Law Firm Accounting: Should You Outsource?

Law firms, like any business, require efficient financial management to thrive. However, the legal profession often prioritizes client matters, leaving accounting tasks as an afterthought. This can lead to time-consuming, error-prone processes that divert focus from core competencies. Many firms are recognizing the strategic advantages of outsourcing law firm accounting functions. By delegating these responsibilities, law firms can optimize their resources, mitigate operational risks, and enhance overall firm performance.

Common Law Firm Accounting Tasks to Outsource

Law firms can benefit significantly from outsourcing various accounting tasks. Here are some common areas:

• Bookkeeping: Maintaining accurate financial records, including accounts payable, receivable, and general ledger.
• Payroll processing: Calculating salaries, deductions, and tax withholdings.
• Financial reporting: Generating income statements, balance sheets, and cash flow statements.
• Tax preparation: Preparation and filing of federal, state, and local tax returns.
• Trust account management: Ensuring compliance with regulations for client funds.
• Billing and collections: Generating invoices, tracking payments, and managing delinquent accounts.
• Financial analysis: Providing insights into financial performance and identifying areas for improvement.

The Business Case for Outsourcing Law Firm Accounting

Here is the perspective of legal professionals on hiring external accountants for law firms.

1. Rosana Tejada Crespo, CEO and Tax advisor at Tejada Solicitors

With over 20 years of experience, I have a deep understanding of finance, economics, and labor laws, and I’ve effectively applied this knowledge to our law firm’s accounting practices.

From my experience, many legal firms recognize the benefits of outsourcing their accounting functions. This allows them to dedicate more time and energy to their core competence—practicing law—by handing over tasks like accounting and financial management to external experts.

This actually leads to greater productivity and efficiency. Outsourcing ensures that financial records are up-to-date and accurate, thanks to the expertise of a team specialized in legal accounting and compliance. This not only reduces the likelihood of errors and legal liabilities but also cuts costs since there’s no need to maintain an in-house accounting team. Law firms can save significant time and resources, enhancing both efficiency and accuracy through outsourced accounting services.

Cybersecurity is another aspect here. Outsourced accounting services help with risk mitigation or transfer. If your financial data isn’t stored on your premises, it’s less likely to be stolen. The responsibility for data security then shifts to the outsourcing provider, who must have robust data protection systems in place to prevent breaches, leaks, and viruses. Of course, this means that the outsourced company adheres to industry best practices and complies with national and industry regulations.

The truth is that most law firms do not have a firm grip on their day-to-day financials and working capital management. As businesses, law firms need a clear understanding of what’s coming in (collections) and going out (expenses) to make informed business decisions that drive growth. Just as clients rely on us for legal expertise, I also believe there comes a time when every firm must hand over its accounting needs to professional accountants.

2. David Fritch, Attorney | Owner of Fritch Law Office

I have extensive experience managing a law firm’s finances and accounting functions. Outsourcing certain accounting services has allowed my firm to improve efficiency and focus on practicing law. For example, we outsource payroll processing and bookkeeping. This frees up our in-house staff to focus on higher-value tasks related to client billing, accounts receivable, and financial reporting. Outsourcing routine bookkeeping and data entry has reduced costs by over 25% compared to handling these functions internally.

Another area we outsource is tax compliance. Preparing employee payroll taxes, sales tax returns, and business tax returns requires specialized knowledge that outsourced accounting firms provide at a lower cost. Outsourcing tax services ensures timely and accurate filing of all returns, allowing us to avoid potential penalties.

While outsourcing accounting functions provides benefits, law firms must choose outsourcing partners carefully and maintain oversight of all financial operations. Close collaboration and clear communication with outsourced partners are key to maximizing the benefits of outsourcing while minimizing potential downsides like loss of control or reduced security. With the right outsourcing approach, law firms can improve efficiency and reduce costs, allowing greater focus on practicing law.

3. Jonathan Feniak, General Counsel and Head of Finance at LLC Attorney

As General Counsel and Head of Finance at LLC Attorney in San Juan, Puerto Rico, I’ve managed the financial nuances of a law firm, ranging from legal service pricing to cash-flow management.

First, payroll processing and tax preparation are the most common tasks outsourced due to their complexity and need for specialized knowledge.

Second, we often outsource financial analysis to better understand our financial standing and growth trajectory without investing heavily in a full-time resource.

Regarding the impact on operations, outsourcing these tasks has led to significant time and cost savings. For instance, outsourcing tax preparation has eradicated the need to constantly update our knowledge about ever-changing tax regulations.

A tangible example here is during my previous tenure at Colorado Online Attorney PLLC, where outsourcing reduced the finance-related overhead costs by approximately 20%, triggering a domino effect of increased operational efficiency. Conversely, the main challenge we face is ensuring the quality of the service, which we navigate successfully by setting clear expectations and conducting periodic audits.

