six specific examples, plus benchmarking norms.
by marc rosenberg
how to bring in new partners
these four metrics are key to any analysis of cpa firm profitability.
- fees per equity partner. the firm’s billings divided by the number of equity partners. this is one of the ways we measure leverage. the more billings each partner can manage, the higher the firm’s profit margin.
more: the business side of cpa firms | public accounting as a business, 101 | 16 steps to creating a partnership path | six ways new partners differ from managers | the four essentials for every new partner
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on average, partners do 10-15 percent of all work performed for clients; the remaining 85-90 percent is performed by staff under the partners’ supervision. the higher the percentage of client work the partners perform, the harder it is for them to find the time to build their client base and help the firm achieve a high fees-per-partner ratio. to manage a large client base properly, partners need to delegate as much of the client work as possible to staff.
- fees per person. this is another leverage metric. the “person” part of the calculation is every employee in the firm, including administrative people. firm head count is measured in full-time equivalents (ftes). someone who works 1,000 hours a year is considered a 0.5 fte. one who works 1,200 hours a year is a 0.6 fte. no one can ever be more than a 1.0 fte, regardless of how many overtime hours they work.
- staff-partner ratio. this leverage metric is the number of professional staff (all client service staff who are not equity partners) divided by the number of equity partners.
- billing rates. the rates assigned to each person in the firm that are multiplied by charge hours to arrive at billings.
many years ago, a great and very successful managing partner told me that the key to cpa firm profitability is “leverage and rates,” epitomized by these four metrics.
a typical cpa firm income statement
| amount | percentage of net fees | |
| gross fees | $5,000,000 | |
| write-offs | 500,000 | |
| net fees or billings | 4,500,000 | 100.0% |
| expenses:
staff salaries and benefits overhead expenses* total expenses |
2,000,000 1,000,000 3,000,000 |
44.4% 22.2% 66.6% |
| total income to the equity partners | $1,500,000 | 33.4% |
* rent, office supplies, marketing, insurance, training, it costs, etc.
examples of how various actions impact a cpa firm’s profits
assume a firm with eight partners and 28 professional staff.
- everyone in the firm records only one extra billable hour per week. notice i said “records,” not “works” an extra hour. both partners and staff perform hundreds, if not thousands, of hours on client work that are recorded as nonbillable time instead of billable time. why? it could be sloppiness in keeping track of time. or perhaps someone feels guilty about spending too much time on a task. maybe a manager spends a couple of hours training a staff person on a client engagement and makes a unilateral judgment that the time shouldn’t be billed to the client. in many cases, this extra time can be billed to the client. but if the time never makes it to the billings records, it will never be billed.
-
- one hour x 48 weeks per year, x 36 people = 1,728 hours
- @ blended billing rate of $130, additional revenue = $225,000
- @ 90% realization, $203,000 of additional profits
- no additional expenses should be incurred.
- 18 people each bring in a $5,000 client. assume that half of the 36 client service personnel were able to bring in just one $5,000 client per year.
-
- 18 people x $5,000 each = $90,000 of new revenue
- at 35% incremental profit, that equals $59,000 per year.
if the client averages a 10-year tenure with the firm, the present value at 5 percent per year of bringing in this revenue is $300,000.
- 18 people each lose a $5,000 client. the reverse of #2. if half of the client service personnel in the firm provided such poor service to a client that the client left the firm, the cost to the firm over 10 years would be $300,000.
- the firm invests time in staff training. assume that managers and partners make the effort to spend more time training staff so that each staff person, on average, becomes able to bill one additional hour per week.
-
- one hour x 48 weeks x 28 staff x $100 per hour = $134,000
- @ 90% realization = $121,000
- if training time cost $25,000, incremental profit = $96,000
- partners push down work to staff and use the freed-up time to bring in new clients. assume the eight partners delegate 100 billable hours each, per year, to staff. further assume that the 800 hours of freed-up time is used for business development and that the result of those efforts adds $400,000 of revenues.
if the partners’ billing rate is $250 and the staff’s blended rate is $110, that’s a difference of $140 per hour. if 800 hours of work previously billed by partners is now billed by staff, revenue will be reduced by $112,000.
-
- new business $400,000
- reduced partner hours $112,000
- profit increase $288,000
it’s important to note that the firm should not reduce billings to clients simply because work formerly done by partners is now being done by staff at a lower billing rate.
- the staff is not very productive. assume that the firm’s 28 staff average a disappointingly low 1,400 billable hours per year. if the firm can improve the staff’s productivity by increasing the average from 1,400 billable hours to 1,600, a very realistic goal, the firm can make do with 24 staff instead of 28.
-
- saving the cost of four people at $80,000 each (includes benefits) = $320,000.
benchmarking norms for cpa firms
| annual fees | fees per partner | fees per person | staff-ptnr ratio | ptr billing rate | income per partner | bill hours ptnrs
|
bill hours staff |
| $2-5m
2019 2018 2017
|
$1,136,669 $1,031,407 $1,045,286
|
$184,842 $179,102 $172,986 |
4.4 4.0 4.1 |
303 295 289 |
$345,537 $332,717 $334,615 |
1,163 1,137 1,149 |
1,448 1,409 1,445 |
| $5-10m
2019 2018 2017
|
$1,535,836 $1,527,333 $1,491,828 |
$190,269 $178,746 $178,533 |
6.0 6.2 6.3 |
329 318 311 |
$477,941 $445,604 $422,073 |
1,148 1,156 1,159 |
1,472 1,510 1,497 |
| $10-20m
2019 2018 2017 |
$1,895,655 $1,813,824 $1,773,257 |
$192,214 $183,906 $176,069 |
7.4 7.3 7.5
|
355 343 339 |
$506,375 $479,451 $473,320 |
1,043 1,028 1,022 |
1,493 1,486 1,480 |
| > $20m
2019 2018 2017
|
$2,543,042 $2,339,067 $2,123,735 |
$204,616 $200,610 $199,390 |
9.3 8.7 7.9
|
406 405 403 |
$674,711 $643,170 $634,949 |
1,031 1,034 1,056 |
1,474 1,448 1,469
|
source: the 2020 rosenberg map survey. data is for 2019.
the term “partner” here denotes “equity” partner.
the main takeaway from this chart is that generally speaking, the larger the firm, the stronger the performance, especially in profits, as indicated by the income per partner metric.