedures:

 

  • The “IOLTA” acronym stands for “Interest on Lawyers’ Trust Accounts”;
  • The basic nature of an IOLTA account is that it is, in essence, an escrow account, for the deposit of unearned client funds. The interest earned on these accounts generates revenue for the state’s legal aid fund.

 

  • Lawyers are required to send itemized bills to clients at the time the lawyer withdraws funds from a trust account to pay themselves for services. These itemized bills should show:
    • the services provided with a description and dollar amount;
    • the amount withdrawn from the client’s trust account to pay the bill;
    • the amount of funds the lawyer continues to hold in the client’s trust account after withdrawal for payment of the invoice.
  • Lawyers should not make withdrawals from trust accounts by ATM or checks payable to “Cash” and are required to use pre-numbered checks.

 

For the trust accounting, you also need:

 

1)    The trust bank account balance to match the trust liability account balance.

 

2)    A ledger for each client’s trust balance, the total of which equals the trust bank account balance.

 

3)    A detailed ledger, for each client, showing the ins and outs of the trust monies.

 

When it comes to your trust accounting, there’s one requirement that affects lawyers and other legal professionals and doesn’t exist in most other professions. It’s called the 3-way reconciliation report. The Rules of Professional Conduct require lawyers to demonstrate that their financial records accurately reflect all of the transactions in which a client has given them monies “in Trust.”  The “three-way” reconciliation accomplishes this by comparing the total of the individual client ledgers and the bank charges with the balance in the check register. Both amounts should be the same. http://goentrust.com/what-is-a-3-way-reconciliation/

 

How  a 3-way reconciliation works:

 

  1. The first part of the reconciliation is the Checkbook Register.
  2. The second piece is the Bank Statement
  3. The third piece is the IOLTA Balance Register (or Trial Balance). This is a report of all client trust transactions, deposits and withdraws, showing a final balance for each client.

 

To complete the 3-way match you first reconcile the Checkbook Register to the Bank Statement.  The Bank Statement must match the Checkbook Register after taking into account any withdrawals or deposits that have not yet cleared the bank.  Most people are familiar with this process as it is the same as balancing your personal checkbook.

 

Once that is complete, you need to make sure the Checkbook Register matches the total on the IOLTA Balance Register.

 

The first step shows you have recorded in your checkbook all of the transactions that cleared the bank.  The second step shows you have recorded all of the transactions which affect the client’s IOLTA balance.

 

There are plenty of IOLTA resources out there. It’s a matter of accessing those resources. The best thing that you can do with respect to IOLTA accounting is to access the available information, and to learn as much as you can. Then, create a system for managing your IOLTA accounting, and follow, in addition to the ethical rules, your own internal procedures, which should include monthly three-way reconciliation.

 

Peggy Gruenke, Chief Operating Officer and Business Development. More articles available on my blog LawBizCOO.

Tip #2: IOLTA/Credit Cards – New IRS Section 6050W & How it Affects Attorneys

IOLTAContinuing my posts on best practices for IOLTA accounts/transactions, I wanted to share this information with you.  This information comes via the ABA Commission on IOLTA.

“Beginning January 2013, new IRS requirements regarding the reporting of credit card transactions will go into effect and may have the potential to negatively impact IOLTA accounts and lead to ethical violations by lawyers. Here are the key points about you will want to know about if you accept credit cards:

  1. Pursuant to the Housing Assistance Tax Act of 2008, credit card processing companies are required to verify and match each merchant’s federal tax identification number and her legal name with those found on file with the IRS. An EXACT match is required.
  2. For the purposes of this requirement, lawyers who accept credit card payments are considered “merchants.
  3. If there is NOT an exact match between the information provided to the credit card processing company and the information on file with the IRS, there are serious consequences:
    1. Beginning January 2013, the IRS will impose a 28% withholding penalty on all credit card transactions, including those that the lawyer directs to her IOLTA account.
    2. If client funds that should be in the IOLTA account are withheld due to the lawyer’s failure to act and thus are not available to the client on demand, ethical issues are raised.
    3. The credit card processing company should have received information from the IRS if a mismatch occurred and already notified the lawyer of the problem. However, it is not known if all processing companies have provided such notice.”

What action should you take to avoid an ethical violation in 2013:

  • Contact your credit card processor to verify that your legal name on your merchant account matches the legal name you use to file your tax returns;
  • Correct mismatches if informed of one.

For more infomration:  https://www.lawpay.com/news/irs60502.pdf