5 min read

Running a law firm is hard work. Whether you are a solo practitioner or an attorney in a small to mid-sized firm, challenges and setbacks are inevitable. While law schools do a great job teaching substantive law, they often fall short when preparing lawyers for the ups and downs of running a business. 

The following are some common challenges that law firms and attorneys face when running a legal practice, along with potential solutions for these issues.  

 

Accounting Issues

  • Client Trust Fund Accounting 

For law firms that use client retainers for compensation, there are numerous regulations that they must follow to ensure compliance with local rules. With retainers, client funds are in the possession of the firm, but they do not belong to the firm until properly earned. Trust fund accounting may also come into play when a law office is holding client property or funds in trust.   

Problems with trust accounting can arise for a number of reasons. For one, the client funds must be kept separate from one another, without commingling with other client funds or law firm operating funds. To ensure this separation, lawyers need to maintain detailed accounting for each trust account.   

Firms must also ensure that they do not overdraft client trust accounts. In some states, when over drafting occurs, the state bar is immediately notified by the banking institution, which can lead to a host of ethical problems.   

One way that firms can avoid this potential problem is to use legal-specific accounting software that includes tools for client trust fund accounting. These platforms make it simple for law firms to: 

  • Properly reconcile trust accounts 
  • Correctly post transactions 
  • Prevent overdrafts
  • Separating Income from Revenue 

Operating income and revenue are important metrics for determining how much money is being brought into a law firm, but each of these numbers involves different deductions and credits.  

Revenue is the total amount of income generated by a law firm for the sale of services. It is the sum generated before any expenses involved in running the legal practice are taken out. Operating income is law firm’s profit after subtracting all operating expenses. 

When clients pay their law firm invoices, a portion of that revenue must be used to pay incurred costs. For accounting purposes, that portion should be recorded separately, not as income. When this Is not accurately completed, firms may find themselves having problems with:  

  • Inaccurate accounting 
  • Noncompliance issues  
  • Recognizing which cases are most profitable to the firm 

 

Firm Management

  • Firm Culture  

Law firm culture is essential to creating a successful practice where all members, from partners to associates to support staff feel connected and valued by the firm. A good firm culture promotes loyalty, a higher work ethic, and the retention of excellent employees.  

To consider whether their firm’s culture is where it needs to be, law firm leaders should ask the following questions:  

  • Do all firm members have a clear picture of the firm’s goals?  
  • Do all firm members feel like part of a team?  
  • Are there adequate lines of internal communication in place?  
  • Do firm leaders easily come to a consensus on important issues?  
  • Does your team work efficiently as a group?  

Law firms can address firm culture issues by focusing on communications within the practice. Communication is key to establishing an effective work environment, from listening to employee concerns to keeping them informed about firm initiatives.  

Lawyers should ensure that firm communications encompass more than memos and e-mails. Personal discussions within-group and in one-on-one settings are important to establishing effective communication as part of the firm’s culture.  

  • Attracting and Retaining Lawyers  

A law firm is only as good as its lawyers and staff members. Inadequate staff can lead to a variety of problems financially, operationally, and ethically. Firms need to ensure that they have systems in place to attract and retain highly skilled employees.  

It can be extremely expensive for a firm when well-performing associates decide to leave for other firms. That’s because it can take years for a firm to truly recoup the money spent on training a new hire. If an employee leaves before that time, not only does the firm lose that investment, but it must then invest more to replace that talent.  

There are numerous steps a law firm can take to attract and retain strong employees, including:  

  • Promoting professional and mentoring relationships among law firm colleagues 
  • Providing ongoing training 
  • Establishing growth opportunities within the firm  
  • Providing positive and effective feedback  
  • Offering monetary bonuses and financial incentives for quality work 
  • Measuring Profitability  

Unfortunately, many firm leaders forget to take a serious look at the profitability of their law firms. This is a huge mistake and a missed opportunity to analyze where firm resources are best spent. By continuing with nonprofitable matters and clients, law firms may actually be losing money instead of making it solely because they are unaware.  

Law firms should compare profitability to help them make strategic decisions that improve the profitability of the firm. Leaders should look at likely trends and whether they will continue to be profitable. By taking advantage of these areas, law firms can benefit from that growth.  

Once law firms have identified the most and least profitable areas, they should:  

  • Put processes in place to part ways with the least productive areas. Sometimes, you may have an attorney who is emotionally attached to a nonprofit practice area because he or she enjoys that type of work. But profitability is not emotional.  
  • Establish productivity and profitability parameters so that there are clear guidelines to follow when these decisions need to be made.     

 

Avoid These Common Law Firm Problems

To run a law firm is to run a business, and attorneys need to implement specific strategies that avoid these common problems. By taking the time to proactively consider these issues, law firms can address them before they threaten the success of the firm.  


About Erika Winston:

Erika Winston is a freelance writer with a passion for law. Through her business, Personal Touch Edits, she helps legal professionals deliver effective written messages. Erika is a regular contributor to TimeSolv and a variety of other publications. 

https://www.personaltouchedits.com/