Trust Accounting Blog by ProFix Accounting & Strategy

Anna DiBella Discusses Old Law vs New Law on Chops Talks Ops Podcast

Tue, 15 Feb 2022 15:24:40 GMT

Why are so many law firms ditching their old, server-based systems and heading to the cloud?

Why are so many law firms ditching their old, server-based systems and heading to the cloud? Join Anna DiBella as a guest expert on Chops Talks Ops (hosted by Celene Hoag of Chops Consulting ), to learn more about the huge shift in technology currently happening in the legal industry.

If you're old law (or not even sure what that means) and wondering how new software or automations can improve your law practice efficiency, you need to watch this.

Find out the key things you need to do to keep your firm competitive in this remote-focused, 2022 world.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

In this 4-hour course , we outline our start to finish process for trust accounting in Clio, plus provide tips and best practices for working efficiently and staying organized. Learn more and see the course outline .

Get in Touch easily.

Get in touch with PROFiX today. Our team will help you determine the right legal accounting software with the best functionality for your needs.

Xero/Clio Software Training

Struggling with reconciling the GST/PST recorded on invoices in Clio with those being ported into Xero?

Create a simple workaround to set up Clio/Xero billing integration
Save time on troubleshooting your bookkeeping processes
Lower the cost of bookkeeping with modernized solutions
Gain expertise into this streamlined software combo for law firms
Find relief in knowing you’re on the right track

The team at ProFix Accounting created a course based on our hundreds of hours of training bookkeepers/accountants in private tutoring sessions.

Now you can get all the best training at a fraction of the price with our new course.

Stop struggling trying to get Xero and Clio to work optimally together.

Clio Legal Software For Law Firms - PROFiX Accounting's Review (Updated 2023)

Wed, 26 Jan 2022 13:49:27 GMT

Clio Legal Software, a CPA's Opinion

Clio Legal Software helps law firms with trust accounts and other accounting procedures. It is approved by 66+ bar associations and law societies. Wondering if your firm should use Clio versus a different legal accounting software ? Anna DiBella, CPA, CGA, breaks down the details you need to know if you’re considering getting Clio Legal Software for your firm.

What is Clio Legal Software?

When you’re on the hunt for a legal industry-specific accounting software for your firm, one of your shortlisted contenders will be Clio Legal Software, along with Soluno , ESILaw and PCLaw .

Unlike the industry-standard options ESILaw and PCLaw, Clio is a cloud-based legal software. This means you can use it from any device.

Clio does time keeping, billing, and practice management for law firms.

I t also has some trust accounting features, including a matter user interface to easily record trust balances and transfer against bills when invoicing.

Who is Clio Legal Software for?

There are a few different options when it comes to legal accounting software — however, not all options will be right for all kinds of firms. It’s important to make sure that your legal accounting software has features and functionality that are right for your business.

Clio is used by many new small law firms and sole practitioners. It is ideal for those who want to move away from more traditional options like PCLaw and ESILaw towards a more modern and intuitive software.

Typically, we find that the types of firms who use Clio are those who do not employ full-time accounting staff. These firms need to be more hands-on with bookkeeping tasks like invoicing, making payments, and receiving payments into their general and lawyers’ trust account, and prefer to use a legal accounting software that is easy to learn and has a sophisticated user interface.

Accounting with Clio Legal Software

While Clio is made for law firms, it is not an accounting software — though it can be used for certain accounting tasks. It is especially useful for practice management, and makes those tasks a lot easier.

Clio and Xero Billing Integration

If you choose to use Clio as your billing software, you will need to add on another software, like Xero , to integrate with Clio and provide you additional functionality for bookkeeping and accounting.

Clio provides certain accounting functionality, such as:

Trust bank reconciliation feature .
Time keeping.
Client disbursement expense tracking.
Billing and payment tracking.
Recording and tracking client trust account balances.

However, Clio does not offer other integral accounting functionality your firm will likely need:

Bank reconciliations (a key control to keep your accounting records reliable).
Accounting or tracking for overhead expenses like rent, salary, and utilities.
Managing your full accounting records required for tax purposes.

If you want that functionality, then we recommend integrating Xero with Clio Legal Software. (This blog article continues after the Software Training information.)

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

Invoicing features with Clio

A critical part of running your law practice efficiently and ensuring you have adequate cash flow at all times is through invoicing. You not only have to invoice your clients on a regular basis — but you also need to be able to follow up with invoices that are not paid on time.

Clio offers more sophisticated billing features then some competitors like PCLaw. It also administers online payments through LawPay . This way, you can invoice and receive payments through the same system.

However, some of the functions don't work properly and may cause errors with your financial reports such as when you use the credit note function or the write-off function.

How to manage trust accounts with Clio

Clio recently offered a trust bank reconciliation feature but does not do a general bank reconciliation. We are still in the process of fully testing it to ensure functionality, so we still still use our proven system in order to guarantee accurate trust accounting.

However, it does allow tools to track trust funds. It does not actually allow you to track trust funds on the client level (not on the matter level).

This functionality provides you with up-to-date trust accounting records without needing a professional bookkeeper to assist you with tracking the day-to-day transactions.

Many PROFiX Accounting Services clients save on their operational expenses by managing their day-to-day trust accounting records in Clio, and then have them professionally reconciled in their accounting software every month by a CPA firm like us.

This is a good way to stay up-to-date on your trust accounts on your own, and ensure they are accurate, complete, and compliant with the Law Society thanks to the experts at PROFiX.

Does Clio comply with my jurisdiction?

Every province and jurisdiction has their own rules, and it’s important to know what legalities you need to follow. You can maintain compliance through a combination of reporting through Clio and your accounting software.

In British Columbia, the law society requires a unique 3-way reconciliation unique to lawyers’ trust accounts. When using Clio, PROFiX performs a 5-way reconciliation to ensure that all our clients are compliant with the LSBC regulations.

How to keep trust accounts full of funds

It’s important to ensure that trust accounts are frequently topped up with funds. The best way to keep clients’ retainer balances in trust full is to track them and monitor them.

Clio has a feature which sends you a notification when the trust account has reached a minimum threshold dollar amount. Using Clio, you can also create a credit card payment plan to charge clients automatically weekly or monthly. This ensures that the amount is deposited directly into their trust account without hassle.

Reporting in Clio

Clio provides limited reporting, and we have noticed that some of the information in the system doesn’t feed properly into the reports. So you need to be careful about how accurate the information on the reports are.

If you have complicated reporting standards, or use a contractor model, then we don't believe that Clio is for you. You also need to upgrade to the Advanced package to access full reporting.

How much does Clio cost?

Clio has a number of versatile plans with differing features and functionality. Based on your requirements, your firm can pay anywhere between US$39 to US$115 per user per month. When gauging the price, it’s important to understand the benefits and drawbacks of the software, and how it relates to your firm's unique needs.

Pros to Clio:

Cloud based with a modern interface
Offers practice management tools like a client portal
Has an API and can integrate with other software like Xero or QBO
More user friendly as compared to PCLaw or ESILaw

Cons to Clio:

Reports are not intuitive, and it can be difficult to find the information you need at times
It is not an all-in-one solution with full accounting functionality
It can be difficult to find professional bookkeepers who have experience using Clio and its various integrations

Should I use Clio Legal Software for my firm?

