When Peggy Gruenke’s business CPN Legal takes on projects with lawyers to implement new accounting technology and processes, she often finds a mess to clean first.
Many firms don’t have adequate finance and accounting habits or make the mistake of hiring bookkeepers without experience working with law firms. Those mistakes, if not cleared up, can put law licenses in jeopardy.
Host Adriana Linares has Gruenke walk through best practices in setting up a business, from getting an EIN to deciding whether to incorporate as an LLC or a partnership. These steps help in determining the types of law practice management and accounting systems to choose.
The two also discuss the negatives and positives of various practice management and accounting tools on the market.
And in this episode’s New Insights segment, brought to you by Nota, Eric Ganci returns to answer Robert Southwell’s second question – what are the must-have trial prep reference materials new attorneys should be keeping close at hand?
Previous episode referenced: Money Management 101 for Solo and Small Firm Professionals
Peggy Gruenke is co-founder of CPN Legal in Cincinnati.
Special thanks to our sponsors, Lawclerk, Alert Communications, Abby Connect, and Clio.
Oh, The Messes We See
Adriana Linares: Before we get started with today’s episode I want to make sure and thank our sponsors, Alert Communications, LAWCLERK, Clio and Abby Connect.
Advertiser: So if I was starting today as a new solo
Adriana Linares: Hi, everyone and welcome to another episode of New Solo on Legal Talk Network. I’m Adriana Linares, I’m a legal technology trainer and consultant. I help lawyers and law firms use technology better. My guest today which I’m pretty excited about because this is a topic everyone’s going to love is Peggy Gruenke and Peggy is an accounting and finance expert for lawyers. Hey, Peggy.
Peggy Gruenke: Hi, Adrian. Thank you for inviting me on your show today.
Adriana Linares: Well it’s a topic that I feel like I don’t cover enough and it’s really important, so I thank you for your time. Before I dig in too deep into the conversation, I want you to not only tell everyone a little bit about yourself and your practice and what you do and how you help lawyers but I also want you to spell your last name in case somebody wants to Google you after hearing this they know how.
Peggy Gruenke: Awesome. So the last name is G-R-U-E-N-K-E. So it’s German but we have bastardized it to be American, grenky and not grunky. So thank you for that. Yes, my background is I’ve actually been in the legal world for about 22 years. I started as an IT consultant, that was my first career and then I got into the world of bar associations. I was director at a bar association which led me down the path eventually of managing law firms.
Adriana Linares: Oh I didn’t know that.
Peggy Gruenke: Yeah, so I managed a couple midsize law firms, which was really great because I got a little flavor of other law practice management softwares that were out there before the onset ten years ago of all the cloud-based applications like Clio and MyCase and PracticePanther and all of those. But my business CPN Legal really took off about seven years ago when I kept getting a lot of calls from solo lawyers to help them set up their virtual law practices, get them started with software on them, what else do I need, really kind of mentoring them. I did a lot of that since law school mentoring and really teaching the business side of the law stuff that they don’t hear a lot about and then about seven years ago when I started CPN Legal, my husband who’s has been an outsourced CFO type person was brought into the business of the legal side, so we’ve been a team.
Adriana Linares: Family business.
Peggy Gruenke: Yeah, family business and now we have nine employees so there’s eleven of us here in Cincinnati and we love what we do for lawyers.
Adriana Linares: And you work nationally and one of the things that I love about what you do is — and this might be a little early in the conversation but I just want to say it, is you help us move from old, what you mentioned earlier which was pre-cloud practice management programs. I like to call those traditional practice management programs versus modern and one of the things you’re good at doing is that transition plus then really helping with the accounting side and I mean specifically helping to move data from and give me an example, why don’t I let you give the example because I feel like we’re always looking for this. If I’m coming off of Abacus and I want to move to Clio, now Clio will do a lot of the data migration themselves but then getting it over to QuickBooks or something like that is part of your expertise as well.
Peggy Gruenke: Yeah, that’s definitely our sweet spot right now and there’s a lot of those conversions going on right now. I blame it on COVID but we’ll take it. So yes, so what we tell lawyers is that when you’re converting from what I call a traditional server based system which is an enterprise-based system is while the Clio’s of the world can bring over your law practice management data as far as contacts and matters and time entries and notes, on the financial side of it, it’s really important to distinguish too because you can’t bring into QuickBooks all your previous years’ worth of financial data it’s just not, you just can’t do it.
