The 5 Major Challenges Faced by Canadian Solo & Small Law Firms
Since they entered law school, not many lawyers have had extensive business management courses or training, and that’s a really detrimental for those looking to run their own practice or become a managing partner of a small law firm. For Canadian lawyers who decide run their own firm, practice management is a critical factor in their eventual success or failure. Even the best lawyer in the courtroom runs the risk of sinking their entire practice if they don’t understand how to effectively manage their business.
Effectively managing a law firm goes beyond understanding the different areas of the business, but understanding how these different areas are connected and work together. When lawyers fail to maintain a strong understanding of how these different areas of a practice work together, their business is at risk of losing decisions in the courtroom, losing revenue, and even falling out of compliance with some of the stringent regulations Canadian firms face.
Up until now, lawyers in Canada did not have a viable option when looking to manage their entire practice in the cloud. However, as it becomes normal to expect legal professionals to operate on the go, Canadian lawyers are looking for practice management solutions that are accessible from anywhere they may be. Canadian small law firm’s need to find ways to operate in this new normal to stay competitive with their larger counterparts while at the same time not leaving compliance behind.
The Five Challenges Facing Solo & Small Firms
Over a decade of working closely with solo and small practice lawyers has allowed our experts at CosmoLex to identify the challenges that Canadian law practice faces. We break down these five prominent challenges of Canadian Firms. It’s important to differentiate between Canadian firms and those south of the border in the United States, as they are responsible for complying with different rules and regulations. In this piece, we look specifically at Canadian firms.
Legal Time & Billing
Every lawyer understands that time is money irrespective of billing method be it hourly, fixed fee or contingency. Efficiently managing a firm’s time and cost presents a few different challenges to Canadian law firms. The first is remaining compliant. By keeping accurate balances at the matter level in real time, firms can more easily realize inaccuracies and issues before they snowball into larger issues that can create bigger consequences for the firm. Accurate timekeeping and easy-to-understand billing practices keep your law firm on good terms with your clients and those who may review your law firm when a dispute or audit occurs.
Another challenge associated with legal time and billing is a that firms need to remain solvent. Improving billing and collections for law firms also increases a firm’s ability to stay solvent. Accurate and timely billing leads to a more efficient collection process and reduces what we call “leakage” — lost funds that are never recognized because meetings, tasks, and events are never properly billed for.
In Canada, legal fees and most disbursements are taxable. Simply tracking time, costs and then issuing a bill seems like it would be a simple process, but Canadian firms are required to track associated sales tax to remain compliant with CRA and Law Society Guidelines.
Sales taxes associated with the matters aren’t as straightforward as one may think. There are multiple variations of tax rates depending on what province the firm and client is located in. Even disbursements, if classified as incurred as an agent of the client, is treated differently when it comes to the taxes associated with them. The best way to meet these challenges associated with legal time and billing is to find a technology solution for your firm that can seamlessly handle the taxation variations Canadian firms face while making easy to make revisions and adjustments as changes to the legal billing process occur.
Business accounting, or “back office accounting”, is central to any business. Every business handle accounting but for law firms in Canada, there are two challenges all firms should be aware of.
Challenge #1: Remain Current. Many firms have difficulty in keeping their accounts current. All too often firms wait until their accountant shows up periodically to check their balances and reconcile their books. In Canada, where firms are required to manage their accounting on an accrual basis this can be exceptionally problematic. Firms who can’t remain up to date with financials will have an inability to make decisions about their business and in extreme situations, and it could come back to haunt them in the event of an accounting audit.
Challenge #2: Remain Compliant. Law firms are subject to many requirements that other businesses simply are not. The way invoice payments are allocated, how client costs are handled, and the management of retainers are all things that are heavily scrutinized. It’s important that when running your law firm, the professional in charge of your books understands all local regulations, tax rates, record keeping requirements and what must be done to remain compliant. This may include employing a legal-specific solution that is built to handle the needs of law firms. Either way, it’s important for the lawyer to fully comprehend that at the end of the day, no matter the software or accountant in place, they are the one accountable for the law firm’s books.
In accrual accounting, expenses are incurred once a bill is received and income is earned and recognized on financial statements as soon as it is invoiced. The use of accrual-based accounting makes it even more important to enter income and expenses in a timely manner or even as they occur. Utilizing cloud-based practice management and accounting solutions allow legal professionals to record and enter this information no matter where or when they are working, greatly reducing the likelihood of unreported income or expenses and the associated accounting concerns.
Accurate back office accounting is something all businesses are familiar with, trust accounting is unique to the legal industry. There are few lawyers out there who don’t understand the importance of proper trust account administration, but that doesn’t mean it isn’t a daunting task. Although it can be a complex issue, lawyers need to take the additional steps necessary to understand trust accounting inside and out. Failure to stay current and compliant with trust account management often results in compliance issues.
Why is trust accounting so important? Because as the lawyer, you possess the fiduciary responsibility for your clients. Ultimately, a lawyer, himself or herself, is fully responsible for the security and management client’s funds – even if you turn the administration over to an accountant or a bookkeeper. The “burden of proof” to show proper funds management rests entirely on your firm.