4. Mark Pierce, Founder & CEO of Wyoming Trust & LLC Attorney

As a seasoned businessman, CPA, and attorney, my experience with financial management in law firms is extensive. Over the years, certain accounting services have shown themselves to be successfully outsourced, releasing the pressure on in-house teams and increasing overall efficiency.

Law firms typically outsource areas like accounts receivable/payable, tax preparations, financial reporting, and payroll functions. By doing so, they benefit from the expertise of specialists, improved focus on core legal tasks, cost savings, and access to state-of-the-art accounting technology.

While I was managing the estate planning section of a multinational law firm, we outsourced our accounts payable and receivable operations. This resulted in about 40% cost savings and enhanced financial reporting accuracy. Even in my present firm, Wyoming Trust & LLC Attorney, we regularly outsource financial reporting; this not only ensures accuracy but also helps us stay abreast of changing regulations.

However, law firms must understand that outsourcing comes with its own set of challenges, the primary being the risk of data breaches and the quality of services. They must ensure they engage with reputable service providers who demonstrate a strong commitment to data security.

I highly recommend outsourcing as a strategic move to improve a law firm’s operational efficiency. However, the strategy should be mapped out thoughtfully, considering the potential challenges and their mitigation plans.

5. David Brillant, Founder of Brillant Law Firm

As the founder of Brillant Law Firm, I have over 20 years of experience managing the finances of my legal practice. Outsourcing routine bookkeeping and payroll has reduced costs by over 30% and improved efficiency. Our outsourced partners handle tasks like payroll taxes, sales tax returns, and tax compliance, ensuring accurate and timely filing.

Outsourcing client billing and accounts receivable has allowed us to improve collections by 7% and cut past-due accounts by 50% through expert management. Our outsourced billing team focuses solely on maximizing billing and has developed strategies for the unique challenges of legal billing. Through close communication, we maintain full oversight while benefiting from specialized expertise.

Outsourcing truly excels in optimizing profits through budgeting, forecasting, and reporting. Our outsourced CFO provides insights into key metrics and KPIs, identifying ways to cut costs and boost revenue. Following data-driven recommendations, we raised rates over 10% while retaining clients. Comprehensive monthly reporting gives transparency into financial health, arming leadership with insights for strategic decisions.

Law firms greatly benefit from outsourcing specialized accounting functions to experienced partners. With oversight and communication, outsourcing allows law firms to focus on the law while optimizing efficiency, controlling costs, and maximizing profits. The key is finding the right outsourcing approach for your needs. My firm has leveraged outsourcing to transform our financial management and ensure sustainable growth.

6. Ben Michael, Attorney at M & A Criminal Defense Attorneys

It’s actually pretty common for law firms, especially smaller firms, to outsource their accounting. Legal work takes up so much time and effort, and a lot of firms don’t have the in-house manpower to also take care of accounting tasks with the level of attention they need. This is particularly prominent with smaller firms because they are more likely to not have the financial resources to hire full-time in-house accounting professionals.

Since accounting is something that you absolutely have to get done correctly, outsourcing is the best option. It costs less than having a full-time accounting team, but you can feel confident that everything is being done correctly and according to compliance regulations. There are accounting firms that specialize in providing accounting services for law firms, too.

7. Russell Rosario, Co-Founder of Profit Leap

As a CPA and former fractional CFO, I have worked with many law firms to optimize their accounting and financial management. Outsourcing payroll processing and bookkeeping has been crucial for improving efficiency and reducing costs. For example, one firm I advised was spending over $200,000 annually on an in-house bookkeeper and payroll administrator. By outsourcing these functions, they saved almost 60% and freed up internal resources to focus on higher-value work.

Outsourcing tax compliance is also common and helps ensure timely, accurate filing of returns. Law firms can avoid costly penalties by leveraging outsourced tax experts who stay up-to-date with changing regulations.

While outsourcing provides benefits, oversight and communication are key. Law firms should choose outsourcing partners carefully and maintain visibility into all financial operations. With the right approach, outsourcing certain accounting tasks improves efficiency, reduces costs, and allows greater focus on practicing law.

8. Ladislav Beganyi, Founder of Beganyi Professional Corporation Law Firm

I have outsourced certain accounting functions, which has improved efficiency and reduced costs. For example, we outsource bookkeeping, allowing our staff to focus on higher-value tasks. This cuts costs by over 25% compared to handling it internally.

We also outsource tax compliance, such as payroll taxes and business tax returns. Outsourced firms have specialized knowledge and ensure accurate, timely filing, avoiding potential penalties. This allows us to focus on practicing law.