Adriana Linares: And I just want to fill in a blank hole here just to make sure this is clear and especially the listeners who’ve never used traditional practice management program, it’s the old genie that’s popped out of the bottle which is this. The traditional practice management programs would do everything for law firms including the accounting and the bookkeeping and writing checks and managing ledgers. In today’s more modern world those programs are a little harder to find, they’re not impossible Zola, CosmoLex, Actionstep and Centerbase —
Peggy Gruenke: And Soluno.
Adriana Linares: And Soluno do that, but very popular programs like Clio and Rocket Matter, they leave the accounting to QuickBooks. So what you’re saying is if you’re going to come from a traditional practice management program that had everything baked into one, now you’ve got to move that data out or at least not move it but transition to a new way of doing it which would be into QuickBooks because it’s easy to take out calendaring, contacts, names, addresses and put that into Clio but now the problem and this is where your expertise is which I always turn to you when I have these clients is what do we do with the financial data that’s either historical and then either keep it somewhere or on an ongoing basis. Did I get that right?
Peggy Gruenke: You did get that right, yeah. And this is really a good time frame to be talking about this because we’re in the first quarter of the year and it knows we have lots of stuff going on right now. What we basically do is we rebuild the current year inside of QuickBooks online, okay. So we’re going to take all of your data as of 2021, 2021 is going to become your financial center moving forward. And we don’t want to file taxes having financial information in two programs so we bring it all over, we rebuild the year in QuickBooks online and it sounds very overwhelming and it’s not, it’s really quite simple to do. I say that because we do it all the time but —
Adriana Linares: Right.
Peggy Gruenke: The important piece is at the end of 2020 when you filed your taxes and submitted your final balance sheet and your P&L statement to your tax person, we have to take what’s called those ending balances and we move them over to QuickBooks as starting balances so that all your financials match from the year end of 2020 to 2021.
Adriana Linares: Even though it’s two separate programs you make them match, right?
Peggy Gruenke: Yes, we make them match. And then and then we always advise people. Most people that are coming, Adriana, from this historical server-based systems are still going to own that software on their server so you’re still going to have access to that financial data, just make sure it’s backed up. What you do lose and I know it’s kind of a shame is you lose the ability to do like a previous year comparison.
Adriana Linares: Yeah.
Peggy Gruenke: Okay, now we have done things for bigger law firms that actually want to maintain that previous year comparison and we have a unique way of bringing in the prior year data into QuickBooks so that they have that flexibility. It’s just a digging a little bit deeper into what we can do for them.
Adriana Linares: This just means it’s going to cost them more money, but it’s probably worth it if they want it, but at least it’s endurable.
Peggy Gruenke: Exactly.
Adriana Linares: Right?
Peggy Gruenke: Exactly. yeah.
Adriana Linares: Very good. And I think you know a lot of times what I will recommend, you just said that you’re going to hold on to that data, you’re probably still going to have the server or the workstation that the information was on, what I tell law firms to do after we’ve taken all that information out of there is air gap it, meaning that server if it has no other purpose than being there for legacy and historical purposes you disconnect it from the internet to prevent a possible hack or ransomware attack. It can sit there till that hard drive dies just running but it doesn’t need to be connected to the internet if it has no other purpose and that’s just I think that creates a safety net for them to be able to go back and look at that data but a double safety net because it’s not connected to the internet but at least the information is there if you need to go back.
Peggy Gruenke: Yeah, so the other thing that was been on my mind when we first started talking about maybe on the show, when they come to us what are their burning questions about finance and accounting needs, right? And I have to say 2020 was a very unique year and your listeners will probably understand this because they may have lived this. It was the PPP loans.
Adriana Linares: Sure.
Peggy Gruenke: So now it’s March, now all this money is available, but what we found were people were not prepared to apply for a PPP loan because they didn’t have good financials. They couldn’t even put together a P&L, they couldn’t even provide the data to submit the P&L because they didn’t have their QuickBooks reconciled, it was a mess, things were all over the place, so really it was a unique year for us and that we were helping a lot of solo lawyers out there, small firms who needed this money to get their QuickBooks what we call cleaned up and up to date so that they could actually produce the proper reports, getting the payroll data properly out of their other payroll system, getting their P&L statements out of their QuickBooks. So that really was a really aha moment for us when the phone kept ringing so much and I was like well this is why. So, when I’m talking to new solos getting them set up I’m kind of using that as a learning experience for them because they’re like do I really need to get QuickBooks, do I really — I’m like yes, you do.
Adriana Linares: Yes, you do.
Peggy Gruenke: You don’t know what emergencies down the road from you that you’re going to need this and COVID was the perfect storm, right?
Adriana Linares: That’s great. So the lesson here is a lot of times we’re a little loosey-goosey with our financials because maybe you are a solo or you’re just a solo and an assistant or what I jokingly refer to as micro law firms, right.
