10 best practices.
by marc rosenberg
the role of the managing partner
i have compared a “true” managing partner to an administrative partner. both are important positions. both share many common duties and expectations. but true managing partners are more valuable because they function like corporate ceos and thus make a bigger impact on the firm’s overall performance than admin partners.
more: the 9 biggest merger pitfalls | the managing partner’s role in mergers | five ways to evaluate partners | manage partners with goal setting | overarching authority that managing partners must have
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these three duties differentiate true managing partners from admin partners. true managing partners
- manage partner performance and behavior
- hold partners accountable
- drive the firm’s growth and profitability
this post drills down on how a good managing partner can improve profitability.
is it foolish to expect the managing partner to drive profitability?
many partners at cpa firms for ages have thought it’s foolish to expect the managing partner to drive profitability. these old-school people are repulsed by the corporate style of governance, prefer a firm where the partners mostly function as sole practitioners and, if they are honest, don’t want anyone holding them accountable for anything. they aren’t bad people. they simply have never seen how prosperous a cpa firm can be with effective leadership at the top.
old-school partners reason that how a cpa firm works is simple. all it takes is a group of partners doing what partners are supposed to do:
- bring in clients
- manage the work and the client relationships
- supervise staff working on projects
- get paid based on their individual success at the above
they question why the firm needs to have one person manage the firm. they reason that it’s simply not realistic or fair to expect a managing partner to improve profitability.
this post is devoted to debunking the above and showing you how a good managing partner can improve the firm’s profitability.
what is profitability at a cpa firm?
first, let’s take a step back and make sure we’re all on the same page regarding the definition of a term you might think is as straightforward as it gets: profitability.
let’s start with an illustration. assume a firm has revenue of $10 million with eight partners. further assume the partner profit percentage is 40 percent and the partners were paid an average of $450,000. here is how the firm’s income statement might look:
revenue: $10,000,000
expenses:
- staff salaries & overheads $6,000,000
- partner salaries $3,600,000
total expenses: $9,600,000
profit: $400,000
what’s the firm’s profit? it’s the combination of what the partners were paid and the income remaining after their salaries were paid. in our example, total profit for the firm is $4 million minus $3.6 million plus $400,000. this equates to $500,000 of income per equity partner (ipp).
as accountants, i’m sure you know the possible reasons why the firm didn’t pay out the $400,000 left over: fluctuations in wip and receivables, retention of profits for investments in acquisitions, technology and marketing campaigns, etc.
what does it mean when we say a firm is profitable? for cpas, the gatekeepers of the financial world, you would think this would be straightforward. but such is not the case.
in common practice, profitability is more judgmental. it’s what you want it to be. when a firm says it’s “profitable,” it could mean any of three things:
- benchmarking the firm’s profits. the cpa industry has no shortage of surveys that serve as benchmarks for firms. a survey that we have a peculiar fondness for is the rosenberg map survey. what if that survey showed that $10 million firms in the geographic market size of the firm in our example posted ipp of $600,000? this could be disappointing to the firm because its ipp of $500,000 is 20 percent below the industry norm. conversely, if the norm was $400,000, the firm would be proud that its profits were 25 percent over the industry norm.
- what the partners consider “profitable” or whatever they will be pleased with, regardless of industry norms. realistically speaking, 99 percent of people in the u.s. would be ecstatic if they earned $500,000 a year. the eight partners in our firm, if they were honest, might be plenty satisfied with ipp of $300,000 or $400,000. even though their profits were below budget or below industry norms, the partners can still be satisfied because they earn a “good” living, making five or 10 times what their parents earned.
- actual compared to budget. very simple. if the firm hits or exceeds budgeted profits, it is “profitable.” if profits fall below budget, then the partners may feel disappointed that they failed to hit their target.
industry norms for cpa firm profitability
the following data is from the 2019 rosenberg map survey, based on 2018 data. it includes firms of all sizes and population markets.
as you can see, the gaps between the highest, lowest and middle-of-the-pack firms are quite substantial. this is all the more reason to use benchmarking in a meaningful way.
you should know that the four metrics listed above, besides ipp, are the top four metrics with the highest correlation to ipp.
many firms have their own pet metrics. if you have found they are useful in managing and optimizing profitability, then by all means, stay with what works.
tactics managing partners use to improve firm profitability
managing partners must pursue profitability with a steely focus. here are the best practices for this:
- manage partner performance and behavior, as detailed earlier. as the partners go, so goes the firm. other firm members are extremely important, but it’s the partners who drive the firm. the managing partner must do whatever is necessary to optimize partner performance.
- set aggressive billing rates and fees. be a high-priced, lower-volume firm instead of a low-priced, high-volume operation. don’t let realization percentage get above 90 percent or so. if it does, it usually means your rates are too low; too many clients are accepting your fees without complaining. remember: you can’t take realization percentage to the bank, but you can always take realized dollars to the bank.
- develop a great staff that is well trained, engaged, productive and upwardly mobile.
- grow the firm’s revenues. increases to the top line fall mostly and directly to the bottom line. revenue growth is the lifeblood of a cpa firm.
- provide wealth management services. only one-third of all multipartner cpa firms are doing this, but they earn way more money per hour on wealth management than cpa services. also, if your firm ever looks to merge into a larger firm, the presence of wealth management services will greatly enhance the allure of your firm.
- provide consulting services. it’s been 30 years since cpa firms started providing consulting services in earnest, but most local firms still have not read the memo. yet most consulting services are far more profitable per hour than accounting and tax services. equally important, consulting services enable firms to satisfy their clients’ needs better.
- specialize. clients want to buy from experts. they’ll pay premium rates for expertise. having specialties makes business development easier because clients will call you because of your reputation in the field.
- leverage. leverage. the higher the staff-partner ratio, the more profitable your firm will be.
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- don’t let your line partners rack up huge billable hours. when partners focus on doing partner-level work, they have more time to take great care of clients and nurture the staff. this is why partners were put on this earth.
- keep the bar high on promotion to equity partner. make generous use of the non-equity partner position.
- build a team. managing partners need to develop a crew that frees them up to keep focusing on the big picture. a key member of this team is the coo/firm administrator.
- never be content. never accept being average.
mark cuban, the billionaire owner of the dallas mavericks, said, “rich people stay rich by living like they’re broke. broke people stay broke by living like they’re rich.”
many years ago, i was invited to facilitate a partner retreat. while the firm’s eight partners and i were sitting around the table waiting to begin, one partner asked me what the national average was for staff billable hours. i told him it was 1,550. he responded, “whew. we’re at 1,553 hours.” to which i said, “congratulations. then you’re a nice average firm!” this firm’s partners apparently had no idea what the national norm was for staff billable hours. firms need managing partners who are never content with being average.