Accounting and Cash Flow for Contingency Fee Law Firms
Contingency fee firms have a unique financial challenge: costs go out every month, but fees come in only when cases settle or win. Good bookkeeping means tracking advanced costs case by case, running every settlement through trust correctly, and planning cash flow around unpredictable revenue.
Why Contingency Firms Are Different
Lumpy revenue. One settlement can be a large share of the year’s income, and months can pass with none.
Advanced costs. Filing fees, expert witnesses, depositions, and medical records are paid long before any recovery.
Settlement funds belong to clients first. Every settlement goes through trust before the firm is paid.
Tracking Advanced Case Costs
Record advanced costs by case, not just in a single expense account.
Reconcile your case cost records to the books regularly.
Recover costs from settlements according to your fee agreement and settlement statement.
Review costs on closed or lost cases, and work with your CPA on how to handle them.
How advanced costs are treated for tax purposes can be complex. Your bookkeeping should give your CPA a clear, case-by-case record.
Handling Settlements Through Trust
Deposit the settlement into your trust account.
Prepare the settlement statement showing the fee, reimbursed costs, liens, and the client’s share.
Disburse to the client and to any lienholders.
Transfer the earned fee and reimbursed costs to operating.
Each step should be recorded in both your trust records and your books. See: Trust Account & IOLTA Reconciliation.
Managing Cash Flow Between Settlements
Know your monthly overhead: payroll, rent, software, and insurance.
Track the cases in your pipeline and when they might resolve.
Build a cash reserve from large settlements, instead of spending them all at once.
Watch line of credit balances, especially if they’re funding case costs.
See: Why a Profitable P&L Can Still Mean a Cash Crunch
Signs Your Books Need Attention
Case costs recorded as general expenses with no link to a case
Settlement funds deposited directly into operating
Fees transferred from trust before client disbursements are complete
No clear picture of how much is tied up in open cases
How Azar Insights Helps
Case-level tracking of advanced costs
Trust accounting and reconciliation for settlements
Cash flow forecasting and fractional controller support for firms between settlements
Frequently Asked Questions
How should a contingency fee firm record advanced case costs?
Track them by case, so you always know how much is invested in each matter and what should be recovered from a settlement. Your CPA can advise on the tax treatment.
Should a settlement go into trust or operating?
Into trust. The settlement includes money that belongs to the client and possibly lienholders. The firm’s fee is transferred to operating only after the funds are properly disbursed.
How do contingency firms manage cash flow?
By knowing monthly overhead, tracking expected case outcomes, keeping a cash reserve from large settlements, and monitoring any credit used to fund case costs.
What happens to costs on a case that’s lost?
That depends on your fee agreement and your accounting method. Your books should show the costs clearly by case, so you and your CPA can decide how to handle them.
Can you work with contingency firms outside our state?
Yes. We work remotely with law firms nationwide using secure, cloud-based tools.
Attorneys remain responsible for complying with their state bar’s trust accounting rules. Consult your CPA for tax advice.
Related Reading
Trust Account & IOLTA Reconciliation · Law Firm Balance Sheet · Law Firm Profit and Loss
About Azar Insights
Azar Insights provides outsourced bookkeeping, accounting, and fractional controller and CFO services for law firms nationwide. With 15 years of accounting experience, we work remotely with solo attorneys and multi-partner firms using secure, cloud-based tools.