So there’s what we call large medium, small and then for me I call a micro law firm really when it’s a solo plus one or two. So the lesson is it’s really important that the business health and the financial health of your law firm is set regardless of what you think may or may not happen and lessons learned disasters can be avoided or at least we can ease the dealing of a disaster by making sure that you have your financials right.
Peggy Gruenke: Yeah, right.
Adriana Linares: So let me ask you this Peggy, when a new solo or new lawyer or a lawyer who’s leaving a big firm going on his own says where do I start what do I need. I start with five very basic things that they need, so I’m going to rattle them off to you and then you tell me either what you add on and then I do have a follow-up question to my own response, which is going to be I always say look you have to have Office 365, you have to have Adobe Acrobat DC, you have to have a practice management program, you have to have a good way of managing documents and emails and that might be the same as a practice management program and you have to have QuickBooks then someone will —
Peggy Gruenke: I like your list.
Adriana Linares: –someone will say to me, well what about FreshBooks or Kahuna, so I want you to respond so that when somebody says to me what about FreshBooks — wait, Kahuna they use Xero, sorry.
Peggy Gruenke: Yeah, yeah.
Adriana Linares: It’s Xero that I’m thinking of, so Kahuna is a company that specializes in helping lawyers and law firms but they use Xero. So what I say is please go with QuickBooks. It’s the most ubiquitous. If you find a bookkeeper or you have to get a new one or yours retires or something, you’ve really got to go with the — that’s my advice, what’s yours?
Peggy Gruenke: So, I love your list but my list starts before your list, okay.
Adriana Linares: Oh good.
Peggy Gruenke: Yeah. So new lawyers starting out, there’s certain things that they have to do, so we’re big on checklists, we run everything through checklists, right? So first of all you need to get an EIN number.
Adriana Linares: Oh okay, right. Let’s start with the super basics, yeah, good.
Peggy Gruenke: Super basics because this surprise you when they come to us it’s like oh do you have your bank account set up yet.
Adriana Linares: So you need a banking relationship.
Peggy Gruenke: Yeah, get your EIN number, which you need before you can create a bank account. Get your bank account number set up. Determine how you’re going to be incorporated, are you going to be a partnership, are you going to be an LLC that’s going to be an S-Corp because that will determine if you can do payroll to the business, okay. So that choice of entity is important for setting up your business then after we get that set up then we choose our accounting software, okay. And now we’re ready to launch into that and I always actually suggest that they choose their accounting software in parallel with their law practice management software because those two are going to have to talk together, all right.
Adriana Linares: Yeah, wait, let me emphasize that. We want your practice management program to talk to your accounting and financial programs. You should not be doing double entry and this day and age nobody should be doing double entry because things talk to each other.
Peggy Gruenke: Exactly.
Adriana Linares: Okay, go.
Peggy Gruenke: And some talk better.
Adriana Linares: Yeah, please don’t involve Zapier in this please.
Peggy Gruenke: No. No Zaps please, Zaps are not good when it comes to sending financial data back and forth. So you need to pick your law practice management software that has a solid foundation, a good integration with QuickBooks online that’s reliable and doesn’t break and has the flexibility to bring over the data in a different — what I call it mapping, mpping the fields over, okay. So we build the mapping, connect work with Clio, we work mostly with Clio. I do have PracticePanther and MyCase clients as well but I am having experience with multiple ones, Clio hands down has the best QuickBooks integration there is out there, I mean you just can’t. And we get the privilege of being on their development team and help them develop in the next new features and test groups so we know what’s coming up and we know what they’re working on and constant improvement. So choosing their law practice management software is important and always choose QuickBooks.
Adriana Linares: So just to your point. Please just always choose QuickBooks do not let some rogue consultant and I don’t mean legal consultant because most of them would not push you in a different direction but you know an advisor push you to anything else, okay get settled, check.
Peggy Gruenke: Yeah, QuickBooks. And that becomes important because if a solo starts out and when help on board a lot of solos and I’m happy to teach them the basics and get them going because I want them to learn their business, I want them to understand some stuff as they build their business but knowing that they’re going to be too busy at some point in time to do this accounting work or this bookkeeping work or wherever you want to label it. So when they’re ready to reach out to somebody to help them, the options for finding somebody that knows FreshBooks and Xero — Xero is probably a unique one but not many people — you know you have many options, but they also have to know law firms.
Adriana Linares: Right.
