Plenty of law firms run their books in Xero or MYOB, and plenty of them are fine. General ledger packages are well built, widely understood, and your accountant almost certainly knows them. But they were designed for businesses that sell things, and a law firm earns, spends and reports differently. These are the places firms usually feel it first.
1. You earn in units, not at the point of sale
A shop raises an invoice when it sells something. A law firm earns in units of time, often months before it bills. That work in progress is an asset, and your general ledger should know about it. In a general package it usually lives in the practice management system and never meets the books until it is invoiced.
2. You spend on behalf of clients
Search fees, filing fees, counsel’s fees: disbursements are paid by the firm, but they belong to a matter and have to be recovered from the client. Some carry GST and some do not, sometimes on the same invoice. That needs GST handled per line and every disbursement tracked against the matter that incurred it. Otherwise unrecovered costs quietly end up in overheads.
3. You hold other people’s money
Trust money is not a bank account with a label on it. It is a regulated ledger, kept by client and matter under your state’s legal profession rules, and an external examiner will read it line by line. A general ledger package is not designed around that, which is why most firms keep trust in their practice management system or separate trust software. The problem is that office accounting then lives in one place and trust in another, and someone has to reconcile the two.
4. You need to see profit the way a firm is run
A partner wants to know which fee earner made money this month, which area of law is growing, and whether last quarter’s marketing spend brought in matters. That means reporting the P&L by fee earner, branch, area of law, seniority, marketing source and billing type. General packages can tag transactions, but they were not built to slice a firm’s results along every one of those lines at once.
5. Reconciliation has to hold up to an auditor
Bank reconciliation compares a statement with the books. A three-way reconciliation compares the statement, the journal and the general ledger balance, and shows where the variance is when they disagree. For a firm that will be examined, it matters that posted journals cannot simply be edited away: correcting an entry should leave a reversal, so the history is never broken.
When Xero is still the right answer
If you are a small firm, your practice management system already handles billing and trust well, and your accountant is happy, there may be no reason to move. The case for legal accounting software gets stronger as you add fee earners, branches or practice areas, and as the time spent reconciling between systems grows.
If you do move
You do not have to start again. A chart of accounts can come across from Xero with its history, so your comparisons with previous years still work. Plan the switch for the start of a period, reconcile your opening balances, and keep read access to the old file for your accountant.
See LAPM Accounting, which is built around how a law firm earns, spends and reports, or read about having our team run the books for you.