Accounting Tips

Lawyer

Trust Accounting in the Legal Industry

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Trust accounting, as any lawyer will tell you, is one of the two most critical pieces of accounting in his practice. The other, tracking billable hours and costs, may cost him money if performed incorrectly, but the repercussions of inadequate trust accounting can mean the end of the responsible lawyer’s career! Clearly, it is important to get this correct.

So, what is so special about trust accounting in the legal industry?

ALL MONEY IN THE TRUST ACCOUNT BELONGS TO THE CLIENT AND MUST ONLY BE USED FOR THE BENEFIT OF THE CLIENT

Trust accounts are set up differently from operating accounts and maintained differently from operating accounts. While all banks have bank fees for all business bank accounts, the fees for a trust account must be withdrawn from the operating account. If the bank does happen to make a mistake, this must be rectified immediately! Any shortages, including those fees taken by the bank, will need to be reimbursed out of the operating account when necessary to ensure all client monies are intact at all times.

About trust accounts, the types of accounts, and disbursements of any interest earned

A law firm will usually have a pooled trust account with mixed funds from various clients. This account may earn interest – but any interest received on this account does not belong to the clients or to the law firm. Interest earned on this account is to be remitted to the Alberta Law Foundation. They may also have a separate interest-bearing account that is maintained on behalf of a specific client. This account would be used in particular circumstances such as real estate transactions. Any interest earned on this account must be recorded and is to be disbursed to the client with the regular trust monies.

Special Reconciliation Considerations

When you reconcile the operating acount or, indeed, any other bank account, you merely reconcile the bank account and the general ledger to ensure they both match. However, trust accounts actually require a 3-way reconciliation. While you still need to ensure the GL and bank accounts reconcile, you also need to maintain a trust ledger detailing the source of all monies received, all monies paid out (payee, cheque number, client name/file number, and balance) and this ledger must also always remain in balance with the GL and bank account balance. A trust account reconciliation must be completed and signed off by the responsible lawyer within one month of the statement date. If this is not done in time the responsible lawyer must file for an extension with the law society. Failure to comply with this can cost the responsible lawyer his license to practice law, so clearly law firms are extremely particular about ensuring the accuracy and timeliness of all trust account reporting.

Additional trust records to be maintained

Not only must a trust reconciliation and trust ledger be maintained as above, but all law firms most maintan a ledger of all transfers between the trust ledger accounts, a general journal detailing all transactions, a billing journal/ledger, bank account statemnts containing duplicate deposits and negotiated cheques, a receipt book, in duplicate, recording any cash payments received by the client, record of cash payments made to the client (including client signature of receipt), and a detailed accounts receivable ledger showing all bills, receipts, and running balance for each client. These items, with the exception of the trust ledger account (which must be maintained in a format capable of being printed on demand) must be printed every month. In the age of digital technology, printing to pdf format is considered acceptable. This must be maintained for 11 years at the place of business.

The adequacy of record keeping for a trust account – and the necessity of ensuring that all funds held on behalf of clients are in the trust account at all times, including, if necessary, replacing funds out of the firm operating account for bank errors, NSF deposits from clients if funds have been disbursed on behalf of the client, and any other shortages however they happen – is paramount to all law firms and should be taken with extreme seriousness.

Bookkeepers working with law firms need to ensure they understand and comply with these rules at all times – and they need to be certain to immediately contact the responsible party should anything unexpected occur in this account!

Theft Control

6 Theft Controls Your Business Should Be Implementing

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Recently, my attention was drawn by another local bookkeeper being arrested for fraud. In this case, the bookkeeper had managed, over a period of six months, to embezzle $275,000.00 from the company she worked for, and the police believe there may have been other victims!

$275,000 over a period of six months. That’s crazy! That will destroy most small businesses, and a lot of mid-sized ones as well!   We all want to believe our staff is honest, but the sad truth is that if you leave an opening for theft, somebody (not everybody) is going to take advantage of it.  Ideally, the person who helps you with this is your bookkeeper, but clearly that is not always the case.  So, what steps can we take to protect ourselves?