Peggy Gruenke: So I think the biggest and one of the things, one of the questions we had prepped about talking about now and I don’t know it makes sense to go into this right now or not but what are we seeing when we’re taking over bookkeeping work for clients like what kind of messes are we getting into. So the types of messes we have are bookkeepers that don’t have any idea how to do law firm accounting. They’re booking trust account transactions to fee income, they’re booking expenses in the trust account to true expenses on the P&L, there’s so much stuff going on so when you’re choosing that bookkeeper QuickBooks is a great product, works with Clio and you want somebody that understands law firm businesses.
Adriana Linares: Can I just say one of the biggest things I used to hear, I feel like I hear it a little bit less and less is QuickBooks doesn’t work for lawyers and law firms and I would always say I know you’re so special you snowflakes you or maybe you just don’t have someone who understands how QuickBooks can work for lawyers and law firms. So are you pretty much saying QuickBooks will work? You just have to have it set up right and you have to have somebody who knows what they’re doing in a legal environment.
Peggy Gruenke: Correct. QuickBooks is the number one accounting software in the world for small businesses for a reason, okay.
Adriana Linares: Yeah, it’s like somebody trying to tell me word doesn’t work for them, I mean —
Peggy Gruenke: Yeah exactly. It’s like — it works. So the key to that working though, Adriana, it goes into a lot of things, its understanding the foundation of any accounting system is what’s called your chart of accounts, okay. You have to build out your chart of accounts to fit your business so we have a basic chart of accounts that we use for all of our solo small firm lawyers that we upload into QuickBooks and then they’re ready to go to work.
Adriana Linares: Excellent.
Peggy Gruenke: And it’s ready to go and everything’s there to handle the trust accounting, to handle the integrations with the Clio softwares of the world and to properly track your income, your cost of goods sold, your client advance costs and all your expenses.
Adriana Linares: That’s great. This sounds just like a good place to stop for just a few minutes, listen to some messages from some sponsors. We’ll come back and finish this conversation. It’s been very enlightening, so far great. We’ll be right back.
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Adriana Linares: Okay everyone if you listened last month we introduced a new segment called New Insights where a newish attorney asks an experienced attorney some questions and I want to make sure and thank Nota powered by M&T Bank for their support of this segment. To learn more, please visit trustnota N-O-T-A, so it’s trustnota.com. Terms and conditions may apply. We’re going to hear Robert’s second question posed to Eric Ganci. All right Robert let’s hear it, question number two for Eric.
Robert: So I’m just wondering as far as trial prep specifically, what are some of those recommended practice manuals, reference materials that are just kind of gold. I know Imwinkelried is a great one for evidence. Do you have any other suggestions for new attorneys looking to move up the learning curve?
Eric Ganci: So there’s a few things to think about with what books that you want to have on your council table at trial. Books that can be very helpful are going to be books about evidence, books about criminal procedure or civil procedure. If you’re in California, CEB has some really wonderful procedural books to go by but if you’re in different states and that you may have good secondary resources for that or not. In general, this is what I recommend is start off with going to the law library and it’s not so much what books do you need to have like right away, it’s more about finding out what books that you will find out that you need to have right away. Because when I first started doing trials, man I would bring in like just wagons full of books, not a wagon, not like a radio flyer, but it would just be like a lot of books and you will be courting all the stuff around and then you set it up all on your table and at the end of the day you got to like cut it all out if they need to be use the courtroom for something else.
And it’s just a lot of stuff to be lugging around although a lot of books they make digitally now which makes things so much easier. If you go to the library and if you check out what books they have on trial stuff and then you’ll see what books that you’re starting to have — that you’re starting to use over and over and over again and then if there’s some books that you’re like I have to have this or I’m at the library every single day then maybe you invest in that. But there’s things to consider about what books to have because books are pricey and then you have to update the books either buying the entire new book series when it comes out usually on an annual basis or if they send you updates you have to pay for the updates for it, so it just it turns into a lot of legwork which if you have a good public law library system, they love it when you use the resources, so I would recommend starting with that. Outside of that it’s not uncommon at all to have a really weird issue come up at trial so whatever the practice area is for the trial that you’re doing and whatever secondary source you have become comfortable with, then you may want to keep that stuff handy either at council table if you want to have it at council table with you or just keep in your car if you’re driving to court, that way you can like pop out and like look at it in your car when you’re on a break or something because it happened quite a bit where it would be a really weird issue that would come up and then on the other side of the view of the prosecutors they would have like tons of ability to like look stuff up through like (00:21:45) stuff and they had access to the internet and all these kind of things and I had none of that. So you know sometimes it would be beneficial to have some ability to look stuff up. It’s more of a question of not so much what do you want to have for trial, it’s more of what books do you find that you use always and so the books on criminal or civil procedure and evidence, those are going to be really main ones and then any books that are just in line with whatever practice area that your trial is.
