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6 Tips for Managing Law Firm Taxes

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There are some important tax to-dos you’ll need to complete before filing your law firm taxes. Are you ready? It’s a good idea to approach your taxes proactively. These 6 tips should help you get started:

Let’s explore each a bit more in depth, going over (a) the tasks you’ll need to account for and (b) the best way to go about handling them.

6 Tips for Managing Law Firm Taxes

Tip #1: Gather all pertinent tax information for your law firm as you go.

You’re going to need to gather documentation covering the full gamut of activity in your firm, and it’s best to collect these documents throughout the year to make it easier when tax season rolls around. This isn’t limited to financial data either. Tax information can include important business data, such as:

  • Expenses and deductions (e.g., bills, receipts, canceled checks, etc.)
  • Inventory and equipment data
  • Depreciation data
  • Personal and business deductions
  • Vendor bills
  • Loan agreements
  • Legal paperwork (e.g., parties in lawsuits, purchases, settlements, acquisitions, civil defense, etc.)
  • Medical, insurance, payroll and employee records
  • Your income and financial statements
  • Theft or loss documents
  • Corporate payroll data
  • Employee documents (e.g., policies, dress codes, CLE requirements, W-2 reimbursement policies, etc.)
  • A copy of your schedule K-1, (if applicable) which outlines shareholder income, losses, deductions and credits

As far as lists go, this isn’t comprehensive. It’s just a helpful place to start.

Tip #2: Closeout outstanding receivables and payables.

Do some of your clients owe you money?

Do your best to close out any outstanding accounts receivables before the end of each year. Chase down clients responsible for unpaid invoices, resolve any disputes and do your best to collect. Certain law firm software will even send automated payment reminders to your clients to ensure they pay in a timely manner.

Then there are payables.

Most law firms are organized as flow-through entities. A large amount of receivables means you won’t fare as well come tax time. Use accounts payables to offset receivables that put you in a less than favorable situation.

It’s a bit of a balancing act.

Tip #3: Prepare for an audit.

Conducting an internal audit means you have an updated copy of your balance sheet and profit and loss statements. Additionally, you’ll want an up-to-date copy of your income statement to analyze firm expenditure and savings.

Why go to all this trouble?

Remember all of the details to gather suggested in task one? These are the same details the IRS will ask for if you’re audited.

A tax audit is not a comforting thought at all. But it’s an important step savvy law firms plan for.

Why?

The IRS released its guide to auditing lawyers. It’s a 54-page document showing examiners how to pursue attorneys and law firms aggressively. Essentially, it’s a step-by-step, how-to guide on auditing you, and, therefore, could serve as a valuable resource to your firm.

If you’re well prepared, with the necessary data in-hand, your audit will likely go more smoothly. It’s a helpful first step if your firm receives the dreaded IRS notification letter.

Tip #4: Strategize with your accountant.

Ideally, this is an ongoing process.

Most firms don’t spend a whole lot of time with their accountants, which is an unfortunate mistake. If you haven’t taken the time to reach out to your accountant, now’s the time. Don’t wait until the 11th hour when your accountant is inundated by the tax rush.

Provide them with your documentation they need. Give them with the appropriate access, statements and reports they need. If they need you to provide them with an unexpected piece of data, help them with what they need. The easier you make things for them, the better your circumstances will be.

Tip #5: Streamline your financial management.

Does your firm have good financial habits? 

Implement disciplined financial controls over your cash. Some action steps to take can include:

  • Tracking your time appropriately and invoicing sooner rather than later.
  • Requiring an upfront retainer for all new clients.
  • Checking references if you’re working with business-to-business clients. It’s a well-known fact that large corporate clients are often slow to pay.
  • Setting retainer/project minimums and sticking to them.
  • Creating, outlining, and enforcing your late payment penalties with customers.
  • Rejecting clients who consistently inflict financial harm on your firm.
  • Rewarding customers who autopay.
  • Factoring payment processing fees into your invoices.
  • Negotiating payment processing fees at the bank, card, or processor level.
  • Negotiating for extended payment terms for your bills upfront.
  • Endorsing checks immediately “for deposit only.”
  • Minimizing overhead.
  • Investing your cash on hand.
  • Building business credit/funding via traditional (e.g., loans, line of credit) and untraditional (e.g., crowdfunding, alternative loans, investors).

