Hard Costs and Soft Costs
Hard cost (Direct) and soft costs (Indirect), I guess I should have included them in my list of terminology that you need to know when you work with Law firm. But this is a post about how LeanLaw works and how it handles these two items.
Want to learn more about how LeanLaw handles Trust Accounting, see this post.
Entering these costs into QuickBooks and into LeanLaw
I’ll start with the easy one, soft costs. The definition of soft costs is indirect expenses the law firm pays for for the firm overall but a portion could be used on a client matter.
A good example is postage. The firm may purchase a roll of stamps to be used on envelopes to mail out its bill payments but also these stamps could be used for postage for client cases.
In terms of postage, you have really no way to delineate exactly which stamps are for the firm’s postage and which ones are to be billed back to a client. You are most likely not going to count stamp. You can just take the method of creating a generalized fee for postage. A lot of the firms will put a price of $10 for any postage to a client.
A few other examples of soft costs are faxing, copies, internet, research fees.
Creating templates is a great way to save time and also a list of the soft costs for the firm to use that you bill back to a client or matter.
- Determine a price point for each.
- Pop into Lean Law and hit the + under the expenses tab.
- Select from the template the expense you want to add to a client file or matter and tag the matter.
Yes, it’s as simple as that. Once you have implemented the steps outlined above, that this is what happens behind the scenes:
The expense will get added as a temporary expense to be billed in LeanLaw. In QuickBooks, it doesn’t show at all. Think of it as non-posting. Like an estimate, it doesn’t affect the accounting until it’s billed. It won’t show up anywhere except as the expense you entered for the purchase.
Entering these costs using QuickBooks to sync to LeanLaw (1 entry)
Hard costs are direct costs that the firm pays for entirely, like a filing fee, and it is assigned to one or multiple clients.
Examples of hard costs are filing fees, witness fees, deposition fees, etc. that the firm would pay by check, debit card, or credit card.
These items would be entered into QuickBooks via receipt bank or Hubdoc or directly using the receipt capture in QuickBooks. You code it to the Advanced client cost account and tag the matter or client name. Once entered, like magic, it gets synced via the power of LeanLaw.
The advanced client account is an asset account. It is a balance sheet account. When the invoice is generated, the firm will recoup the funds once the invoice is paid. There’s no income or expense transaction like a soft cost.
In the video below you will see how you set this up in LeanLaw in the settings. It’s important to be sure that this is mapped correctly. As in any app, it all comes down to settings. Incorrect settings can make a mess of the books.
In the graphic below, You can see the differences between the two costs.
I hope the graphic helps you visualize exactly how these two costs are handled within the application, LeanLaw.
On a side note, the soft costs in the hard costs are handled a bit differently when we do a data rebuild. When we take someone off of one accounting system, like a PC law, and move them to QuickBooks we start at the beginning of the fiscal year. When we rebuild the data, we use an account called billable expense income and billable expense, that is offsetting the income account. We don’t want to put fees that have been billed already into the client advanced cost account.
One more point regarding the client advanced cost account, it has to be reconciled monthly. If you have expenses that come in after the matter is closed and the attorney determines that it does not need to be recaptured or invoiced, you have to account for them and move them out of that asset account. Otherwise, it’ll stay there in perpetuity.
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