Adriana Linares: I hope you all are enjoying new insights as much as I am. I got some feedback from Robert on Eric’s first answers to his questions. He was so grateful for his time and expertise and I want to do the same and thank them both for their time and now we’re just going to listen to a couple messages from some sponsors.
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Adriana Linares: All right everyone we’re back and I’m here with Peggy Gruenke. Peggy is a financial expert in the world of legal technology and when I get new lawyers and law firms that are looking for help with bookkeeping, accounting, finance, how to get QuickBooks to talk to their practice management programs, I help up to a certain point and now I’m just sending them to Peggy because I don’t do accounting and I’m happy now to — it would be a mess if I tried to help and I really like referring experts. Peggy I meant to ask you before I dive back in, do you all do month-to-month bookkeeping for lawyers or you more just part of the process of getting them on-boarded and set up and then you let them fly.
Peggy Gruenke: We do both. We go through the onboarding process and then the real heart of our business is the monthly ongoing bookkeeping and producing of financial reports, we deliver a package every month, go over it with them. We do a lot of cash flow reports. This is a big item lately for solos and we can get into that later but really understanding where their business is at.
Adriana Linares: Excellent so I want to double back for just a second and ask you about the messes so you said we clean up a lot of messes and last year was a lot of mess-up clean-up. You mentioned just not having the accounting either updated. I bet you encounter people that just don’t even have QuickBooks at some point, right, like they just hadn’t gotten to that point yet. And then we mentioned that sometimes the bookkeeper isn’t very knowledgeable about how law firm’s books need to be kept. What other messes can you tell us about that we want to avoid and not come to you with?
Peggy Gruenke: The biggest mess we see is people’s trust accounts and it’s really sad because this is the one that has their law license on the line and we’re in the process now of cleaning up a few of these messes and what we see is — and to your listeners, I don’t know how deep we want to get into this but your trust bank account is really a liability. That’s where your liabilities sit. So, on your balance sheet you have assets and you have liabilities. Your biggest liability that you’re holding on to is other people’s monies and anything that happens in that trust bank account cannot hit an income account, it cannot hit an expense account. Those are things that are reserved for a P&L. Those things only hit what’s called a liability account and what we see when we look at a trust bank account is we’re looking at these transactions and we see things booked to bank fees, that’s a big one or they order checks and they charge the checks to the trust account. You can’t do that kind of stuff. Everything has to stay within a liability account inside that, so we have to go back. A lot of things have they’re doing transfers, so when they transfer funds, so you do your billing, we’re doing our billing and we do a lot with billing for lawyers too by the way, and you’re ready to transfer your trust monies and your law practice management software has taken care it and applied them to your invoices. But on the accounting side of it in your books you still have to move that money from the trust account to the operating account, right? Well, we see a lot of people doing that incorrectly and which causes trouble with what we call is a three-way match reconciliation report.
So when we take on a new client and we notice the mistakes in the trust account, the first thing we do is prepare what’s called a three-way match reconciliation report, which is a unique, it’s not unique but I think our process is a bit a little bit unique, because we’re going to identify the errors right away and fix them before we get too farther down the path with them. And a lot of times right now we have to go back and clean up 2020 because they’ve over recorded income, right? So they’re going to be paying taxes on things that recorded incorrectly because their bookkeeper didn’t know how to do them, so that that’s a big mess that we clean up unfortunately. The other thing that we see a lot of is understanding client advanced costs. Now this is important for you guys because you’re paying upfront for these expenses and you need to make sure that you’re getting reimbursed for these later down the road. So how you’re recording them in your QuickBooks is important to have your chart of accounts set up correctly to capture those as expenses. We actually call them cost of goods sold and this is a new terminology that speaking of PPP loans. The PPP loan application they all have what’s your cost of goods sold.
Adriana Linares: We don’t sell goods.
Peggy Gruenke: What you do it’s called client advanced expense. So being a way to properly see that monthly on your P&L statements the monies that you put out for client expenses and separately the money that came in to reimburse yourself, so we call that recovered income, recovered expense income. So we see a lot of people confused about that when we take them on board and so we just really clean up their chart of accounts so they can have a better visual picture of all those transactions. The other thing that we see a big issue with is AR, a lot, a lot of big AR out there that hundreds of thousands of dollars’ worth that just needs to get off the books.
Adriana Linares: I was helping a firm a couple weeks ago and we were looking at their old data and he said there’s 120,000 dollars of unpaid bills in here. You know, he was surprised and I thought I can tell you right now if a client owes me one dollar because first of all I’m not a lawyer I have a simple different business but I can tell. I said you’ve got 120,000 unpaid dollars, that’s a whole salary for someone. How is this possible but it happens.
