There are many misconceptions about bookkeeping. Because most attorneys did not attend business school or receive formal educations on how to keep the books, few understand how the task works. When you look at your law practice’s bookkeeping, you need to know how the process of bookkeeping works so that you can understand where the numbers that make up your financial reports come from. Here are 14 common misconceptions about bookkeeping:
1. You only need a budget if money is tight. Budgeting gives your money a purpose and a plan. It doesn’t matter if you only have one client or too many to handle, if you lack a budget, you can easily overspend or forget about expenses that only occur annually.
2. Bookkeeping is so easy a monkey could do it. While data entry is easy, it isn’t what bookkeepers spend most of their time on. A lot of their time is spent fixing mistakes and solving complex problems. For example if you do not file your use tax on purchases made out of state, you could be audited. Mistakes like this can cost thousands of dollars if not caught quickly.
3. What you deposit is equal to your income. Not all deposits are income. Some are transfers from one account to another and others are refunds from expenses that are not classified as income. Recording either of these as income is a mistake and would overstate your practice’s profits.
4. Bookkeeping is the same as accounting. While bookkeepers and accountants are on the same team, they don’t play the same positions. Whereas great bookkeepers help analyze data and show their clients how to grow their practices, accountants focus on filing taxes and auditing a business’ accounts.
5. Solo practitioners and small law firms can’t hire great bookkeepers. Great bookkeepers work with businesses of all sizes. We know that not everyone has a need for every service, so we offer a range of service options to law practices of any size.
6. Deposits always appear in your account when they should. Let’s say you received an authorization code from a client’s credit card but something happened on the merchant end and their card was never charged. As a result, this money never made it into your bank account. If you don’t double check your deposits, you could miss out on money that is owed to you.
7. It is okay to pay personal expenses out of a business account. While you may think that paying personal expenses with your business account is not a big deal, it is important to uphold the legal protection that your practice gives you. If you pay for personal expenses from your business account, you can lose this legal protection and become personally liable for lawsuits against your practice.
8. Bookkeeping is just data entry. While data entry is a part of bookkeeping, the most useful tools a bookkeeper can provide have more to do with their monthly analyses of financial data. They can help you assess how much cash flow you need to expand your law practice or point out that you are spending more on rent than the average attorney. These factors can help you to grow your practice.
9. Most contractors are not really contractors. There are strict rules about who is and who is not a contractor. While it may seem easier to pay someone as an independent contractor, there are huge consequences both criminally and financially for wrongly classifying employees as contractors. If you set their schedule, they are an employee and not a contractor. If you are their only client, they may be an employee.
10. Hiring a bookkeeper is a waste of money. You might think that you or someone in your law practice can handle your practice’s bookkeeping. However, if you lack the proper education, you probably won’t realize all the benefits that a great bookkeeper can provide. By helping you to budget and point out problematic areas that relate to your financials, a great bookkeeper can save you a lot of money.
11. You don’t need financial reports to know how your practice is doing. Just because you have a lot of clients doesn’t mean your practice is doing well. In order to increase your profits quickly and efficiently, you need financial reports that can identify areas where problems may arise.
12. Your sales don’t always match your cash flow. Although many small law practices look at their income statements (profit and loss statements) to determine how much money they have, they should really be looking at their cash flow statements. Income statements are formed on an accrual basis and show sales that you have yet to collect. Unfortunately, this may cause you to believe that you have more cash than you actually do. Cash flow statements show you the actual amounts of cash that you are collecting and spending.
13. Having a bookkeeper fixes all of your financial problems. While employing a bookkeeper to handle your practice’s books is a good idea, it isn’t the end all be all. Bad bookkeepers can harm your practice more than if you handled the task yourself. Make sure to hire a great bookkeeper who is also experienced in bookkeeping for attorneys.
14. Your financial reports are always accurate. Though some small law firms don’t question their financial statements, you should take the time to review your reports with your bookkeeper every month. During the review process, you may come across errors, like expenses being categorized wrong, that would otherwise go undetected.
Now that you know a bit more about bookkeeping, you may feel a little overwhelmed. How are you supposed to handle your bookkeeping and run your small law practice at the same time? Don’t worry. Legal Ease Bookkeeping, LLC can help. Click here to schedule a free 30-minute consultation