There is no right or wrong answer here — only what is right for your firm.

When deciding on the right legal accounting software for your firm, it’s important to consider a number of factors, such as features and functionality, ease of use, and cost.

Give PROFiX a call to discuss your legal accounting software needs and our team would be happy to answer your questions and help you find the right legal accounting software for your business.

PC Law Trust Accounting Software Review (Updated 2023)

Sat, 08 Jan 2022 22:17:39 GMT

Anyone looking to use or switch to PC Law Trust Accounting Software must read this review to find out if this software will help them reach their financial goals .

Anna DiBella, CPA, CGA, founder and lead accountant at PROFiX Accounting and Strategy, breaks down everything you need to know about PC Law .

PC Law is Legal Accounting Software for Lawyers

PC Law is one of the most common legal accounting software used today in Canada, used by over 14,000 law firms . It offers billing, time-keeping, trust accounting and a full general ledger, making it a convenient all-in-one solution.

PC Law also has complete trust accounting features, including matter-level trust balance reporting, trust bank reconciliation, and trust administration fee tracking and reporting.

However, PC L aw is no longer supporting their original desktop version. They are creating their own new product that is more geared towards large firms, and therefore, firms are being forced to convert to the other products that are available on the market.

PC Law is for Law Firms Requiring Trust Accounting

Today, PC Law is mostly used by small and medium law firms.

It is especially geared towards those firms who want a solution that makes trust accounting easy.

Keep in mind that PC Law was developed in 1982 , so it does not have a modern user interface or the kind of intuitive features that many people are used to today. Many firms are on older versions of PC Law (from 2017 or earlier) that are no longer supported by PC Law, and require costly upgrades to their subscription version in order to continue to receive updates. According to the PC Law Website, this means firms on this version face “vulnerability to data corruption, broken links, integration incompatibility, among other software issues”.

It is also a server-based software without a cloud option meaning accessing your systems remotely is difficult with PC Law.

This has created a lot of problems for firms over the past couple of years as they adjust to working remotely to accommodate COVID-19 working conditions and modern working conditions.

What Training do you need to use PC Law?

Like most legal accounting software, PC Law does require some training to get used to. If you’ve never used PC Law before, we highly recommend getting some hands-on guidance from an expert in the software.

You will also have to be familiar with the Law Society Trust Accounting Rules in your jurisdiction to ensure you are compliant.

At PROFiX Accounting and Strategy , we have over 11 years of experience working with PC Law. However, we no longer work with PC law because it is so outdated and difficult to- to provide services on. What we do is help convert firms off of PC law and set them up into a cloud based system that is more competitive in the 21st century.

PROFiX employs a team of trust accounting specialists, and we are always ready to dive in.

One of our experienced bookkeepers can provide you with the training and orientation you need to get started with PC Law. (This blog article continues below.)

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

Key Features of PC Law

Having used PC Law for over a decade, we’re intimately familiar with the ins and outs of this legal accounting software. Here are the features you’ll need to be aware of if your firm is considering using PC Law.

Billing & Accounting

We find the billing templates in PC Law to be ineffective for the most part. One of the biggest drawbacks is that they do not include any automation for past-due notices, which is necessary for ensuring your firm is paid on time. The templates are also difficult to edit for custom billing.

Accounts Receivable

PC Law provides sufficient accounts receivable reporting, and even has options for multiple accounts receivable reports showing balances by the client or responsible lawyer.

One of the biggest pros of PC Law software is the reporting provides access to a lot of business data, which is useful for strategic planning.

The biggest con is that PC Law does not assist with collections with no automated past due invoice reminder feature, which is critical to keeping your accounts receivable balances low.

Matter Management

PC Law has a matter management dashboard that provides you with the details on client information, time, bills, and expenses. This feature helps you centralize all of your client information so you always have it available with one-click.

Calendar, Client & Contact Management

While PC Law does have a calendar and contact management features, most of our clients prefer to use Outlook for this purpose instead.

PC Law does offer an integration with outlook but I don’t recommend it.

Keep in mind the PC Law does not integrate with many other software programs, and can be less user-friendly than options like Outlook or Google Workspace.

Law Society Compliance

Ensuring that all of your financial documents and reports are compliant with the Law Society is critical.

PC Law ranks fairly high when it comes to Law Society compliance.

It offers full trust accounting all the way to the bank reconciliation and offers good reporting. It is one of the few accounting softwares with a built-in Trust Administration Fee feature.

Many law societies are now requiring paperless audit processes, which PC Law makes it more difficult to be compliant with.

Trust Accounts

PC Law is one of the top legal accounting software because of how efficient and effective their trust accounting features are.

They make it easy to manage your client trust accounts, including trust to general transfers, and offer effective matter-level and client-level trust reporting.

Training & Maintenance

If you’re new to using PC Law, we highly recommend getting the training you need so you’re comfortable with the software. This way, you can reduce errors and inaccuracies in your law firm’s financial documents.

Connect with PROFiX to set up your PC Law training with one of our team members. We bring over 10 years of experience working with PC Law.

Software Releases and Updates

PC Law regularly provides updates to their software, and it’s important to maintain those updates to limit the number of glitches in the software that create error messages.

In order to have access to these updates, you must maintain a PC Law Annual Maintenance Package. The cost of these packages increased drastically in 2021, with some clients seeing their annual fees increase 3 times the previous year .

Customer Support Options

As long as you maintain a PC Law Annual Maintenance Package you will have access to their customer support. You can call their support line for assistance with any error messages or other software glitches that are preventing you from completing the firm’s accounting or billing.

AMP Membership

A PC Law Annual Maintenance Membership is a must-have if you are using PC Law Software. It provides you with regular software updates and support for when you receive an error message, which happens periodically.

It also provides some additional training resources. I don’t recommend cancelling your AMP membership if you still plan to operate using PC Law.

Connect with PROFiX to set up your PC Law training with one of our team members. We bring over 10 years of experience working with PC Law.

Alternatives to PC Law

While PC Law is a popular choice for established small and medium law firms, keep in mind that it is not the only option out there. ESILaw, Clio (which integrated with cloud-based XERO Accounting Software), Cosmolex, and Soluno are just a few other major legal accounting software options your firm can use.

We break down the details on other legal accounting software for you in this article , so your firm can choose the best option for your needs. Note that your firm’s business structure, size, and core values all come into play when choosing your legal accounting software.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

Get in touch

Get in touch with PROFiX today. We will help you determine the right legal accounting software with the best functionality for your needs.

Top 5 Differences Between Accounting and Bookkeeping

Thu, 28 Jan 2021 16:46:21 GMT

What is the major difference between accounting and bookkeeping?

One of the most common questions we get from clients is “what is the major difference between accounting and bookkeeping?”

Clients want to know why they need to work with an accountant for certain aspects of their business and a bookkeeper for other aspects of their business, and why the same person cannot do both.

In this article, we’ll delve into the details of what the difference between accounting and bookkeeping is, and how each professional can help you reach the financial goals you have set for your business.

What is accounting vs. bookkeeping?

