I am often asked whether it is a good idea for a firm to outsource their admin functions or not. For larger firms, this generally isn’t a good idea, although a number of large law practices overseas have relocated their admin departments to cheaper centres where good people are available at a more affordable price. But for single practitioners and smaller firms, outsourced admin is almost always a smart idea.
There are a few reasons I say this. Firstly, most lawyers are “words” people, whereas accountants are “numbers” people. So most lawyers don’t do accounting well. Besides, the time it takes a lawyer to do her or his own admin could be far better spent doing billable legal work, or finding new relationships and growing their practice. Secondly, there is a lot of admin associated with practising law. It is not simply the accounting functions such as recording fees, managing disbursements, invoicing, debtor management and VAT submissions, but also compliance aspects such as FICA, trust accounting, and Law Society audits. Even in a small firm, admin is likely to take at least 2-3 days out of your billable hours. There are other functions too: Bank reconciliations, paying creditors, salary and PAYE, and producing financial reports, for example an income statement.
“I can’t afford an outsourced bookkeeping service,” is something I regularly hear from single practitioners, especially younger practitioners. “I’ll just use Excel for my accounting.” While recording your time in a spreadsheet is a step in the right direction, you will still need to handle all of the other admin tasks listed above. Let’s assume that a bookkeeping service will cost you somewhere between R3,000 and R5,000 per month. If you’re a startup lawyer, your hourly rate will probably be around R1,500. So if you save just 2-3 hours on admin a month (6-9 minutes a day!), you’ll cover the cost of the admin/financial service.
“But I am only just starting out. I have plenty of spare time to do admin.” One of the biggest mistakes new practitioners make is that they think that just because they have a law qualification work will come pouring in. The truth is that single practitioners have to work hard building relationships and looking for clients. In fact, in the beginning that aspect is far more important than doing the actual legal work. Because the lawyer is doing their own admin, tasks get batched, so clients might only get invoiced at the end of a month, or worse still on finalisation of the matter. This causes discounting (see the previous article on this subject) which is a direct hit on profits.
“I have a secretary who is bored. She can do the admin.” While that is certainly an option, most secretaries don’t know how to manage trust accounting or to produce a set of accounts. And you probably don’t want them to see your salary information. Even with a competent secretary on board, you’ll still need an accountant/bookkeeper to do the more complex financial tasks. And you can bet you will still get pulled into doing some of the admin yourself.
“I have my own bookkeeper.” Once firms reach a certain size, they justify an in-house bookkeeper. But for most smaller firms and single practitioners, a full-time bookkeeper is unaffordable. I am always surprised that many lawyers don’t see people-cost as an expense. For years I have illustrated that a staff member who earns R10,000 a month actually costs the firm 50% more than their salary because of associated costs. (It is actually much higher than 50%. But better that I illustrate this point conservatively.) So that’s R15,000 per month cost-to-company, or around R180k a year. Over 5 years that’s a million Rand. Yet it is the easiest thing in the world for a lawyer to take a decision to hire someone!
Unfortunately, many lawyers who elect to do their own admin quickly end up in a financial quagmire, having to employ an accountant to clean it up for them at substantial cost. Without a decent set of accounts, lawyers are flying blind, and it becomes all too easy to dip into the trust account to fund business costs or salary. Lawyers need up to date access to bank balances, cash flow, and whether or not they are making a profit.
So what should you look for in an outsourced bookkeeping or financial service? Firstly, they should commit to turnaround times for providing financial figures. (Like 10 days after month end.) It doesn’t help if you have to wait 3 months for your monthly reports – especially if you are using your results to negotiate an overdraft with your bankers! You also want your service to have more than one person who will do your books, because they might get over-busy, or sick, or they might decide to take up full-time employment with someone else and you’ll need to spend time finding another admin service. You’ll also want your service to be able to do all of the functions you need, including payroll. You’ll also need an accounting software system, and ideally you should be able to access this from anywhere on a desktop/laptop computer, or a tablet computer.
Some financial service providers will also give business advice, which is invaluable for a small law firm. Lawyers often forget that while law is a profession, the legal practice still needs to be run as a business. So you’ll want an outsourced ‘partner’ who has good business and financial experience, so that they can help you to minimise expenses, optimise your tax, create budgets, and grow your practice.
Despite the compelling reasons to outsource admin, many lawyers still fight the idea. Sometimes this is because they don’t particularly want good accounting records, and sometimes it is because they don’t yet understand just how much time their admin will take up. As explained earlier, they might also not yet realise what’s most important in growing a new firm.
Outsourcing your admin is not just a good idea that makes sound financial sense. It will also reduce your stress, and help you to maintain a healthy work-life balance!
AJS Legal Practice Management Systems