the lessons every firm needs to learn.
by ed mendlowitz
call me before you do anything: the art of accounting
“cpa firm grows prosperous by heeding its own advice.” the wall street journal published an article with that title in their may 18, 1981 issue about my firm, and this column describes some of what we did.
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the article began by stating there were about 28,000 cpa firms in the u.s., with about 19,000 being sole practitioners and many others with just two or three cpas. these numbers are lower than now, so the profession and small firms have grown significantly in the last 40-plus years.
small firms are still around, and i might add, they’re doing quite well. the introduction also said, “the fortunes of small practices tend to be limited by the amount of work the principals can do. most small-practice cpas are always overworked. they are busy doing financial statements, tax forms and other client work, but seldom managing their own practices.”
seymour siegel and i started our practice in 1974 and we were concerned with survival, making a living and not managing a practice. however the wsj article wrote that our “firm prospered because the principals realized they needed to devote time to building the practice. the two men opened their practice with only a few clients, using free space in a tiny office in a law firm” and contributing $15 a month toward the receptionist who answered the phone.
our start was not unlike many others. it was even smaller because we had no strong base of clients and decided not to do any per diem work. however, we started on january 1 and knew we would be busy through tax season. my wife typed our bills; we had no savings, only a house we had just moved into and a three-month-old son. we did everything ourselves and after tax season my partner sy siegel virtually became a full-time salesman during the day, along with being a full-time accountant at night. he had extensive contacts and became a new business machine. we did very well that first year – way beyond anything we could have ever anticipated.
we then made a decision to grow and to hire people so we could make profits from those working for us. there were growing pains. we made less the second year with 30 percent more revenue and four employees. it took us four years until we made more than we did that first year! we kept adding staff. siegel said, “we do everything we can to make them happy. we don’t want them to leave.”
at the end of 1975 we hired a friend of sy’s – paul rich – who had larger firm experience, and a year later he became an equal partner. paul ran the audit part of our practice. i was the tax expert. sy was the outside person and also assisted clients in obtaining financing. we grew “too rapidly and were scattered all over the field,” we told the wsj reporter. we then decided to drop “clients who weren’t worth keeping. some had marginal businesses; others were so demanding that we knew they wouldn’t let us make any money from them.”
we also raised our fees to what they should be, not what we knew we could get. “those were scary days,” we told the wsj. “we didn’t know how our clients would react. but the first few said yes and we got the courage to ask the others. after dropping 15 percent of its clients and raising fees, the partnership increased revenue by 30 percent.” we looked to grow, but wanted the right kind of clients – “someone with a financial awareness and a desire to get good advice.”
“finding good staff has slowed expansion, not a lack of prospective clients,” we said. “our biggest problem is getting people with good solid accounting knowledge.”
this article was written over 40 years ago. we were small, but in some respects we were ahead of the curve because we had a strong aspiration to run the practice as a business. it seems the issues are the same today as they were then.
nothing much has changed. as to the future of the small firm – it is as good as it has ever been.
2 responses to “the growing pains of a small firm”
john sanchez
so good to read this. very validating for other small forward-thinking firms of today. keep grinding it out, peel away from ops and focus on the business
frank stitely
100% true. every time i hear someone tell me that they don’t have time or the resources to grow, i tell them other people have solved this. it’s not an unsolvable equation.