There are many differences between accounting and bookkeeping, but if we had to sum it all up, it’s this: A bookkeeper records financial data for your business, in real time or historically.

On the other hand, an accountant analyzes, forecasts, and strategically plans for your business to help you reach specific business objectives. They use the financial data that is prepared by the bookkeepers.

A bookkeeper records the past and present, while an accountant looks to the future.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

Cash flow

One of the most important financial statements in your business is your cash flow .

This is the amount of money that is going into and coming out of your business.

Contrary to what many business owners think, cash flow is not the same as sales transactions. Keep in mind that in many businesses (including law firms), cash isn’t received at the same time a sale is made. It often comes in several months later.

A bookkeeper’s job is to record the sales transactions, as well as other transactions such as payments and deposits.

A n accountant uses financial strategies to ensure your business’ cash flow is healthy and consistent. They discuss financial goals with company leadership to ensure your business has the cash flow you need to make those goals a reality.

Financial data

Your business’ financial data is anything to do with your goals. It can include expenses, payroll, bank reconciliations, and tax planning documents.

A bookkeeper records financial data from the past and in real time in the present. They ensure your business’ billing, accounts receivable, accounts payable, payroll, and bank reconciliations data is complete and accurate.

An accountant uses the financial data a bookkeeper records to help the company leadership set goals, evaluate business performance, and develop financial strategies.

O ther activities an accountant completes using financial data are tax planning and filing, compliance with industry regulations, risk evaluation, and providing financial advice to the executive team. Accountants also use financial data to predict company performance in the future.

Accounts receivable

Your accounts receivable is the balance of money that is owed to your business by customers and partners. These are sales transactions that you have made for which you have not yet been paid. It’s vital to keep on top of your accounts receivable to ensure that your company mitigates any risk and maintains a healthy cash flow.

Bookkeepers play an important role in managing your accounts receivables. They create and process invoices, manage recipients and payments, and log all of your business’ financial transactions.

A bookkeeper will have detailed information on which customers owe your business money, how much, and for how long. When you are paid, they prepare and enter deposits. Bookkeepers will also know how much of your money is owed to creditors (accounts payable).

An accountant uses this information that the bookkeeper provides to predict your company cash flow. They let you know when you have adequate cash flow to make a big expenditure, such as hire a new staff member, for example.

Accountants also manage your business risk by reviewing the accounts receivable, accounts payable, and cash flow. They ensure that your accounts receivable doesn’t get too high by implementing credit policies.

In some businesses, accountants are in charge of collecting large invoices from clients, and deciding when to let go of clients who do not pay.

Financial statements

Your business’ financial statements include balance sheets, cash flow statements, and income statements. A bookkeeper enters in the day-to-day data to complete these 3 key statements.

An accountant not only reviews the financial statements and ensures the data is correct, they also verify that the data is compliant with industry and government regulations.

Accountants analyze your business performance based on these financial statements, identify micro and macro risks, and measure your success against your business’ strategic objectives.

Financial advice

The key difference to note when it comes to accounting and bookkeeping is the financial advice that either professional can provide you about your business.

Bookkeepers have extensive knowledge of bookkeeping processes, and can advise you on which software to use, how to manage your expenses and receipts, and how to prepare timely and reliable financial statements. A bookkeeper can also help you file GST/PST and simple tax returns.

Accountants can advise you on tax strategy, financial objectives, and how to be compliant with the Canada Revenue Agency (CRA) and other legislative bodies.

Accountants will help you identify your strategic goals and will develop and implement plans to help you get there.

P lus, accountants analyze and monitor your business performance and relate it back to your objectives, so you always know whether you are on track.

Which do you need: an accountant or bookkeeper?

Having a good bookkeeper and a good accountant on your team will benefit your business greatly. They each bring equally valuable but different skills to the table.

Keep in mind that most accountants do not have experience with bookkeeping, and cannot advise you on bookkeeping processes to run an efficient business. Similarly, a good bookkeeper does not have the training and expertise of a CPA, and cannot advise you on tax strategies or build plans to reach your business objectives.

At PROFiX Accounting and Strategy, we understand the importance of having both bookkeeping and accounting team members to support our clients.

Plus, PROFiX founder and lead accountant Anna DiBella, CPA, CGA, started off her financial career as a bookkeeper, so she brings a unique perspective to the table.

The team of bookkeepers and accountants at PROFiX are ready for any challenge your business is going through. From setting up sound financial processes to strategically expanding your business, we can help.

The best Legal Accounting Software for Canadian Law Firms | PROFiX (Updated 2023)

Sun, 27 Dec 2020 21:57:14 GMT

Legal Accounting Software

In order to make sure you have sound financial records and reliable accounting processes for your law firm, you need the right legal accounting software.

The wrong software — or not using the right software correctly — can result in errors which may cost your business in the long run. Anna DiBella CPA, CGA, of PROFiX Accounting and Strategy, reviews the key legal accounting software packages for law firms.

What is legal accounting software?

Legal accounting software is a type of program that is tailored to the legal industry, helping to keep track of time, billings, schedules, and more. You can use this software to make it easy to produce financial reports and statements and monitor your business performance.

Often, legal accounting software also includes practice management components such as document management.

Unlike a legal software like Clio which does billing and time keeping, an accounting software will include a general ledger and have functionality like bank reconciliations.

It will also include a feature that easily accounts for and tracks lawyers trust funds and the specific accounting and reporting rules outlined by the Law Society. Legal accounting software keeps client information safe and secure, and follows all data security laws.

Do I need legal accounting software?

While many law firms prefer using a legal-specific software, it isn’t necessary for every firm. Some law firms we work with at PROFiX like legal accounting software because of the added features, such as client contact portals and matter management.

Legal accounting softwares, like PC Law , also offers full trust accounting add-ons that make trust accounting easy and straightforward.

However, keep in mind that these options can sometimes be costly and offer outdated accounting solutions. Many firms we work with prefer to use a more modern non-legal accounting software, like Xero. This kind of accounting software is intuitive and easy to use, with all the functionality you need.

Top law firm accounting software

Here are a few of the most common legal accounting software programs our clients use:

PC Law

PC Law is a relatively inexpensive option that can be a good choice if trust accounting is important in your business. This software acts as an overall practice management system, and includes billing and timekeeping. It’s an all-in-one solution; however, there is no cloud option.

This means that you can only use it from your desktop. Keep in mind that PC Law does not have any integrations to assist with financial reporting or expense management either, which could leave your firm operating less efficiently then you want. We also find that the billing template functions are not effective.

PC law is no longer supporting their desktop version and firms are either being forced to move to their new software (which is geared towards big firms). So small and midsized firms are being forced off PC Law and encouraged to move to LEAP.

Clio

Keep in mind that Clio is not actually a legal accounting software, but is used by many of our clients.

Small firms and sole practitioners like it, especially to track and apply their own trust funds, however we do not recommend it for large firms.It does billing, timekeeping, and document management — plus it has a client portal.

However, it provides a streamlined user experience, and is ideal for a sole practitioner to track and apply their own trust funds to client bills. You can integrate it with a non-legal accounting software like Xero, which offers more modern solutions like Hubdoc for receipt management.

Should you switch from PC Law to Clio?

We break down the pros and cons for you in this short video .