Protect Your Bank Account

Do not allow unfettered access to your bank accounts.  Not ever.  If your bank will allow you to set up templates – use them.  Limit where and how your AP staff can send money.  Set up a second approving authority.  If you do not want to do it yourself, and you are too small to have a second accounting staff, consider hiring an outside controller.  Talk to local bookkeeping or accounting companies to see if they have the ability to serve in this capacity.  The cost for this can be quite affordable – and definitely cheaper than fraud if it occurs.  Have a person not responsible for entering and paying bills perform the bank reconciliations.  Again, you can use an external service for this if you are a small business.  Do not allow any employee sole signing authority on your bank account.  Either you sign, or two employees sign, with a third employee (or external party) reconciling accounts.

Reconcile and Review Everything

Again, if necessary, hire an outside service to oversee this.  Vendor statements should be reconciled.  Customer statements should be reviewed.  Suspicious revenue reversals should be questioned, as should suspicious payments.  All bank account transactions should be reviewed to ensure they make sense.  In the case of the person mentioned above, she wasn’t even that smart about her theft – she received email transfers, deposited them into the company bank account, then transferred them out to her own account.  A simple review of the bank transactions would have instantly caught this large amount of money being stolen!

Inventory Counts

If you are conducting regular inventory counts, you can catch discrepancies and monitor for employee theft.  Have service store clerks count high value, high theft items (lottery tickets, cigarettes, etc) at the beginning and end of each shift.  Implement periodic inventory counts to ensure acceptable loss levels.  If the loss starts to increase, conduct more frequent counts – and try to narrow down a reason for the loss.

Implement Cash Controls

Count cash yourself, or have a second person count cash in a designated area that is monitored by video surveillance.  Watch for cash shortage trends.  Implement a POS system that scans barcodes into a system.  This system can also be used as a double check for inventory counts to help reduce theft.

Use Purchase Orders

Requiring the use of purchase orders makes it more difficult for employees to engage in fraudulent purchases.  Monitor the purchase orders.

Control Vendor and Customer Set Up

Allow only one party, not the party entering invoices and printing cheques, to set up new vendors and customers.  This will prevent the employee from fraudulently sending goods or submitting false invoices from a fake vendor for payment.

Ultimately, when it comes to protecting your business and your assets from unscrupulous employees, we should hope for the best – honest employees – but prepare for the worst.  It can make the difference between success and failure for your business.

Why you need a bookkeeper

5 Very Good Reasons Why Your Business Needs a Bookkeeper

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Why do you need a bookkeeper?  Many small business owners ask themselves this critical question.

Two words:  time and money.

A qualified bookkeeper can save you both.  OK.  Time is a given – and wouldn’t you rather spend your evenings enjoying your family, friends, and hobbies than dealing with a pile of paperwork after working all day on your business?  How much money is that downtime worth?

But I said a bookkeeper would save you money!  So how do you save money by spending it on a bookkeeper?  Well, a qualified bookkeeper does more than just crunch numbers so you can pay your taxes and keep CRA off your back (although that is important of itself).

Managing Profit Margins

A qualified bookkeeper is an active partner in ensuring the success of your company.  Your bookkeeper can help you keep an eye on profit margins – and bring your attention to depleting profit margins.  This can allow you to take proactive measures to bring your profit margins back in line and keep your company on track.

Managing your obligations

Your bookkeeper will keep you current with vendors and government remittances.  This means reduced interest, reduced penalties, and, when it makes sense, this can allow you to take advantage of early payment discounts – putting money back into your pocket.

Managing your income streams

Your bookkeeper can help you manage your credit granting processes.  It’s a great feeling to get the job but, let’s face it, in the business world, a job well done is not its own reward.  Getting paid is!  Your bookkeeper can manage your receivables, ensuring only worthy clients get credit and making sure you get paid for the work that is done.

Managing your cash flow

Your bookkeeper can keep a critical eye on incoming and outgoing funds and help you ensure you always have cash on hand to meet your obligations.  This means no sudden credit card use, your debt and lines of credit can be managed, and you don’t have to scramble to make payroll.  Your bookkeeper will help you make sure you have it in the bank.

Processes and Controls

All businesses, whether large or small, need processes and controls.  Your goal is grow your business, but a business that grows without implementing controls and truly understanding their numbers, profits, and ratios is at risk of failing from too much of a good thing.  Processes and controls, implemented at the start, allow any small business to take advantage of opportunities as they present themselves and be well situated to handle their growth seamlessly.