Peggy Gruenke: That’s a great way of putting it, right? Its tuition for your kid’s college for next, you know, whatever.
Adriana Linares: My god, and how are you going to go back now and get it. Some of that AR that we were looking at was eight, nine, ten years old. I thought, well, bye.
Peggy Gruenke: Yeah, okay. And there’s no such thing as bad debt on a P&L statement for lawyers by the way. They’re cash based systems so you only are realizing the income when you receive it. But anyway, so getting a better handle on preventing these AR issues ahead of time but also just getting rid of the AR issues that are out there and we say let’s start with a clean slate. Lessons learned, what are we going to change to make sure that this doesn’t happen again. My personal belief is it all starts with the fee agreement letter because in that fee agreement letter that’s where you have to identify financial obligations and be really crystal clear with your attorney what your expectations are, are you taking retainers and does a client understand what a trust account is.
You use these terminologies that they really don’t understand but that’s one of my big pet peeves is people that don’t have good fee agreements with the ability to do that.
Adriana Linares: Do you suggest that they add a glossary of sorts to the fee agreement? I mean it sounds silly but that’s totally something I would do I’d add an appendix with a glossary that explains what those things are unless we’re going to talk about it over the phone during a consultation.
Peggy Gruenke: Well you always talk about in person that’s the other, that’s a great point because you can’t rely on them re-reading that fee agreement, they’re going to glance over those financial obligations and in your terms, in your retainers that you’re requesting, and I’ll tell you what we’re seeing a big onslaught of lately is evergreen retainers, Adriana, a big push —
Adriana Linares: What does that mean?
Peggy Gruenke: That means that you set up an arrangement in your fee agreement that a client is required to keep a minimum trust balance of a thousand dollars and as soon as that trust balance falls below a minimum, they have to replenish that trust back up to that minimum so that you always —
Adriana Linares: In order for you to keep working on their matter.
Peggy Gruenke: Exactly, exactly. And I always tell lawyers I mean like when you go to the doctors, you go to the dentist they will have payment upon receipt, right? You guys are not in the business of loaning money to people, okay. You’re in the business of being a lawyer and that expectation has to be set. But we’re really seeing a lot of success from a cash flow perspective with our solos that we’re setting up on these evergreen retainers and with taking the credit card payments too.
Adriana Linares: Right. Well that’s in a whole another conversation I still have a lot of lawyers that don’t take credit card payments.
Peggy Gruenke: The other issues we see coming, you’re asking about issues we see —
Adriana Linares: Yeah, more messes. Give us the messes.
Peggy Gruenke: More messes is inconsistent revenue, okay. We’re looking at them and this is a different type of mess. It’s not a mess because their books are messed up, it’s a mess because they haven’t gotten good habits into their billing systems. So we’re seeing — we can’t project future revenue if we don’t have a good billing process in place to help them decide how much money do you need to cover your next six weeks of expenses, all right. So we know what your six weeks expenses are because we built what’s called your monthly nut, so we know what you need to come into but what we don’t know is your monthly revenue because you’re not tracking your work in progress properly, you’re not getting your time entered and you just aren’t getting your bills out on a regular basis so we have switched a number of our solos from particular small ones to bi-weekly billing so they’re actually invoicing twice a month.
Adriana Linares: I think that’s great.
Peggy Gruenke: For people listening out there if you want a nice profitable bill or business, you invoice twice a month and then what happens is if you’re training your clients to expect that, right? And you’re getting billed, you’re communicating with them more frequently, right?
Adriana Linares: They like that.
Peggy Gruenke: Another complaint I get is that they never hear from their lawyer. So there’s a lot of good things that happen because of bi-weekly billing and one of which is that you get paid more frequently.
Adriana Linares: Is this a good time for me to just make a case for practice management programs, so I’m thinking about Clio because like you I favor Clio. I know there’s a lot of other good products out there, so I’m going to just mention Clio does these things but I will also assume that a good practice management program does them too. One of those is I know that Clio will remind the users inside of a firm when a retainer has dropped. So if you are going to work on evergreen retainer you don’t have to sit there looking at all your matters to see where it’s dropped Clio will send a reminder when it has dropped to a certain amount, is that right?
Peggy Gruenke: It is right and there’s also a great report out there Adrian called the matter — the trust replenishment report, trust management report. So we run that right before we’re going to do a billing or right after a billing cycle. So in one report we have a report that shows us everyone that’s below their minimum balance so right after sending out invoices we turn right around and prepare their inside of Clio your trust requests invoices and get those out too.