LEAP

LEAP does not do general accounting, but it does do trust reconciliation. You need to integrate into an accounting software like Xero or QuickBooks. When we tested the integration, it was not functioning properly at the time. LEAP is primarily for firms who want to integrate their email, allow document automation, and other practice management features into one platform and don't have complicated billing needs.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

ESILaw

ESILaw legal accounting software is an all-in-one solution that offers trust accounting functionality. They recently launched a new version that has fairly contemporary and intuitive features. However, like PC Law, it does not integrate with any modern financial management applications like Hubdoc.

ESILaw recently launched a new version that they call cloud based. However, it's not fully cloud based, and it does not integrate with any modern financial management applications, like hubdoc. We do not work with ESILaw at PROFiX.

Soluno

Soluno is a very comparable product to PC law. It functions in a similar fashion, which makes it easy for lawyers and bookkeepers to learn. It has its own set of unique challenges, just like PC law. You simply need to take the time to learn the workflows and adjust them a little bit to adapt to Soluno.

Xero and Hubdoc

When our clients aren’t using a legal-specific accounting software such as PC Law or ESILaw, we set up their accounting records in Xero Accounting Software .

This is a modern cloud-based platform that offers integrations with hundreds of applications including Clio. Hubdoc is an encrypted document management portal where you can easily send and store all of your financial documents. This means that you don’t need to keep any paper records. With Hubdoc, we can do your accounting 100% remotely if that suits your business.

Keep in mind that there are other legal accounting software options, like Cosmolux and Soluno. We’ll be reviewing these in the near future, so look out for more information on those coming soon.

Legal accounting software features to look out for

When you’re trying to decide which legal accounting software is right for your firm, you need to evaluate a number of different features and how they apply to your business. Here are some of the most important things you’ll need to consider when choosing your legal accounting software.

Trust accounting

PC Law and ESILaw both do trust accounting including reconciliations, while Clio does not. If you use Clio, then your trust bank reconciliations have to be done in external accounting software, like Xero.

The bottom line is that you don't actually need a specific legal accounting or trust accounting software to manage lawyers’ trust funds when you work with a legal accounting expert like PROFiX.

However, there is no harm in using these products for trust accounting, as long as your accounting team is familiar with the trust accounting rules outlined by your local Law Society.

Cashflow

Reports like Accounts Receivables and Accounts Payable are used to project and manage cash flow in your firm. All of the major accounting softwares have these reports, but using a non-legal software, or a more modern software like Xero, offers the benefits of integrations with other apps to help report on your financial performance including cashflow.

Video: Should I switch from PC Law to Clio ?

Accounts payable

All major legal accounting software do accounts payable date entry, but only modern software like Xero offer solutions that integrate into Hubdoc.

You can use the app or forward invoices directly from your email to your secure cloud storage solution.

T hen, those can be posted directly into your accounting software, while a PDF of the invoice is pushed into your Xero accounting system. This makes all your documents easily accessible for when you are reviewing that accounting entry.

Accounts receivable

All legal accounting software options offer invoicing and accounts receivables, but only Xero offers automated accounts receivable reminders. These are key to getting paid on time in an efficient way, and we love this feature.

Bank account

For a general bank account, you’ll need to use an accounting software with a general ledger that performs bank reconciliations. Any accounting software with a general ledger should offer this feature.

For trust accounts, PC Law and ESILaw offer streamlined accounting solutions to administer trust accounting payments. You can use trust-general transfers for retainers to pay down client accounts. They also offer full trust accounting bank reconciliations and matter-level trust balance reporting to keep your firm compliant with the Law Society of BC (LSBC).

Clio does not offer these features, but does offer a trust bank account ledger and some reports. It's best practice to record your trust accounting in an accounting software outside of Clio, especially if you need to report on the client matter level and be compliant with your Law Society’s trust accounting rules.

I n most cases, this needs to be set up and monitored manually and involves some double entries. Although Clio integrates with Xero and Quickbooks Online , the integration has a lot of glitches and many bookkeepers prefer to do things manually.

Billable hours

In order to ensure your law firm is productive and profitable, you need to carefully track your billable hours in real time. If you lose track of how long each lawyer has spent on each task, you don’t have a clear idea of what to bill your clients.

A ll major legal accounting software has time tracking capability. We recommend using the built-in timer features to keep accurate records of your attorneys’ time.

Client information

When you need to manage client and matter-specific level data that is required by your firm’s workflows, it’s best to use a system that has a client portal — such as Clio and PC Law. This is a secure option that is compliant with privacy laws.

Document management

If document management is vital to your legal accounting software, opt for ESILaw or Clio. These have varying document management capabilities. Keep in mind that PC Law does not offer any document management features.

Which legal accounting software is best for your law firm?

There is no right or wrong answer when it comes to legal accounting software. It all depends on which stage of business you are in and the unique situation of your law firm. Typically, traditional firms with more established business and partners use PC Law or ESILaw. Startup firms often use Clio, Xero, and Hubdocs. Many innovative firms prefer to use accounting solutions that are outside of the legal industry niche.

Get in touch with PROFiX today if you’re wondering which legal accounting software is right for you. We’ll walk you through the pros and cons of each kind of software and help you determine the right choice for your firm.

How to Calculate Net Profit Margin for Law Firms

Fri, 02 Oct 2020 00:29:08 GMT

How to Calculate Net Profit Margin for Law Firms

Many law firm managers and owners will argue that it's difficult or impossible to measure net profit margin (NPM) accurately in a law firm.

However, at PROFiX, we’ve been perfecting this over the years. There is so much value in measuring the NPM of your firm, in addition to calculating it by lawyer and practice area. You can see which areas of your business are highly profitable and which ones need to be streamlined.

Why Net Profit Margin Is Unique at Law Firms

Law firms have an exceptionally high net profit margin compared to other industries because of their partnership structure. Payments to partners are not considered a wage expense that would be included in the income statement in any other industry.

However, in a law firm, these wages are actually paid out as draws, shown only on the balance sheet.

This means that when calculating gross profit margin by taking your revenue and deducting your COGS (such as lawyer and paralegal salary expenses), the partners’ compensation — who are often the highest billers in the firm — is not included in the wage expense.

The more partners in the firm, the artificially higher the net profit margin will be.

Calculating Accurate Net Profit Margin for Law Firms

Allocate an appropriate market value salary to the partner when calculating net profit margin. What would that partner's compensation be if he or she was an employee of the firm? Also be sure to include an accrual for bonuses in the monthly NPM calculation so the figure is accurate and includes all compensable amounts.

With this approach, you can get a clearer picture of your net profit margin because you essentially turn each partner’s payments into a wage expense, rather than a draw that is only seen on the balance sheet. As a result, you can get a better idea of the financial health of the firm.

Need a primer on calculating net profit margin? Read our detailed article on Net Profit Margin .

Allocating Overhead Expenses When Calculating Profit by Each Individual Lawyer

It's not the best approach to take a simple overhead expense calculation in law firms. By dividing the number of revenue-generating employees by the total overhead, you won't account for the difference in resources each employee takes.

