five ways to separate accounting winners from losers

how many of these are you expert in?

by marc rosenberg
the rosenberg practice management library

if cpa firms did everything “right,” they could easily double or triple their income. doing things right includes effectively bringing in clients, charging high billing rates, maintaining strong realization, high leverage of staff to partners and keeping expenses down. it’s the rare firm that does well in all of these categories.

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the path to profitability is different for every firm. but the truly profitable firms are successful at achieving one or more of the following:

1. high billing rates.

a friend of mine owns a construction company. i asked him who his cpa firm was and whether or not he was satisfied with the firm. his response was, “he’s expensive, but he’s good.” that’s how all firms should want their clients to think of them.

on the surface, it might seem overly simplistic to suggest that raising billing rates will increase profitability. of course it will. but the issue of billing rates runs deeper. high billing rates are a barometer of four important attributes of the way firms conduct their business.

first, billing rates are an indication of how well you convey value to your client. cpas are quick to point out how competitive the market is. they claim that if their rates are too high, their clients will leave and go to a cheaper firm. indeed, clients may often tell their former cpas that fees were the reason for the change. but that’s just an easy out for the client: studies consistently show that fees are way down on the list of what causes clients to change cpas or become dissatisfied with their firms. issues related to quality of service – for example, lack of timeliness, tardy return of phone calls, functioning like numbers crunchers instead of business advisors, lack of contact, etc. – always rise to the top of the list of factors causing dissatisfaction.

second, billing rates are an indication of how well you differentiate your firm in the market. cpas have a tendency to view themselves as one of several fine firms in their market. but there are ways to achieve noticeable differentiation: niche marketing, specialty consulting services, stability, longevity, size, growth rate, activity in the community, and an exemplary reputation with key referral sources such as banks and law firms are just a few techniques.

remember: differentiated service of an undifferentiated product can command a premium.

third, billing rates reflect the value provided to clients. cpas have a strong tendency to undervalue themselves. they think that because they are doing work that the client needs but doesn’t always want (compliance work), the client will not pay “high” rates. the client may, in fact, balk at paying high rates, but this probably is a reflection of the cpa’s failure to convey value to his/her client rather than the client’s predisposition to be cheap. for example, if you view the audit as a routine, rubber stamp activity and mail the report to the client, you may very well experience heavy fee resistance. but if you use the audit as an opportunity to understand your client’s business, routinely provide your client with fresh, innovative ideas, and deliver the report instead of mailing it, you have conveyed value. firms that know they are good, work hard for their clients, and meet the clients’ needs should be able to charge high rates because they are worth it. firms with higher billing rates experience the highest levels of profitability.

fourth, to some extent billing rates need to be commensurate with the level of work performed. for example, partners may experience a difficult time commanding a high billing rate if they do the work of a third-year staff person. partners need to leverage themselves by pushing down work, not doing staff-level work.

2. high staff billable hours.

i am always skeptical of map surveys for two reasons. first, i have found that these surveys tend to attract more underperforming firms than overperforming firms. second, the surveys tend to perpetuate a sense that average is acceptable. here’s an example: frequently, when i begin working with a new client on a project, they throw questions at me. i encourage this.

one common question is, “what is the national norm for billable hours for professional staff?” lately, my response has been in the mid 1,500s. the next sound i hear is a sigh of relief from the partners, followed by the comment: “that’s good to hear. our firm is at 1,575, so we’re ok.” i respond: “congratulations, you can all feel good that your firm is a nice average firm.”

the reasons why firms experience annual staff hours below 1,500 include one or more of the following:

• the firm is reluctant to convey their expectations of higher billable hour levels to the staff for fear that the staff will leave. the reality: as long as the total hour requirements don’t go up, the staff will work 1,600, 1,700 or more billable hours. contrary to some partners’ perception, today’s young people like to be busy.
• the firm is reluctant to be honest in conveying negative performance feedback for fear that the staff will leave. reality: staff won’t improve and they crave feedback.
• the firm has ineffective staff scheduling that, among other things, has resulted in partners losing sight of one of the fundamental duties of a partner: to keep staff busy. there is no reason why the professional staff of a firm can’t be closer to 1,700 or even 1,800 billable hours. many of the more profitable firms do this. don’t be content merely meeting map survey norms – they are too low.

3. high ratio of staff to partner.

this is commonly referred to as partner leverage. to the extent that a firm can achieve a high ratio of staff to partner, firms usually make more money. this is probably one of the main reasons why the large, national firms make so much more money than the smaller firms – they have ratios that approach 10:1, while smaller firms struggle to get to 2 or 3:1. but it takes several things to achieve this high leverage. first, partners must be delegators instead of doers. second, the firm must be effective at training. third, the firm must be a good place for people to work, which keeps the staff energy level high and turnover low. firms with high staff turnover almost always have a catch-22 situation with the partners’ attitude toward the staff: the partners get frustrated with the turnover and think that it’s not worth the effort to delegate and train the staff. this situation is obviously not conducive to achieving a high ratio of staff to partner.

4. high fees per partner.

a very important measure of leverage. to excel at this metric, partners need to be good delegators and be effective at bringing in business. they also need to have a good mix of large and small clients. partners that excel at this metric avoid administration like the plague. finally, from a firm perspective, the firm needs to be a great place to work for well-trained staff, and the firm should have high standards for promotion to partner.

5. high fees per partner and per person.

these metrics are not only measures of leverage, but also a measure of firm efficiency. firms that make full use of technology, have efficient work processes, and provide good supervision and training will excel in these metrics.

posted on january 18, 2024