Adriana Linares: And two, you mentioned you know that the work in progress isn’t being tracked, bills aren’t going out and yet again ways that you can get helped by technology and doing all that is by having a practice management program, I’m sure you won’t be surprised to hear that obviously a lot of lawyers still think I’m just a solo I don’t need a practice management program that makes me crazy, so if you’re struggling with these things and you haven’t gotten a practice management program, it’s really important that you do and if you do have a practice management program and you’re still struggling it’s important for you to get help in getting to the point where these aren’t issues anymore and I think the next topic Peggy is kind of exactly where you were which is reports. It’s important to get reports and look at reports and I also want to go back real quick and remind our listeners that there’s another good episode we did about a year ago maybe a little bit more so you can Google or go back to the list but it’s a long list but look for new solo podcast then put in the name Amanda Moore.
Mandy Moore come on a while ago and give us the money management 101 for solo small firm professionals, so she’s a CPA and she came and gave us a lot of the basics that will help you understand and better process what Peggy is saying. So it’s just a good supporting episode to go back and listen to. Okay, Peggy, we were talking about reports.
Peggy Gruenke: Yes. so we have two places we can get reports. Out of your QuickBooks program is going to be what your financial reports are going to be that you’re going to need for your taxes at the end of the year as well but it’s also the reports that kind of give you a — tell the story of your business so we have two types of reports in QuickBooks, one is called a balance sheet report which is probably the most boring one but there’s important stuff on there and when you run a balance sheet you always want to compare it to the previous period so you can see the change, all right. So remember your balance sheet lists all your assets which is all your bank accounts and then all your liabilities. So on the bank account side, you might see at the end of January you had 20,000 dollars in your bank account but at the end of December you had 150,000. So that’s a big jump. So we want to visually be able to see these changes that happen. And on that balance sheet the other reason in that report is utmost importance it’s because your trust bank account which is on your balance sheet has to tie to your trust liability account number. Those numbers have to match and the third leg of that is the data, that you get data from two places, the third leg to that three-way match is in Clio or in your law practice management software where you have your client ledger balances. So you kind of want to look at your balance sheet, you kind of want to look at your own withdrawals, how much money you’re taking out of the business and that’s all part of the balance sheet. The profit and loss report is going to be the one that if you design a good chart of accounts, it’s really going to lay out all your expenses and we like doing those in what we call a format called rolling 12 months, so you always have a whole full 12-month view and you can visually see for each category rent or software or remotes receptionist what those amounts are each month and what has jumped up. So it’ll really point out, my god what went with supplies, they went up 2,000 dollars this month.
Adriana Linares: Right, why?
Peggy Gruenke: So looking at that information and really deciphering it and understanding what’s on those reports is helpful which is why we are really adamant about designing that chart of accounts to tell you the story that you need to hear. The other set of reports that we get out of the Clio software part of it is a lot of lawyers want to know fee income by practice area and things like that, so we can take those reports out of Clio. Let’s use an example, the revenue report by practice area and we can take that breakdown and put that into QuickBooks so now their P&L statement will take their revenue number and break it out by practice area so it’s not all at what we call a top level.
Adriana Linares: One lump sum.
Peggy Gruenke: Yeah.
Adriana Linares: This allows you to see where your most profitable areas of law are, maybe you decided to do real estate and estate planning and litigation. And then it turns out that litigation costs you a lot more money than it makes you and maybe it’s better for you to eliminate that party or practice you’re going to have a more profitable business if you focus on these two areas or vice versa you might look and say wow litigation sure is a cash cow we should focus on that. Is that one of the reasons you really want that type of information?
Peggy Gruenke: Yeah and you want to see the historical trend because you want to really see where you’re spending most of your time and that actually kind of couples with the whole idea of tracking your billable time, you’re tracking your hours, getting them — when we talk about a profitable law firm has a funnel, okay. The top of that funnel is your time, all right and are you being efficient with getting — your using your eight hour day and getting it all recorded on a client’s bill so that it can eventually be paid to you and you can make the money that you started this business for, right, so yeah.
Adriana Linares: What do you say to attorneys who say I do contingency or flat fee work I don’t need to track my hours?
Peggy Gruenke: Yeah, that’s a good one. You still need to track your hours.
Adriana Linares: Still need to track those hours.
Peggy Gruenke: Okay, and that’s a good point because one of the things that we see with people that do a lot of flat fee work is a very inconsistent revenue workflow, okay. You’ve got to balance that with hourly and flat fee, I mean everybody loves this whole flat fee concept but until you really know how profitable you’re flat you’ll be shocked. We’ve done flat fee analysis for lawyers, by the way that means you have to actually put your hour in Clio, but Clio makes it really, really easy to do this.