For example, this type of calculation would make a paralegal seem unprofitable and operating at a loss, and make a senior lawyer seem extremely profitable. The reality is they take up very different amounts of overhead costs. A senior lawyer will be assigned a marketing budget, an expensive laptop, and travel budget. A paralegal will only require a desktop computer to produce revenue.

That’s why you have to look at the real COGS and develop a strategic overhead expenses allocation formula to apply to each individual lawyer in order to get a true understanding of their accurate net profit margin.

Is Your Firm Financially Healthy?

If your net profit margin is always artificially inflated because of the way your partners’ compensation is reflected, it’s likely you don’t really know how well your business is doing.

Get in touch with PROFiX today and our team will walk you through how we can help your firm clarify your financial position.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

How to Calculate Net Profit Margin

Thu, 01 Oct 2020 23:50:23 GMT

How to Calculate Net Profit Margin (NPM)

What is net profit margin and how does an accountant calculate it? When you’re running a small business, one of the most important metrics to review is your net profit margin.

T his helps you figure out the overall financial health of your business. Work with a CPA that specializes in your industry so you can get strategic advice that applies specifically to you.

What Is Net Profit Margin?

Net profit margin, also shown as NPM in many accounting documents, is the ratio of your net profits to your revenue. You can show your net profit margin for your entire business or for a specific segment. The higher your net profit margin, the better your business is doing.

Net profit margin essentially tells you how much of every dollar your business earns as revenue actually becomes profit. For example, if your net profit margin is 28%, this means that 28 cents of each dollar you make is profit.

What is a good net profit margin value to aim for? It really depends on your industry, as each one has its own profit margin standards and norms based on market prices and expenses.

Y ou can purchase reports that provide data on your industry standards, find free information online, or exchange confidential business information with a friend in the same industry to see what net profit number you should be targeting.

Calculating Net Profit Margin

Calculating your business’ net profit margin can be complicated, so it’s best to work with an experienced accounting firm like PROFiX that can help you make sense of the numbers.

Here is the formula for calculating net profit margin for your business:

Calculate Your Sales : Tally up all of your business’ sales within a given time period, such as one year. Exclude any revenue that is not directly related to your operations, such as the sale of an asset or interest revenue on investing extra cash.
Calculate Cost of Goods Sold (COGS) : This is the direct cost of producing the goods for sale. For example, if you sell tables, your COGS is the total cost to produce that table including the materials and labour. If you sell cannabis, for example, the COGS is the cost to grow, pick, and package the inventory. If you are a law firm and sell people's time and expertise, the COGS is the cost to employ revenue-generating people such as associates and paralegals.
Calculate Your Gross Profit: Deduct the COGS from your revenue to find out this number.
Calculate Your Net Profit Margin: Deduct overhead costs from your gross profit, which are non-revenue-generating costs such as rent, computers, and office expenses. Divide this number by your sales in step 1. Convert the number to a percentage by multiplying it by 100. This number is your net profit margin.

Once you determine your business’ net profit margin, calculate profit margin by different revenue streams, such as individual products and services. You can allocate overhead in different ways, such as by dividing it equally by the number of products you sell and using that amount to apply to an individual product.

Contact PROFiX if you need help determining the best way to apply overhead expenses to individual products’ profit margins. This will help you determine which areas of your business are most profitable, and which are not meeting industry standards.

Interpreting Net Profit Margin

The net profit margin number is just that — a number. On its own, it doesn’t really tell you much about where your business has been and where it's headed. It’s important to give context to numbers to understand your business’ financial position. Consider two companies that have the same revenue.

On the surface, it may look like both companies are equally successful. However, this may not be the case when you review the net profit margins of each company.

Your net profit margin shows how much of every dollar of sales get converted into profit. For example, a profit margin of 30% means you make $0.30 in profit on every dollar of sales.

Try to get industry data that shows profit margins for your industry and competitors to compare how your business is doing. While 30% may seem like a high net profit margin to you, it doesn’t look so successful when compared to a competitor’s 49% net profit margin.

T his is why context is always key when examining the numbers.

Do not compare your business’ net profit margin to a business in another industry. Each industry has unique standards, based on the market, sales, and cost of goods.

Software Training offer:

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Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

Ensuring Net Profit Margin Is Accurate

If you’re not paying yourself a salary, your earnings will not be reflected in your business’ net profit margin. This will make it look artificially high, as is the case for law firms where partner draws are not recorded as salary .

It’s important to include an allocation for the business owner’s salary when calculating NPM to determine how successful your business is performing. For example, if you are the CEO of your business, and the typical CEO of a business like yours is earning $150,000 a year, you would allocate for that in your overhead expense when calculating NPR.

The reason is that if you are only paying yourself $75,000 (for tax purposes or because that’s all you can afford), your business’ NPR would look artificially high compared to your industry’s norm.

This may give the false impression that your business is running more efficiently or more profitably than your competitors, when in fact the opposite is likely to be true if you can only afford to pay yourself half the market rate.

This is important to consider as a business owner because when taking on the added risk of entrepreneurship, most people hope for an added benefit like an easier lifestyle or making a lot more money than they would earn as an employee.

A ccounting for your own salary while calculating NPR and evaluating the health of your business is an important feature often overlooked by a lot of CEOs and CFOs.

Understanding the Relationship between Wages and Profit

In order to motivate employees to perform their best, it’s also important to tie wages to profit. At PROFiX, we have experience developing employee compensation plans where compensation is aligned with profits.

By offering a bonus structure that ties bonuses with company profits, these businesses reduce their risks and help motivate team members to align their day-to-day decisions with long-term company goals.

The results are higher employee engagement and retention with mitigated business risk. If the business has a bad year, for example, they don’t have to worry about paying high base salaries during it.

Want to Increase Your Net Profit Margin?

Improving your net profit number isn’t as simple as increasing your sales and reducing your expenses.

Get in touch with PROFiX Accounting and Strategy to not only determine what your net profit margin is and how it fares in your industry, but also what you can do to improve that number.

Contact PROFiX Today

Trust Accounting: The Basic Principles for Lawyers and Law Firms

Tue, 15 Sep 2020 15:11:06 GMT

Trust Accounting for Lawyers

Trust accounting is simply the bookkeeping of multiple lawyers’ trust accounts that law firms manage in accordance with provincial requirements and regulations. Everyday, millions of dollars pass through lawyers’ trust accounts and law firms are required to safeguard, segregate, and properly account for these funds.

Trust accounts are regulated by both generally accepted accounting principles (GAAP) and Provincial Law Societies — in BC that is the Law Society of British Columbia (LSBC). Handling a trust account is an important responsibility subject to regular audits by the Law Society, and it’s critical to ensure that your accounting processes are correct.

Trust accounting is a foundational aspect of many legal transactions, and is used by most law firms in British Columbia. However, there are not many CPA firms that specialize in trust accounting, like PROFiX Accounting and Strategy. Find out the basics of trust accounting to determine whether your firm is handling it correctly.

What is a lawyers’ trust account?

A lawyers’ trust account is a legal arrangement where funds are held on behalf of other people in bank accounts designated as Trust Accounts. They are subject to the rigorous trust assurance standards outlined by your provincial Law Society. The handling of these funds, and the trust that these funds will deliver when appropriate, are fundamental in the completion of all kinds of business and personal transactions, including buying and selling of businesses or property and settling legal disputes.

