Paul W. Carlson, CPA (00:00):
Hi, this is Paul Carlson, CPA with Law Firm Velocity. Here we're looking at what I refer to as our client balance report. This is a tool that hourly firms need to run every week to manage client IOLTA balances. So let's start simple and look at client A, demo case one. So in this case, the client has $5,000 in IOLTA and they have $856 of accounts receivable. We see this pattern when a firm is using advanced deposits for fees, the client exhausts trust account funds, they transfer. So last month, they had an $856 balance on their invoice, and then the client transfers or pays $5,000 into trust. But the systems never automatically apply that trust money to the existing accounts receivable balance, and someone needs to pay attention and run this report to see that, oh, the client has trust money and they have accounts receivable. Let's go ahead and run a trust draw to use the trust money to pay the accounts receivable.
(01:15):
So what we do is we create a formula on the sheet that will use a big if statement that will tell us whenever there's a client that has trust money and they have accounts receivable, and we'll say, yes, we need to go do a trust draw. The other piece that's on this report is a net IOLTA balance. The idea here is firms working on hourly basis to reduce their credit risk or payment risk is to have clients pay advanced fees into the trust account and then earn out those fees with invoices. The trouble is, yes, we can understand the concept of asking for $5,000 up front, but we need some process to understand that, okay, we need to subtract the amount of money the client has in trust minus what they might owe us for accounts receivable, minus all time and expense entries in WIP or entries that have not been yet billed.
(02:16):
And then from that, we can see that even though the client has $5,000 in trust, we've used up $2,100 of that already, so the client really only has $2,800 in trust. An example of what we don't want to happen is this client has $500 in trust, we have $3,000 in WIP, which means at this point, the client owes the firm $2,500, and so now we're at a collections risk. The idea is we run this report that anyone who is getting close to negative or they're getting close to zero, and we know we have a lot of work to do, at that point, we start requesting additional trust money and when needed, we're going to stop doing work as much as allowed under ethics rules until the firm is able to collect more trust funds.
(03:11):
So that's the theory on where we're going. The other thing to be careful of is my case has a minimum trust balance field within the client record. That field is driven purely based on the trust account balance. So if we had that field set for client B, that the minimum trust balance is $500, we would not be getting an alert because the client has $500 in trust. The problem is the client has $3,000 in WIP that if we ran bills today, then the trust money would be exhausted and we'd get the alert. But we can't wait for monthly billing for those alerts to populate that if we're doing a lot of work into a matter, that we need to see these numbers weekly so we know what we need to manage.
(04:03):
So great report. This piece just came together for us this week. My case fights us considerably on getting this detail. So what we need to do within my case is we run the create a new invoice screen to get the WIP amounts that I can't find WIP anywhere else within my case. So what we do is we run create an invoice. Here's our un-invoiced amounts. If you're very careful and you highlight from this title down to here and hit control C, bring this over to Excel, and you do paste, paste special, and we just paste as text, that the data will come in a reasonable fashion. When it comes in, the columns are too narrow, so it's going to be squished. And so you have to expand the columns.
(05:05):
So there's the WIP balance. To get the trust account balance, we can go over to the trust summary listing and we can export this or print a copy of this, and then you can manually stitch those values into every client. As this gets bigger, we could possibly stitch this together with a VLOOKUP formula. That could be tricky. And then the remaining piece is the trust draw, which is just a logical formula that says if there's money in trust and there's money in accounts receivable, it needs to say yes, we need to do a trust draw. And so with this, we can weekly monitor client trust balances as needed. Thanks.
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