Fix Law Firm Bookkeeping Before Tracking KPIs

Summary: Decisions made from looking at KPI’s are useless at best and harmful at worst unless your bookkeeping is already accurate and designed with the KPIs in mind. Law firm financial operations (core accounting & bookkeeping) produce a “summary ready structure” (your financial statements). To prevent integration errors, the manual cleaning of inconsistent records, and eliminate the need for the principal’s “active involvement” in core accounting, firms must find one comprehensive, A-level quality solution that understands their specific type of practice, software, and accounting.

Knight Lancaster, CPA, JD, MBA, specializes in operational accounting, legal accounting & software technology integrations, and tax. His credentials as dually licensed Attorney-CPA reinforce his expertise and authority in the matter. He focuses on ensuring the “first point of contact is handled consistently” and that “errors are affirmatively surfaced“.

Full Slide Deck to Continuing Legal Education Seminar to the American Academy of Attorney-CPAs can be found HERE.

Law Firm Bookkeeping Creates Financial Statements That Are Used to Create KPIs

The core issue facing law firm financial operations is structural: Bookkeeping is not completed with the goal of producing KPI’s.

Most law firms buy KPI software with the idea that it will make sense of their numbers.

The truth: it won’t unless your bookkeeping and accounting are already accurate and structured for the KPI tool.

The reason: All cashflow & budgeting related software tools plug in to your accounting software and prompt actions using existing line item totals in your financial statements. The data that makes up those subtotals is almost always the error.

The initial fundamental bookkeeping errors lead to highly misleading financial metrics. With “minimum effort books” or misused billing integrations, you’ll see severe data errors like double-counted revenue or missing expenses altogether.

Factoids vs. Useful KPIs… Even when firms have decent accounting, they often lump all software spend into one category. This creates a nothing more than factoid:

• Knowing 12% of revenue is spent on all firm software is not only useless, it’s harmful.
• Knowing the factoid normally comes at the expense of not knowing your true spend in an area where software is used / how to make software decisions by business function.

This lack of “intentional accounting structure” prevents financial data from being “chunkable data” for analysis.

The Search for the Legal Software & Accounting Expert

KPI’s are great, but not when they’re built on inconsistent inputs, broad generalizations, duplicate, incomplete, or inaccurate info.

Before decision-makers rely on these KPIs, they often must manually adjust records to monitor only (2) of (10) metrics they care about most. Many times, by the time the records are adjusted, the information is no longer useful for decision-making. It’s purely historical data.

This leads to routine operational blindness:

• This is better than nothing, but only when you have time to adjust the data (and normally not until the data is no longer helpful).
• The primary KPIs attorneys need for forward-looking decisions are cash flow related and evaluating how money is being/should be spent.

This critical data, cash outflows and their purpose, lives primarily in the accounting software. When firms encounter integration errors / inconsistent records, someone must clean data manually.

The “Nobody Understands My Firm” Issue

Searching for a CPA & legal software guru who knows your accounting, billing, KPI software, integrations, and how to use them leaves you thinking, “Nobody understands my firm”. After talking with a few, you’re hesitant to hand anything off because they don’t understand the existing data they see and want you to tell them what to tweak.

The reality is that every industry has their own specialized software. Until recently, software did not integrate well which meant that the only software CPAs needed to know was accounting & tax software. This allowed CPAs to easily work across a number of different industries providing basic accounting services.

For CPAs to be more helpful to attorneys, they need to learn how to use your billing software (Clio, Smokeball, MyCase, LeanLaw) and payment processing software. It’s impossible to assist with trust accounting compliance & point out errors/issues, much less move into the money movement functions if you do not understand the software.

The lack of CPAs understanding your software creates the situation where they, many times, tell you not to integrate your billing software and accounting software because they do not want your billing software (that they do not know how to use) feeding into your accounting software (that they do know how to use).

The end result is you’re effectively told to keep the entire revenue side of your firm out of your accounting records.

Resetting Strategy with A-Level Accounting Solutions

The solution lies in shifting the focus from fixing individual errors to preventing errors with establishing a structured, A-level system.

The error in almost all accounting situations is an error at the first point of contact. When you start a process with a mistake and add software integrations, the mistake will be amplified.

The structure needed to have a reliable machine (clear, consistent data and a clean process) is the same structure needed for sound finance. This is where the benefit of rules-based AI comes in:

• If the first point of contact for each transaction is handled consistently, my category totals are consistent…
• …the category subtotals push through the system into your KPI reporting, are compared to benchmarks, and synthesized based on other KPI numbers.

In other words, when you handle your inputs correctly and consistently, your outputs are consistent and reliable.

Firms should reset with this strategy:

• I want these 3–5 KPIs.

• My bookkeeping & accounting needs to be designed to produce these 3-5 KPIs.

• I need an accounting process that surfaces errors so I am prompted when there is an error.

• Let me find one solution that can execute (not “coach” me on how to do it).

This proactive approach forces a realization: Anything less than an A-level quality accounting & financial ops solution requires you to actively monitor, troubleshoot, identify errors, and lead the person that is supposed to be leading you.

Conclusion: Future-Proofing Financial Operations

The only way law firm financial ops will work without your active involvement is a solution that understands your type of practice, software, and accounting. You need all 3.

You have only three options for financial operations:

• Pay nothing (your assistant/office manager): You only know dollars in/out. (Minimal, unstructured data.)
• Pay someone to redo accounting monthly so KPIs can be produced: KPIs useless by the time you receive them. (Fails the “helpful test”.)
• Find a solution that does the full financial operations process.

FAQs:

FAQ #1: When does the most likely accounting error occur in law firms?

Answer #1: The first point of human contact.

FAQ #2: What is the most common mistake that law firms do not attempt to quantify?

Answer #2: How much they are failing to capture in billable expenses.

FAQ #3: What is the biggest software mistake law firms make?

Answer #3: Failing to set it up properly or working with accountants that do not understand their software.