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Client Balances and Accounts Receivable IOLTA Draws

Learn the best way to standardize your billing process to avoid unpaid balances from customers.
Client Balances and Accounts Receivable IOLTA Draws
Written by
Paul W Carlson, CPA
Published on
Dec 12, 2023

Review the best practices in invoicing clients, and making sure firm does not increase their unpaid hours. Running these balance reports weekly will help your unpaid invoice numbers stay down. Look out for the "secret sauce" formula to calculate trust draws quickly.

Paul W. Carlson, CPA (00:00):

Hi, this is Paul Carlson, CPA with Law Firm Velocity. Our law firms that bill hourly and rely on collecting advanced funds from clients to avoid receivables issues, have two management issues when using Clio. So, the first is the firm needs some form of an overall client balance and they need to monitor that balance each week. No one has really defined what this term means, so I call it client balance. And what I'm looking for is the total amount of funds that the client has in trust, less accounts receivable, less WIP, and then calculate that balance. Using this matter in front of us, the client has $5,000 in trust, which seems like that should be sufficient and we're in good shape, but what's happened is the last week's been very busy on the matter. We have $6,100 of unbilled time against this matter.


At this point, the client actually owes the firm $1,100. We immediately need to request more trust funds, or stop work until things are taken care of, because at this point the client owes money to the firm. And if the client decides not to pay, there's very little we can do to collect those funds.


Other examples of, like, here's negative 20,000. Here, the client has no money in trust, and they have $20,000 in accounts receivable and $500 in WIP. The client owes the firm $20,500, and the firm has no money in trust. We are fully exposed for that accounts receivable risk. So, that's what we use the client balance calculation for. And then the other piece that some firms need, is the firm will send an invoice to a client, but the client will pay the invoice balance into trust. Or if the client owes $1,000 for an invoice, the client will send $5,000 into trust, and Clio doesn't automatically apply trust funds to outstanding accounts receivable.


So, if we look at this matter as an example. So, the matter has $4,000 in trust, but has a $2,862 accounts receivable balance. The firm should really go in and use the trust money to pay this invoice and go ahead and pull the $2,862 out of trust and transfer it to operating. What we do here is, we create this complicated formula that says if the client has trust money, and the client has accounts receivable, that then give us a note that says we need to do a trust draw. So this example, the client has $2,500 in trust. We have $500 in AR, and so from this report it can tell us that we need to go do four trust draws. This is how to use the tool, so let's talk through how to actually make this. We go to Clio. We'd want the matter balance summary report for all clients, for all dates, and we want to check the box that says we want the client trust balances. We push this to a CSV and we generate the report.


Here we have the native export from Clio, plus quick maker title's useful. And so to do the client balance calculation, we create a formula that goes equal. We're going to do matter trust balance, plus client trust balance, minus accounts receivable, minus work in progress, minus expenses. So, in Clio language, this is legal fees and process, and these are unreimbursed costs. Here we have the client balance as calculated as $2,000, and we grab this little corner and pull it down. And now we have calculated the client balance for all these matters.


To do that trust draw, we're just going to go ahead and grab the formula from over here. Copy the formula, go to this report, and then paste that formula in. If you need that, you can go ahead and contact me if you need the formula, or we will maybe put it in the video description below. Once we have the formula in once, we can grab this little corner and pull it down. And here we can see that we have our three trust draws. I edited the example data, so that's why this one trust draw went away. With that, that's an overview that's here. If you want to make this actually readable, we can turn on some formatting. With that, that is how we would suggest monitoring the client balances. So do this weekly, and while you're making this, I would go ahead and make this report as well every week. Once you have this template, you can just copy the formulas from the prior week. Thanks much. Bye-Bye.