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Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

How a Lawyers’ Trust Account Works

A lawyers’ trust account must be held at a designated financial institution and can hold cash of different types of currencies for a variety of reasons related to legal transactions or for legal services.

A lawyer may also hold trust property, which can be anything of value other than trust funds received by the lawyer in trust. Only law firms may set up and operate lawyers’ trust accounts and a lawyer must always approve of, and be one of the signatories on, any transactions involving trust funds.

Any interest that is paid by a financial institution on trust funds held in a lawyers’ trust account is payable to the Law Foundation of BC, and law firms are required to instruct their bank to remit those funds directly to the Law Foundation in writing when they open their trust accounts.

The Law Foundation uses these funds for legal education, aid, and research.

I f a client instructs their lawyer in writing that they would like the interest on their trust funds payable to them, then the lawyer may deposit these funds into a Separate Interest Bearing Trust Account (SIBTA) and instruct their financial institution to pay the interest on those funds into the SIBTA to be eventually returned to the client or used for other purposes at their direction.

The most important thing to note is that the lawyers must follow the BC Law Society Rules: Part 3, Division 7 & 8 on the receipt, administration, and disbursement of client trust funds. The guidelines for administering a trust account and the required accounting records are found in the Trust Accounting Handbook from The Law Society of British Columbia.

Trust Accounting Rules

In order to be compliant with the LSBC trust accounting rules and regulations you are required to follow when opening and operating a trust account, it’s vital to know and understand the trust accounting rules and requirements.

T hat’s why it’s best to work with a leader in trust accounting, so you can be sure that your clients’ funds and your practice’s books are in order. The law firm is responsible for having controls in place for receiving and disbursing client trust money and keeping accurate records.

What You Need to Know About Managing a Trust Account

Any client trust funds received by a lawyer must be deposited into a pooled trust account as soon as possible. PROFiX recommends the funds are deposited within 1 business day of receipt.

Keep in mind that only funds directly related to legal services provided by the lawyer or law firm may be deposited into the lawyers’ trust account. A lawyer may only accept a maximum of $7,500 in a trust fund transaction involving cash, unless a very specific use for those funds is met.

Beware of trust shortage, which is any situation where $2,500 or more of client trust funds related to one client matter is disbursed in error or when inappropriate. Most firms experience a trust shortage at one time or another. The important part is to fix the error and report it to the Law Society immediately.

Bank Accounts and Deposit Slips

You must deposit client trust funds into your pooled trust account as soon as practicable after you receive them.

In other words, don’t delay in collecting information about what client matter the funds should be deposited to and what they are for. If funds are paid by cheque, record the transaction in your accounting software being sure to apply it to the correct matter.

I nclude a description that is easily understandable, such as “Retainer for Legal Fees” or “Settlement Funds”.

You should determine at that time if the funds will be subject to the LSBC Trust Administration Fee (more on that below). The amount of the deposit should be posted to the pooled trust bank account journal and the clients’ trust listing journal. This will have the running balance of the funds in both your bank account and by individual client matter.

Accounting Records

Review your trust account bank statement regularly and carefully to ensure there are no errors or unrecorded deposits or withdrawals.

PROFiX recommends setting up view-only access to your trust account through online banking so you can check your trust account daily.

You will need to reconcile the balance by checking off all withdrawals and all deposits against your records for each trust account. You will also have to complete and keep extra records to be compliant with the Law Society’s regulations for certain transactions, including matter-to-matter trust transfer and electronic trust deposits or payments.

Trust Account Ledgers and General Ledgers

A three-way reconciliation is unique to the legal sector, and it’s important to work with a CPA who is familiar with this process. In a three-way reconciliation, you need to make sure that your trust account statement aligns with the client trust ledger and the bank account ledger.

U sing law accounting software like Clio, the trust account supervisor can get a full listing of the transactions for a specific client and audit the funds going in and out of the trust account with ease.

Reporting and Audits

Law firms that operate trust accounts are subject to extra reporting standards by the Law Society. Any practicing lawyer in BC must file an Annual Trust Report, which provides information to the Law Society about their practice and trust accounting procedures.

Anna DiBella has experience assisting lawyers understand their trust accounting information in order to complete these reports, as well as implementing processes to ensure you are compliant with all of the trust accounting rules.

Certain trust funds are subject to the Trust Administration Fee (TAF), payable quarterly to the Law Society of BC. It is important to remember that certain types of trust fund deposits are subject to TAF while others aren’t, and that TAF is only payable once by each individual client matter.

Note that all law firms in BC are subject to compliance audits by the Law Society of BC. In some cases, the Law Society will instruct a firm to pay for an Accountant’s Report, which is an external review of your accounting practices.

PROFiX can assist you in preparing for your audit, or help you get your trust accounting procedures in order so you are audit ready.

Accounting Software

Using the right tools for the task at hand means that the job will be easier and more accurate. Most law firms work with Clio, ESILaw, or PC Law for managing trust accounting.

Anna DiBella is familiar with using all law softwares to handle trust accounts, so there is no training or onboarding required. Once she has an understanding of your needs, Anna is able to get started with managing your trust accounts right away.

Trust Accounting and Law Society Rules

The Law Society of British Columbia has outlined a number of resources, forms, checklists, templates, and other information for law firms and their finance teams to use when implementing trust accounting practices.

Be sure to follow these processes to avoid any current liability — or work with a CPA specialist in trust accounting — to ensure that your clients have confidence in the security of their trusts.

Get in touch with PROFiX today to learn more about how trust accounting works. We will personally set up your trust accounting processes to ensure they meet all compliance requirements.

Law Firm Accounting in British Columbia

Wed, 02 Sep 2020 00:49:17 GMT

Law Firm Accounting

Law firm accounting requires specialized knowledge of law society regulations for specific procedures like trust accounting.

Whether you’re looking to get a more accurate financial picture of your law firm, update outdated technology and process, or create a plan to improve profitability, it’s important to work with a CPA who is experienced in the legal industry.

At PROFiX Accounting and Strategy, we have over 10 years of experience providing high-level accounting and consulting for law firms. Anna DiBella, CPA, CGA, specializes in trust accounting for law firms, a service not found at many other accounting companies, in addition to legal accounting and bookkeeping.

The Role of Accountants at Law Firms

Many legal practices have both bookkeepers and accountants, whereas some have just one or the other. It’s important to know the distinction of what a bookkeeper and an accountant can do for your firm. As a result, you’ll be in a better position to reach your business goals.

Bookkeepers: The role of a bookkeeper is to record financial transactions in your bookkeeping software. These end up in your financial statements, so it’s critical to ensure that the numbers are correct.

This includes expenses, revenues, bill payments, and deposits. Experienced bookkeepers can help with payroll and GST/PST remittances.

Some may perform month-end procedures to verify your financial information is reliable, such as bank reconciliations and other month-end closing duties.

Accountants: Industry accountants who take on CFO or similar high-level accounting positions interpret and analyze financial statements to identify trends and risks for the business. They advise on partnership compensation including when cash balances are high enough for partners to take draws.