You can create your flat fee matter, you can record all your time entries and then when that case is finalized we can pull the report for you real quickly and tell you exactly what the fee expenses and real expenses were on that case that you charged a 1,500 dollar flat fee for may have actually ended up costing you 2,500 dollars and that’s not even the personnel — I could go on like this forever because I get really excited — but that’s not even your personnel cost, okay.
Adriana Linares: No, right.
Peggy Gruenke: And your admin costs and everything else that goes into doing something, so it’s interesting, but yeah. So contingency cases, flat fee are the ones I’m really more adamant about but making sure you record your time. Contingency case is more because you may have to actually submit it to the judge right to get your fees, but probate work is this way type thing.
Adriana Linares: And they do you track their hours too because of that I know.
Peggy Gruenke: Yeah.
Adriana Linares: Well, I think this is all such good advice and I really hope listeners heed your warnings and advice and really pay attention, maybe take some time and get set up right. Look for those reports, get some help if you need it. But Peggy I know one of the questions that you answer a lot and very well especially helping solos as well, I think you’re doing a presentation for the San Diego County Bar Association for me on this very topic and that is how do I make money like what are the secrets to profitability in a law firm.
Peggy Gruenke: We have a formula for that and we have a spreadsheet. So my advice here is that you have to first start with identifying how much do you need to make. How much is a lawyer, why did you go into this business, what do you need to support your family, how much salary are you going to need to take out of the business, right? And so write that on a piece of paper. What’s your expenses, what are your monthly expenses going to be, and we call that your monthly nut, so that’s anywhere from software to rent, to supplies, to virtual assistants, to contractors, you name it but you need to write all this stuff out and a very more cautious word here is please avoid shiny objects, all right, because those shiny objects add up really, really quickly.
So we got your salary at the top because we always want to think of you first. We’ve got your expenses at the bottom. We have your number, okay, now that number, maybe that number is 150,000. Law firms are the simplest businesses in the world you guys and we try to make it so complicated. The hardest part is getting business. So get your business then you do the work and then you bill your clients and you get paid and if you’ve done everything well up through that, this whole process to getting paid part should be really simple. But here’s how you make the money, you figure out what you need, your 150,000 dollars is your breakeven point, now you go back into that, you say well if I’m going to bill a thousand dollars a month at 250 dollars — a thousand dollars — a thousand hours, sorry, a year at 250 dollars an hour, that’s 250,000 dollars, right? But we all know that that doesn’t always come out in the end because we have things like billing realizations and collection realization rates which affect that bottom number which is a whole other topic Adriana that I don’t have time for it but–
Adriana Linares: I’ll have to have you come back.
Peggy Gruenke: Anyway, my point is to find out how profitable you’re going to be and how much you can actually make, it’s a simple business don’t complicate it, do the right things upfront and everything should flow through to the bottom line.
Adriana Linares: Well that’s great. Peggy, I can’t thank you enough for your time. This has been so helpful, it’s an enlightening conversation. Like I said it’s a topic, I mean, there’s so many topics it’s hard for me to cover everything but I know this one’s really important especially after the year we’ve had where a lot of law firms were afraid, right?
Peggy Gruenke: Yeah.
Adriana Linares: When COVID started, man I got some real panicked calls, so you really want to be prepared and I very much appreciate your time and your advice. Remind everyone where they can find, friend or follow you if they want to get a hold of you and talk bookkeeping and accounting sexy topics.
Peggy Gruenke: Yeah, I don’t how I got into this. So CPN Legal is our website cpn-legal.com. You can meet our whole staff on there and our office dog is on there as well.
Adriana Linares: And that’s CPN like —
Peggy Gruenke: Dash.
Adriana Linares: C like cat, P like Paul and like nut dash legal.
Peggy Gruenke: You’re correct, you are correct and I’m also in LinkedIn and Facebook as well. I look forward to hear from your listeners and my objective is help. I mean I seek to help first and if I can help with a quick email, I’m happy to help.
Adriana Linares: Right. You’re like me, we are always happy, an email, a question here and there, please email, ask, we’re there. We like our jobs and I know that you like me love working with lawyers so we’re always willing to help and I appreciate that. I appreciate you helping me out today with this episode thanks so much Peggy.
Peggy Gruenke: You’re welcome.
Adriana Linares: Well, thanks everyone. Looks like we’ve reached the end of another great show. Make sure you find, friend, follow New Solo, tell your friends about it and give us a five star reading on iTunes it really helps.
I’d love to see New Solo trending on like best podcast of 2021 someday soon so get out there and help us out we’ll see you next time and remember you’re not alone you’re a new solo.
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