Canadian Law societies are known to keep a particularly close watch on compliance associated with firms’ trust account bookkeeping by routine audits. In Alberta, for example, it is even mandated that every law firm submit data in a predefined format related to trust accounting on an annual basis for the review.
So, while it is undoubtedly in a firm’s best interest to always remain audit-ready everywhere, in Canada it is imperative that a firm is always audit-ready. Maintaining an audit-ready status is virtually impossible without having the appropriate technology in place to automate and monitor the following tasks:
- Avoid the commingling of client funds
- Avoid the commingling of client funds with your own funds
- Avoid overdrafts at the client ledger level or at the bank account level
- Perform systematic bank reconciliations
Events & Tasks
When it comes to event and task management for Canadian law firms there are 4 “C”s for you to keep in mind. Compliance, collection, collaboration, and cloud access. Managing these 4 “C”s can be challenging if the right solutions aren’t in place.
To remain compliant, it is important that all task and events are able to be linked to the specific legal matter they are associated with and have detailed and accurate information and notes which are easily accessible.
When it comes to invoicing, small tasks and meetings fall through the cracks all too often. Events & Tasks can, and should, flow automatically into your billing workflow. It’s the most important first step to making sure firms are able to collect payment for all the work they complete and reduce leakage.
Many firms are made up of a number of legal professionals and their success is dependent on efficient collaboration between multiple members of the firm. Calendar events and tasks should be shareable across the organization. This is made even more important by the rise in people working virtually — from home and on the road while using a multitude of devices.
One of the best ways to ensure efficient collaboration between everyone in your firm is to utilize a cloud-based application. Cloud access plays an important role in the world regardless of the industry and this is no exception for lawyers. Utilizing practice management solutions in the cloud is the only way to make sure firms keep everything up to date as it happens. Log your client meetings while meeting them on the road, set your next due date while leaving the courthouse — only cloud access gives you the freedom required to practice law in the 21st-century. With great power comes great responsibility though. Make sure that your firm utilizes cloud solutions that are secure and don’t run the risk of violating any ethical standards and regulations.
Documents & Email
Every aspect of the practice of law will eventually end up on a document, either virtual or printed. Unfortunately, these documents tend to be spread out across multiple systems and members of the firm. To be successful, your firm needs to make sure that all documents and emails are factually accurate, completed and filed on time, retained for future reference, and easily retrievable. Getting multiple members of a firm to organize these documents and communications in a meaningful way can be challenging.
Successful firms are utilizing practice management software to improve how they manage their documents and emails. When choosing a practice management program to assist with document and email management, search for a solution that can:
- Create automated, predefined workflows that can help you get documents completed and filed on time
- Store matter-based records that lets you look at any document or email and instantly find the associated matter. And, conversely, looking at a matter will show all of the documents and emails related to it.
- Meet all of your electronic storage criteria. Nowadays, storage should be unlimited, secure, and can be cross-indexed (and synchronized) to your own filing structure.
- Mark your client communications as billable — helping you to even further close the gap between practice management and billing.
While being able to access all of these materials in the cloud, it’s important that they remain secure and meet the security standards put in place in your jurisdiction.
Overcome These Key Challenges
What many law firms often fail to realize is how interdependent these different challenges associated with their business are. It’s not enough to take on one of these challenges and hope for the best. Imagine a group of people driving a car. The first person operates the gas, the second is on the brakes, a third the steering, a fourth shifting through gears, and the fifth is navigating through the windshield to see what’s ahead. That sounds like a recipe for disaster and yet that’s how practice management works if you don’t coordinate actions among these five areas. The most successful firms have solutions in place that allow these different areas to communicate with each other.
Each practice management area might work well on its own, but if the different areas and systems don’t communicate with each other your firm is headed for an absolute disaster. In addition, all case information has to be associated with the appropriate client matter. The challenges faced in one area of your firm are directly related to challenges faced in another. If you imagine these five key areas of your firm as making up a wheel, then matter-based organization is the axle that turns the wheel. When anyone looks at a matter, all information related to that matter — filing dates, tasks, billing, client costs, and trust transactions — should be readily available. Having to look in several different places for all of the data and having to piece it all together is simply inefficient.
For example, as a matter is started by your firm, the events should be placed into a workflow which schedules tasks and events on your calendar. The same calendar events that are entered into a firm’s calendar need to have a timecard created for them and then be billed to a client from a billing system and have the appropriate tax rates attached. When the client receives your invoice, they should be able to easily remit payment to you online. And when you finally receive payment from your client, you must be sure that the funds are distributed to the proper general ledger accounts. When these tasks are taking place in two, three, or four different systems, the rates for lost time, error, and even security breaches begin to climb.
What’s A Law Practice To Do?
Every law practice is different. Firms in Canada face extra challenges that neighboring American firms do not. What’s right for the firm down the road or across the border may not be the best solution for you. With the variety of practice management solutions available to the market today, it’s more important than ever to do your research and find a system built to meet your specific needs and take on the challenges your firm will face.
A unified approach to practice management that looks to stare down all of the challenges above, will supercharge your law firm’s operations. You will get the convenience of centralized, matter-based organization, the ease of collaboration across team-focused cloud applications, and improved compliance with local requirements. Your practice will be in a better position to help your clients and have a competitive advantage over firms that take a piecemeal approach to organization.