An important part of their role involves preparing budgets and projections, as well as measuring Key Performance Indicators to understand the health of a firm. They also supervise bookkeepers and junior accountants and provide advice to the firm’s owners.

In addition, accountants mentor staff and new lawyers on best practices in the business of law. A critical function of accountants is to manage billing and timekeeping processes to ensure that the firm’s cash flow is healthy and steady.

For many law firms, having both bookkeepers and accountants as full-time staff isn’t possible or feasible. ProFix Accounting and Strategy can take on both of these roles in a consultant capacity to ensure your firm has a clear understanding of your finances and a plan to help you realize your business vision.

How PROFiX Helps You Meet Your Business Goals

Whether your firm is looking to hire additional lawyers, wants to open another office, or is planning to corner a new segment of your market, it’s vital to understand where your business stands financially. Regardless of your goal, PROFiX founder Anna DiBella, CPA, CGA, can help you get the information you need to make the right decisions for the future of your firm.

Here’s what we focus on to help you reach your goals:

Cash Flow

If you want to grow your law firm, cash flow is critical. We advise on appropriate partners’ compensation and the amount of cash reserves that are needed for smooth operations.

Typically, law firm billing procedures result in cash flow delays. It can take between 90-120 days after the work has been performed to actually receive cash in the bank. PROFiX can guide your law firm on how to speed up cash inflow by properly managing your billing and collections cycle.

This helps you predict cash flow through projections and plan your finances accordingly.

Accounts Payable

Accounts payable is all about receiving and paying the bills your firm owes to vendors. PROFiX helps you manage the cash in the bank by ensuring your bills are paid on time — but not before they are needed.

This develops positive vendor relationships and builds trust in the industry. We also ensure proper internal accounting controls are in place to prevent and deter fraud.

Accounts Receivable

Managing what your clients owe you at any given time is the essence of accounts receivable. This number should be as low as possible relative to your income. PROFiX manages it by collecting retainers from clients and applying them to bills as they come due.

As an experienced leader in law firm accounting, we also ensure your firm meets all trust accounting standards.

Your firm is directly affected by proper billing and collections procedures. Whether or not you’re able to open a new office or hire your new staff is dependent on how your accounts receivable and accounts payable are doing.

Shortening up billing turnaround time and paying attention to collections pays off. We send out all bills by the third day of the month, for example.

Think outside of the box and bill your clients twice monthly or mid-month at the end of a project instead of waiting until the end of the month.

Making small changes like this, such as shortening payment terms from net 30 to net 15, can make a big difference to your cash flow.

Profit and Loss

Profit is the difference between your revenue and your expenses. However, in the legal world, no profit and loss statement is the same because it does not include partner compensation.

Never compare your P&L to that of another firm because the more partners you have, the more profitable you will look. Partners’ draws are only reflected on the balance sheet as equity paid out to partners.

Partners’ draws come out of the profit of the business after they pay their overhead expenses and associate salaries.

With years of experience in law firm accounting, PROFiX founder Anna DiBella, CPA, CGA, can advise your firm on how to maximize your profit and your partners’ compensation by aligning your P&L with industry standards.

Bank Reconciliation

Bank reconciliation is about matching your bank records with your accounting records, and making sure all purchases and deposits have been accounted for. This is a great control to ensure your bookkeeping is in order.

Be sure to complete bank reconciliation within 30 days of each month’s end. If your bank reconciliation is delayed or out of order, call PROFiX to get your records up to date. We’ll ensure you’re caught up — and that you don't fall behind again.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

General Ledger

The general ledger is the roadmap of your business. It outlines every single penny that has been spent and on what. Without an accurate general ledger, you will not have an accurate picture of your firm’s finances.

As a result, you won’t be able to figure out how you can improve profitability, reduce your expenses, or hit a new financial milestone.

The first thing we do at PROFiX when we receive a new client is review their general ledger. This shows us how their bookkeeping workflow works, what they spend money on, and how they account for it.

Typically, the general ledger needs to be adjusted to account for bookkeeping errors during the year, especially at year end. PROFiX can work with your firm and complete your business year-end for you, so that everything is ready to go — and accurate — for your tax accountant.

Trust Accounts

All law firm bookkeepers and accountants must be familiar with trust accounting rules set forth by the Law Society of British Columbia.

As a leader in trust accounting, PROFiX can manage all of your trust accounting practices, or review and implement procedures to keep you compliant with industry regulations.

Anna DiBella, CPA, CGA, also assists with completing quarterly Trust Administration Fee remittances and completion of annual trust reports, which is required by anyone with a law firm trust account.

Training and Support

It’s critical to provide your junior accounting staff and bookkeepers with the right training and support so that they are able to accurately manage your firm’s finances.

PROFiX helps review and implement internal controls and accounting procedures to help with elements such as cash flow, accounts payable, accounts receivable, and more.

We assist with bringing on new accounting staff and getting them up to speed on legal software such as Clio and PC Law , in addition to trust accounting procedures.

If your accounting staff are on a leave or vacation, PROFiX can also fill in the gaps. Anna DiBella, CPA, CGA, is ready to dive in when your team is behind or overwhelmed, or consult on a new complicated file using her settlement administration experience so that it remains accurate.

Video: Should I switch from PC Law to Clio ?

Growth Strategy and Execution

Does your firm have a vision for the next ten years, but not sure how you’re going to achieve it? PROFiX can work with your firm’s partners to develop a plan to get you to your goal.

This includes budgeting and planning, developing KPI identification and measurement procedures, and implementing financial and operational procedures at scale.

You’ll have a clear idea of whether your goal is realistic based on your current financial status.

You’ll also know the changes you need to make in order to attain your vision.

Getting a leader in law firm accounting on your team is easy

Contact our team to learn more about how PROFiX can help your firm manage your finances more effectively. Click the button below and get started on the road to crystal-clear financial records, sound accounting and bookkeeping practices, and an aggressive growth strategy.

PROFiX’s Guide to Reading and Understanding Financial Statements

Tue, 01 Sep 2020 17:31:20 GMT

Reading and Understanding Financial Statements

Check out our guide to reading and understanding the 3 key financial statements: balance sheets, cash flow statement, and profit and loss (income) statement so you understand your business’ financial position.

As a business owner, you’re an expert in your field. Whether it’s law or professional services or retail — you know your stuff inside and out. You understand your customers’ problems and know how to provide the kind of solutions they’re looking for. However, you may have a financial blindspot.

Don’t worry — it’s completely normal for small business owners and entrepreneurs to not be fully proficient in financial operations.

That’s where PROFiX comes in. Anna DiBella, CPA, CGA, will guide you through the three most important financial statements you need to understand, so you feel confident about your business and can bring your vision to reality.

What are financial statements?

Let’s start with the basics. You’ve heard the bank representative ask for your financial statements and you’ve handed them over, but you’re not quite sure what they mean or what they tell people about your business. Here’s what you need to know.

A financial statement offers a snapshot of your business at any moment in time (through a balance sheet) or over a period of time (through an income statement). These documents break out revenue, expenses, assets, and liabilities, and show what your business’ profit and loss is for any given time period.

Financial statements are important because they help you make data-based decisions about your business. When you have access to timely and reliable financial statements, you know exactly what the financial position of your business looks like, and you can use this to drive operations and other functions.