These details are important because they give you the ability to scale your business up or down rapidly. Train employees to manage your cash flow safely and protect your practice from fraud and embezzlement. These headaches are completely avoidable if you have the proper foundation in place. What’s more, these good financial habits are reflected in a variety of places: credit reports, bank account data, and more.

Tip #6: Pull your credit reports + scores.

Do you have credit available?

You’ll want to pull credit reports for yourself and any notable partners in your firm. You’ll also want to pull your business credit reports. Here’s why this is important for your firm.

Your personal credit reports + scores give you a heads up on any judgments or derogatory marks that may create problems with ethics regulators. It’s common practice for lenders to pull all three of your credit scores (your tri-merge or VantageScore), using the middle number in their creditworthiness and financial assessments. 

This is crucial.

Pulling your credit report ahead of time means your creditworthiness ahead of time. You can address any serious problems before regulators come knocking. It also ensures you have suitable access to credit so you’re able to make the financial moves you need to make. You can refer to sites like Credit Karma or Free Annual Report for a free copy of your credit report. 

What about business credit report? 

Your business credit report (and score) is more important if you’re the owner or shareholder at your firm. A strong business credit rating means your firm is better able to: 

  • Get financing from both conventional and unconventional lenders at more favorable terms (i.e., no personal guarantees) when you need it. 
  • Minimize insurance costs: A strong business credit score means it will cost less to insure and protect your firm from any unexpected disasters. 
  • Proper financial separation: Specifically of personal and business finances. This separation makes tracking expenses and filing taxes much easier for businesses. 
  • Increased borrowing power: You’re able to borrow larger amounts of money, in less time and with more favorable terms than those without a strong business credit score. 

Credit reports and scores come from Equifax, Experian, and Dun and Bradstreet. Your business credit reports contain more data but are typically more concise. Here are samples for each:

See what I mean? Short, concise, and to the point.

We’re just scratching the surface here. But whatever methods you choose, it’s a good idea to approach them proactively. Gathering all of your data/documentation ahead of time and staying audit-ready make a significant difference.

But this isn’t everything. You’ll want to bring in the professionals. Make a list of the documentation you’ll need to provide — schedule meetings with your accountants and financial professionals ahead of time. If you’ve kept decent records and you’re reasonably prepared, you won’t be caught off guard.

The Master Guide to Business Spend Management

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Law firms, like any other business, need to effectively manage their spending to ensure financial stability and operational efficiency. 

By implementing proper spend management strategies, law firms can benefit from accurate expense tracking, informed decision-making about budgets, and minimizing errors that could impact the firm’s bottom line. 

In this guide, we’ll explore the importance of business spend management for law firms, effective spending tracking methods, the components of the spend management process, and the benefits of automated spend management with law practice management software. 

Whether you’re a solo practitioner or part of a larger firm, this guide offers valuable insights and practical tips to optimize your firm’s billing and spending for financial success.

What Is Business Spend Management?

Thomson Reuters defines business spend management for law firms as the process of reviewing, tracking, analyzing, and reporting on the costs incurred by the firm and its clients.

Benefits of tracking your firm’s spending include: 

  • Increasing your firm’s efficiency
  • Knowing where your firm can cut spending
  • Saving money, allowing you to operate sustainably

How Do Law Firms Track Spending?

Your law firm could track spending using traditional methods like written logs, spreadsheets, and paper receipts. These expense tracking methods are inconvenient and prevent your firm from staying competitive. 

That’s why many modern law firms choose practice management software that allows them to stay organized while avoiding the perils of traditional expense tracking. 

With a solution like Bill4Time, you’ll have quick access to detailed reports and billing online, eliminating the need for paperwork or worrying about any expenses going unaccounted for. Plus, you’ll be able to easily determine if your firm’s budget is working and identify areas where you may need to cut back on unnecessary spending.

Importance of Proper Business Spend Management

Knowing how to track and manage your firm’s spending is essential to its financial stability. Without a business spend management strategy, you may not be aware that your firm is losing money or spending too much on the wrong things. 

When you implement proper business spend management, your firm will benefit from: 

  • Accurate expense tracking: Whether you’re implementing a new marketing strategy or paying for any of the dozens of business tools your firm needs to operate, knowing where your money is going is essential.
  • Informed decisions about spend/budget: You need to know whether your spending is paying the return on investment you were expecting. For example, if your firm is dedicating thousands of dollars to a marketing strategy that isn’t generating a positive return on investment, you’ll know it’s time to try something new. Spend management will alert you if you’re throwing good money after bad.
  • Fewer errors: When you don’t have a plan for your firm’s expense tracking, mistakes will happen. For example, you could forget to consider certain expenses or fail to pay vendors and suppliers on time. Proper business and spend management allow you to avoid errors that could significantly impact your firm’s bottom line. 