The question isn’t “Why do you need a bookkeeper?”  The truth is that you can’t afford to be without one!

WIP

Work in Progress in the Construction Industry

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Work in progress is a method of valuing inventory or projects in progress at the end of a reporting period.  In the construction industry, this calculation allows you to monitor the progress of your jobs and the cash flow relevant to them, provides a method for more accurately ensuring your costs remain on track through the life of the job, and ensure costs and revenues are adequately matched, which provides a consistency in financial statements that will provide a sense of comfort to banks and lenders.

A work in progress report compares the costs incurred, the costs anticipated, and the contract value, allowing the business owner to monitor his project and know immediately if his project is incurring major cost overruns, figure out why, and correct the issue before the project becomes a major money drain.  The larger the project, the more difficult these cost overruns can be to spot – and the more likelihood of them becoming major disasters.

A work in progress report allows a business owner to analyze his billing practices, ensuring he is not underbilling and causing cash flow shortages for himself.  Similarly, during negotiations with the contractors who, in an effort to keep their cash flow healthy, will often dispute the completed portions on a progress invoice a work in progress can allow a subcontractor to confidently support his billing position.

Because a work in progress provides a method for allocating revenues to the months the costs are incurred it eliminates wild swings in profitability.  This consistency keeps lenders comfortable – which can be important when you’re trying to finance a major project.

Without a work in progress, it is virtually impossible to be certain of your margins or your profitability.  Large material purchases at the start of a project that have not been used can drastically reduce profit margins.  Consistent inadvertent overbilling can lead business owners to believe they are far more profitable than they turn out to be when the project is done.  This misinformation can lead to decisions that cause stress on a business.

And, finally, at tax time a work in progress calculation can prevent the business owner, who is in an overbilled state, from paying taxes on a profit that he doesn’t really have.

Work in progress is critical to the informed decision making of any construction professional, especially the business owner trying to expand his market – as most of us are.

Cash flow

Cash Flow vs Revenue

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I have had business owners, baffled, ask me “Why does my income statement show I’m making money, but I have none in my bank account?”

And that’s a very good question. Why does it look like you’re making money, yet your bank account is low, or even overdrawn? There are a number of things that could be causing this – and we’ll touch on a few of them here.

Holdbacks – these are a cash flow killer in the construction industry. If you are following my earlier advice and recognizing the revenue for the holdbacks, there will be an increased discrepancy between cash flow and profits. Make sure you review your uninvoiced holdbacks regularly, keeping in contact with the client to ensure you invoice this money as soon as possible.

Accounts Receivable turnover – Great! You’ve made the sale, but it is even more important to collect it! If it is taking too long to collect your money – if a large segment of your receivables are over 90 days – you are heading for trouble. Make sure you stay on top of your receivables – or better yet, implement good credit granting and management policies right off the bat. Bad customers can kill a viable business quickly, costing them the time and money to provide goods and services they never receive payment for.

High inventory – sure you need to keep inventory on hand, and there may even be value to buying larger than necessary quantities in terms of volume discounts – but keep a close eye on the turnover rate to ensure you are maintaining a balance between the inventory you need, the price you’re paying for it, and your cash flow. Having inventory in hand can help speed up production, but the inventory can’t pay the lights or salaries. Make sure you maintain sufficient cash flow levels.

Revenue recognition and underbilling – in the construction industry, it’s often a negotiation between the subcontractor and the general contractor as to how much of a project is complete for billing. If you are underbilling, your cash flow will suffer. A properly completed set of records in the construction industry includes WIP, which will properly allocate revenue to costs, but make sure you keep an eye on the WIP. If your WIP is consistently adding revenue to the bottom line, you are likely underbilling your jobs.

These are just a few of the reasons for discrepancies between cash flow and revenue. Some others may be heavy shareholder draws and personal spending, acquisition of large assets, and a heavy debt load – the principal portion reduces cash, but not your income.

If you are having cash flow issues, you should be sitting down with your accounting provider to determine exactly what the cause is and how to minimize it. Your business may depend on it.