Be sure to review your financial statements on a monthly basis at minimum. Ideally, these need to be reviewed sooner. If you’re finding it overwhelming to keep up with your everyday business tasks and review your financial information, work with a CPA who specializes in small businesses and entrepreneurs.

What is a balance sheet?

Think of a balance sheet like a photograph. It captures your business’ financial position at a specific moment in time.

It shows the tangible assets of your business, such as cash and accounts receivables, machinery, inventory, and anything else that adds value. With a balance sheet, you can also see the liabilities your business has, such as any loans owing to banks or other institutions, unpaid bills, or anything that decreases the value of your business. Equity is another important factor on your balance sheet.

T his is the cash contributions to the business from investors (owner contributions) and retained earnings (profit from previous years).

The most important formula you’ll need to know when it comes to balance sheets is Assets = Liabilities + Equities. Keep in mind that if your liabilities are higher than the equity, it means your business assets are financed primarily through debt. This isn’t necessarily a bad thing, but an experienced accountant can help you manage your liabilities more effectively.

Software Training offer:

TRUST ACCOUNTING IN CLIO and XERO

Is your law firm Law Society Compliant in Clio and Xero? If you aren't doing a 5-way trust bank reconciliation, you are not compliant.

Learn the proven method for keeping your financials clear and on track. We'll go through each step from set up to reconciliation, plus share tips for best practices and supporting apps.

How to read and analyze a balance sheet

The higher your equity is compared to your liabilities, the more value your business has. Take a look at this common mortgage as an example:

Balance Sheet

Asset : The value of your home $500,000

Liabilities : The balance you owe on your mortgage $200,000

Equity : The value of your home that you own $300,000

Equity is what you get to take with you if you sell your home. A business is no different. As you pay your mortgage every month, the liability decreases and your equity increases.

The value of the asset doesn’t change, just the amount of debt and equity that finances that asset. The more equity you have on a balance sheet compared to liabilities, the more valuable your business is (on paper).

What is cash flow?

This is a term that is likely to come up in any conversations you have with financial institutions or investors, so it’s important to be familiar with it and know how it applies to your business.

Cash flow is the amount of cash you have coming into and out of your business at any given period of time. It’s extremely important to monitor your cash flow because when you run out, your business is bankrupt.

An important distinction to note is that revenue (or sales) is very different from cash flow and they shouldn’t be confused for the same thing.

In some businesses, like a restaurant for example, sales and cash flow are very aligned because customers pay for their meals the same day they receive them. As a result, when sales are high, cash coming in is high too.

However, in some other types of businesses like law firms, when a sale is made, payment comes in later. In some cases, you may not be paid till 30, 60, or even 90 days after the sale is made.

I n this case, when sales are high, cash payments will increase in 30-90 days. These businesses need to plan ahead to ensure that they have enough cash flow to pay bills and employees during times in the year where they are waiting for their revenue to come in.

If you’re in an industry where your customers don’t pay you right when a sale is made, it’s especially important to work with an experienced CPA to build a plan to manage your cash flow.

Cash flow statements

A cash flow statement is an important financial document that tells you your business’ financial position over a specific period of time. If a balance sheet is like a photograph, a cash flow statement is like a video.

Cash flow statements measure cash coming in and out of a business. It shows if you are gaining or losing cash reserves, and what you are spending cash on (like expenses, assets, or owner’s compensation, for example).

This financial statement is most useful if it’s paired with financial projections to ensure you are planning ahead. The key rule of thumb is that your bank balance should always have a minimum amount to cover 3 months of overhead.

This means that your business should have enough cash flow to operate in a crisis where you don’t have sales for three months.

T he current pandemic is a good example of a crisis that has affected almost every business in every industry. In these cases, having cash flow and reserves is critical for survival.

Income statement — how to read and analyze

If you took an accounting class in high school or university, you likely know the P&L statement or Profit and Loss statement as the income statement. It’s recently rebranded to more clearly reflect what it’s about: your profitability.

This financial statement shows a breakdown of your business’ revenue and expenses, and whether you made a profit or loss. An income statement shows a breakdown of the different revenue streams you have and the direct expenses (cost of sales) that went into producing that revenue.

For example, in a law firm, the revenue is the different areas of law the firm practices or the individual lawyers. The cost of sales is the lawyers’ salary that generated that revenue. Then a list of overhead (general expenses) are deducted, and the difference between your revenue is your net income or loss (profit).

Determining the expense and revenue categories in a strategic way that aligns with your budget is an important step many businesses miss when designing their accounting systems. This is where a leader in accounting and financial strategy like PROFiX can help you ensure your financial statements are accurate and in order and support you in meeting your business objectives.

Financial ratios and indicators

Here’s where many business owners begin to feel overwhelmed, but we’re here to guide you through it. When it comes to financial ratios and indicators, any old ratios will do. What’s important is that you ensure the ratios align with your specific business goals.

For example, if you are trying to grow your business, you’ll want to look at sales growth percentage year over year. If you are a cannabis grower, you’ll need to track things like yield per plant or profit margin per yield.

Context is everything when it comes to ratios and indicators. If you’re not following the right ones for your business and your goals, you won’t have a useful picture of your business’ performance.

Accounting period

An accounting period is the same as a financial reporting period. For example, for tax purposes, the accounting period is one year.

A nna DiBella recommends looking at your financial statements in both monthly and yearly periods and comparing them to prior periods. It’s best to align your business accounting period with the tax period for simplified reporting (Jan-Dec).

Financial statement FAQs

At PROFiX, Anna DiBella gets a lot of questions about financial statements. Here are some of the most common questions and answers to help guide you in your business. Want more details? You know who to call.

Balance sheet vs. profit and loss statement: what’s the difference?

A balance sheet is a snapshot in time. It includes your business’ assets, liabilities, and equity on any given day. A P&L statement (also known as an income statement) covers a period of time , usually a month or a year, and lists your revenue (sales), minus any expenses, showing a profit or loss.

How do I spot financial statement manipulation?

It’s not easy. The best way to ensure your financial statements haven’t been manipulated is to prevent it from happening in the first place. You need sound financial processes and good internal controls. PROFiX can help you set up financial procedures from the ground up with checks and balances so you know your numbers are accurate.

How do cash flow and revenue differ?

Revenue is your sales, while cash flow is your cash deposits (aka money in the bank). Revenue does not necessarily equal cash flow as sometimes payments come in after the sale happens, or they don’t come in at all. By ensuring you have adequate collection and write-off procedures in place, you can help prevent low cash flow.

How can I use my financial statements?

One of the most ineffective ways to use your financial statements is to have them prepared and then file them away. These are important documents that should be consulted whenever you make any important decisions about the future of your business.

F or example, if you want to hire a new employee, start selling a new product, open a new location, or corner a new segment of your market, then your financial statements can help figure out how.

Be sure to work with an expert in accounting and strategy who can help you understand your financial statements, so you have context around all the numbers and know what they say about your business.

Want more time for your business and more clarity around your finances?

Our team is here to guide you through your financial statements. Not only that, we can help you figure out how you can reach your goals. Whether you want to improve profitability, have more cash in the bank, or reduce your expenses, PROFiX can make it happen.