Using Bill4Time’s time and expense tracking software helps your firm track spending without the hassle of obsolete methods. You won’t need to manually allocate payments  or records, and you can monitor your firm’s expenses from anywhere, on any device. 

Pro Tip: Take your practice wherever you go with the Bill4Time mobile app. Use the user-friendly dashboard to manage billing, track time, and review documents on your mobile device.

Components of the Business Spend Management Process

With any spend management strategy, you must have a process to collect data and analyze your firm’s current expenses. The spend management process usually involves: 

  • Collecting spend data: You should determine where your company is spending money. Consider all expenses, including purchase orders, invoices, payment data, receipts, and any other information about money your firm spends. You’ll also want to consider the costs associated with suppliers, expenses within each department, and your firm’s spend categories. Make sure you consider all aspects of your firm’s spending to gain a clear picture of your current financial situation. 
  • Use the proper categorization: After you’ve collected your firm’s spend data and removed any duplicate or inaccurate information, you can create spend categories. They’ll enable you to organize your data and develop strategies for saving money or reducing spending. You can also determine if your firm should adjust the budget in a particular category. Many firms categorize their spending based on supplier, business unit, or geographic location. 
  • Analyze spending patterns: You should analyze your firm’s spending history, patterns, procurement processes, and risk exposure. You can find areas where your firm can improve your spending habits and save money. 
  • Forecast spend: Now that you know where your company is spending and where you have opportunities to save, you can implement spend management techniques. By forecasting, you can estimate ROI and prepare for upcoming expenses. Knowing what’s ahead for your firm’s finances, you can respond to changes and allocate accordingly. 
  • Implement: Once you’ve researched, categorized your spending, and anticipated future costs, you can implement your business spend management plan.  
  • Measure performance: Check in on your firm’s spending regularly to ensure the money you spend is helping you reach your goals. 

Pro Tip: Use the robust accounting reports in Bill4Time to gain digestible insights about your firm’s finances. 

How to Implement a Business Spend Management Strategy at Your Firm

Implementing a business spend management strategy doesn’t need to be complicated. The three steps you should take when implementing your strategy include: 

  • Documenting the process: You will want to keep track of all your firm’s expenses and each step of the spend management process. Consider using a practice management system with document management capabilities. Keep your important files in one place, and access them anytime, anywhere. 
  • Communicating to staff: Communicate your expectations to your team clearly during the business spend management process. If they need to keep any documents or share any information with you, let them know.
  • Using technology: Turning to a practice management software allows your firm to centralize information and automate spend management. You can simplify the legal billing process, view accounting reports, and track time and expenses in one system. 

Using a well-planned business spend management strategy at your firm keeps everyone on your team up to date. 

What Is Business Spend Management Software for Law Firms?

Business spend management software for law firms allows you to access all your firm’s needs in one place. Bill4Time’s reporting feature helps you understand how your firm is doing financially to support your continuous business expansion. 

You should choose a practice management software that offers features like: 

  • Expense tracking: Efficiently organize receipts, record expenses, and customize expense types for accurate financial management.
  • Spend reports: Simplify tracking and reporting of expenditures, allowing you to gain a clear overview of your spending patterns.
  • Budgeting and forecasting: Evaluate your firm’s spending habits, plan for future costs, and make informed financial decisions

Benefits of Automated Business Spend Management

There are several benefits of using automated business spend management. Some of these include: 

  • Centralized data: When using an automated system, you can access all the information you need about your firm’s spending. Your finance department can analyze, budget, and plan based on this data. 
  • Robust reporting: You can stay in the know about payment history, collections, expenses, and productivity. 
  • Real-time spend management: Get updated payment reports and view a snapshot of your firm’s progress on an organized dashboard. 

Final Notes on Spend Management for Law Firms

Using automated methods to track and measure spending allows you to optimize your law firm’s budget. You don’t need to worry about organizing and analyzing paper receipts and documents. 

With Bill4Time, your firm can seamlessly implement a business spend management strategy that allows you to track, analyze, and forecast spending. It’s the practice management software that is the solution you have been looking for. Schedule your free demo today!

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