Choosing outsourcing partners carefully is key. Close collaboration and communication maximize benefits like improved efficiency and cost reduction while minimizing loss of control or security risks. The right approach lets law firms focus on practicing law. For example, we chose an outsourced firm with expertise in law firm accounting that provides detailed monthly reports allowing oversight of all financial operations.

Outsourcing accounting has been crucial to improving our firm’s operations. The benefits of outsourcing routine functions outweigh the risks when proper oversight and the right partners are in place. Law firms can significantly cut costs, become more efficient, and focus on their core business.

9. Oliver Morrisey, Owner and Director of Empower Wills & Estate Lawyers

Outsourcing has been a game-changer for our firm. We’ve outsourced a few areas, but accounting has been a standout. Bringing in external accounting experts has been a wise decision that has significantly freed up our team’s time to concentrate on what we excel at, which is providing outstanding legal advice to our clients.

Before outsourcing, our in-house team was spending a significant chunk of time on bookkeeping, payroll, and financial reporting. These tasks, while essential, aren’t core to our legal practice. By handing this over to specialists, we’ve managed to recoup around 300 hours of lawyer time per quarter. That’s the time we’ve been able to reinvest in client consultations, estate planning, and complex casework.

The benefits extend far beyond the time saved. Our outsourced accounting team brings a level of expertise and efficiency that’s hard to match in-house. They’ve streamlined our financial processes, improved accuracy, and even helped us identify cost-saving opportunities. As a result, we’ve managed to reduce our overall accounting costs by 25% while enhancing the quality of our financial reporting.

10. Lyle Solomon, Principal Attorney, Oak View Law Group

Most law firms outsource many of their accounting functions to various extents to improve efficiency in the practice of their core legal services. Typically, outsourced services include bookkeeping, payroll processing, accounts payable/receivable management, financial reporting and tax preparation. In my experience, outsourcing these functions can bring immense benefits.

For instance, our firm outsourced our bookkeeping and payroll processing about three years ago. This gave our in-house staff substantial time to devote to strategic planning in finance and client billing optimization. Within the first year, we had a 15% reduction in our overall administrative overhead costs.

Another major advantage of outsourcing is that it opens up the gateway to specialized expertise. In outsourcing our tax preparation, we opened the door to expertise in tax professionals who were more attuned to new tax laws and regulations affecting law firms. Such expertise resulted in more accurate filings and a number of deductions we had overlooked in the past, saving us some $30,000 in taxes last year.

However, outsourcing is not free of issues. Confidentiality is an enormous concern in our business. When we initially reviewed outsourcing, we had to screen potential service providers for the safeguards they had in place to protect our data. We also had to check over our letters of engagement with clients to make sure we got the proper permissions to share financial information with third-party service providers. The other challenge we had was with integration. We outsource our bookkeeping function, and initially, they were unable to interface properly with our practice management software.

These are some of the problems, but overall, it has been a net positive for our firm’s operations. Our partners have timely and more accurate financial reports, which have enabled us to make proper decisions. Our collection rate has increased by 10% since we outsourced our accounts receivable management simply because there is now a more reliable and aggressive team following up on old bills.

Also Read: Law Firm Accounting: Best Practices for Financial Success

Impact of Outsourcing on Law Firm Operations and Efficiency

Several studies and surveys highlight the positive impact of outsourcing accounting services on law firms:

• Increased Efficiency: According to a survey by Clio, law firms that outsource accounting tasks report a 20-30% increase in overall efficiency. This allows lawyers to dedicate more time to client-facing activities.
• Cost Reduction: A study by the International Association of Outsourcing Professionals (IAOP) found that firms save up to 40% on accounting costs by outsourcing.
• Improved Compliance: Outsourced accounting firms have specialized knowledge in compliance, reducing the risk of errors and penalties. This has led to a 25% decrease in compliance-related issues among law firms that outsource.
• Enhanced Financial Management: Firms that outsource accounting services report better financial management, with 35% experiencing improved cash flow and more accurate financial reporting.

How Eternity Paralegal Services Can Help Law Firms with Accounting

Eternity Paralegal Services offers comprehensive accounting solutions tailored to the unique needs of law firms. By partnering with us, you can:

Focus on Your Core Competencies

• Free up valuable time: Let our experts handle the complexities of your firm’s finances.
• Enhance client focus: Devote more attention to legal matters and build client relationships.

Streamline Your Financial Operations

• Accurate and timely bookkeeping: Maintain organized financial records for efficient reporting.
• Efficient payroll processing: Ensure accurate and timely payment to employees.
• Comprehensive financial reporting: Gain insights into your firm’s financial health.
• Expert tax preparation: Minimize tax liabilities and ensure compliance.
• Robust trust account management: Maintain strict adherence to legal and ethical standards.

Contact us today to learn more about how we can support your firm’s financial success.