QuickBooks is the most common accounting setup at small firms, and for good reason. QuickBooks for law firms can be a great fit for firms that have low trust volume and are not systematically tracking profitability. When trust accounting and reporting needs get more complex, however, QuickBooks can cause friction.
Where QuickBooks for Law Firms Works
QuickBooks is excellent at its core function: general ledger and accounting for the standard small business. It handles inventory, invoices, and accounts payable with ease. Users have access to many integrations, and your bookkeeper, accountant, or tax pro will know how to use the platform.
QuickBooks tends to work best for two types of law firms:
- Law firms that look like a standard small business, like solo attorneys with easy bookkeeping or smaller practices that don’t need to hold funds in a lawyer trust account (or that only hold funds rarely).
- Law firms that have already invested in an in-house legal QuickBooks specialist to build out and maintain the custom workflows and controls that most law firms need.
Where QuickBooks Tends to Break
Many law firms’ business needs differ from the needs of the small businesses that QuickBooks was designed for. These are high-stakes differences: compliance and reporting obligations that go to the core requirements of the legal profession and the software.
Trust Accounting Without Safeguards
Lawyer trust accounting is the most important difference between how small law firms and other small businesses use their accounting software. Theoretically, QuickBooks can do trust accounting. In practice, however, things look a bit different.
- No built-in subledgers. In legal accounting software, built-in matter subledgers can automatically track movement of money in and out of the trust account. The workaround in QuickBooks requires users to manually create sub-accounts and track trust money manually.
- No built-in trust controls. Trust accounting is a complicated and exacting process, and it is easy to miss a step. QuickBooks has no built-in trust accounting controls and alerts to warn you when you are about to make a mistake.
- Trust reports are tricky. Attorneys must be able to quickly pull a report that accounts for every penny in the trust account, but that is not easy to do in QuickBooks. Thus, firms end up building workarounds and doing extra work.
- Reconciliation is manual. Most state bar associations require monthly three-way reconciliation of the trust account (and firms should reconcile monthly even if not required to do so). QuickBooks cannot do three-way reconciliations automatically, so users have to reconcile by hand in a spreadsheet.
Limited Matter-Based Reporting
Another important difference between small law firms and other small businesses is how law firms bill clients and track profitability. The hourly billing model is still the standard, and firms must map those hours to matters and invoices. Even firms that do flat-fee work need to accurately track time by matter to gauge profitability, set rates, and avoid excessive fees. And many firms need matter-based reporting to measure and improve profitability.
- Tracking is fragmented. QuickBooks is centered on invoices, not matters. It can be difficult to connect expenses to matters, and tracking matter profitability can require custom programming or workarounds.
- Basic law firm reports are missing. QuickBooks also makes it difficult to track timekeeper utilization and realization at the matter level. Even a standard work-in-progress (WIP) report requires a manual workaround.
- Strategic decisions are less informed. Without the core profitability insights that law firms need, you are left guessing at which practices or matters are profitable, how to staff your matters most efficiently, and how to price your services.
Limited Native Time Capture Options
QuickBooks was designed to track inventory and invoices, not billable hours. In addition to the challenges of relating time to matters (rather than invoices), the actual time-tracking features, like built-in timers and mobile access, are limited or missing. As a result, many law firms using QuickBooks have to purchase a third-party add-on with more robust time capture support.
QuickBooks also does not support LEDES billing natively. Even if your firm does not serve corporate clients, you may need to do LEDES billing for insurance companies or other large organizations, and you would need a third-party add-on to do so with QuickBooks.
Workarounds as a Way of Life
With custom programming, manual workarounds, and third-party add-ons, QuickBooks can handle most law firm accounting needs (up to about 50 lawyers). It is important, however, to add up all the costs, including:
- Workaround set-up costs plus ongoing labor to enable the workarounds.
- Additional subscription fees and setup costs for third-party add-ons.
- Trust accounting risks (depending on how much trust volume your firm handles).
7 Signs Your Firm Has Outgrown QuickBooks
Small law firms are under constant financial and time pressure. It makes sense to start with the product that your bookkeeper or tax pro recommends. This checklist can help you identify when it may be time to contemplate a switch.
- Trust accounting errors or near-misses. When you look at root causes for trust account errors, evaluate the role your software played (or failed to play).
- Unable to complete three-way reconciliations on time every month. If spreadsheet-based reconciliation takes too much time, it may be time to automate.
- Regular LEDES billing needs. LEDES billing workload can quickly add up, and legal accounting software can ease the burden.
- Too much time or cost to get key monthly reports, like WIP by timekeeper. The longer you wait to bill, the harder it is to collect. Easy reports can ease collections.
- Integration costs for third-party add-ons are adding up. The availability of integrations is a huge plus for QuickBooks, but keep an eye on the bottom line.
- Have to gauge profitability on gut feeling, not data. If you are struggling to grow your revenue, more insight can help you spot problems.
- Over 50 lawyers in the firm. Once your firm exceeds this threshold, your needs are likely too complex for QuickBooks.
What Legal-Specific Accounting Looks Like
Legal accounting platforms have a single goal: meet law firms’ unique business needs. Tabs3 Financials in Tabs3 Cloud enables trust accounting, AP, and a robust general ledger.
- Trust accounting is front and center, with built-in journaling and controls.
- Three-way reconciliations are automated (with appropriate human checks).
- Matter-based accounting and reporting is standard.
- Key law firm reports, like WIP, aging WP, realization by matter, and profitability by matter, are available right out of the box.
Tabs3 Financials also works with Tabs3 Billing, helping you capture more time with less work and reduce fee entry errors.