someone else could do it, but why?
by ed mendlowitz
call me before you do anything: the art of accounting
one of my partners once was asked to recommend an accountant who could do corporate tax returns for a very large company.
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he was told it would take about 20 days and the fixed fee was an amount that was about a third of our normal rates. my partner was going to refer a cpa who sublet from us who seemed to have the time and he asked me if i thought the accountant could do it.
this was the beginning of january and was the morning after i put together our budget for the year and, as usual with our practice, our projected revenues were short but were made up with special work that we always got plenty of. however, in january it looks pretty bleak – in august it seems like a piece of cake.
well, i walked into the office wondering how we would make up the shortfall when i was asked this. i asked about the work and because it would cover about 40 percent of january’s budgeted extra business, i said we should do it. the argument against it was that it was far below our regular rates, but i pointed out that we would not have to hire anyone extra and could cover it with who we had, with some overtime for the staff and extra hours by us, with most of the fee dropping to our bottom line. i also added that it would reduce the pressure for extra work for january.
when we met with the client, we were shown the prior years’ returns and we noticed that the returns had a major error. the corporation, which was quite large but able to be on the cash basis, had an accrual basis balance sheet – a terrible mistake. when we pointed it out and explained the consequences, they of course got very upset and ended the meeting saying they needed to consult with the big eight accounting firm that prepared the return.
our findings were confirmed, and we were then asked how much we would charge. we quoted our normal fee, which was about three times greater than they expected to pay, but still lower than the big eight firm charged the prior year and substantially higher than two other firms. but we were the only ones who “knew what we were doing.” we did some bargaining and got the work for about 2 ½ times what they originally said they wanted to pay.
the takeaway here is that when you are in business, you should not summarily turn down work because of low fees if you do not need to increase overhead or have added substantial costs attributed to that work. every “extra” dollar goes straight to the bottom line.
obviously you cannot run a practice successfully without minimum rates or fees, but an occasional special job at a low fee will not upset your revenue structure and will add to your profits.
a final comment is that i don’t consider this a lowball fee because the client clearly laid out what they wanted and the price at which they already had two firms willing to accept the work. also, our fee was the opposite – it was much higher!
9 responses to “my first thought is to never turn down business”
ed mendlowitz
i posted a related article today. go to https://www.accountingtoday.com/opinion/art-of-accounting-discounted-fee-season
ed mendlowitz
thank you for all the comments.
1. thanks to everyone that agreed with me. the posting was a real incident and it was strictly motivated by getting revenue we would not have had. i never minded working hard and if i needed staff to pitch in, they would have done so for two reasons – i would have asked them to and they would know that i needed them to step up; and i would have paid them [right away] for the overtime they worked.
2. the client was a top rate company using a big 8 firm for its audit and another one for the tax returns.
3. we had every intention of getting the work for the stated fee. when we discovered that the balance sheet was done incorrectly and it was confirmed then there was an opportunity and no reason to price it low – we were the only game in town and we got the work at the right fee which was still much lower than they were already paying the larger firm. by the way, we ended up getting more and more assignments and eventually this became our largest client with annual fees more than 30 times the initial fee they wanted to pay.
4. the reader that disagreed is entitled to their opinion. we all make decisions on how we want to run our businesses and lives. mine was to take every client that came my way. i was building a practice and was trying to earn a good living and also put money away for my retirement and have money left over to grow my practice. that could not be done by turning away business.
5. i was picky with clients – i never took a client that wanted me to do something illegal or who wasn’t willing to pay me. otherwise i took the client. occasionally i dropped a client that was extremely obnoxious and disruptive to my staff and the way i did business; but that was very few and far between. i could probably count them on one hand. i don’t believe in dropping clients to grow a practice.
6. the issue of the balance sheet is not important at this point. the issue in what i wrote was getting business at off price fees; and then [getting lucky] recognizing an opportunity and changing the dynamics. but for those of you that will lose sleep if they don’t hear what the tax issue was – here it is. it was a cash basis tax payer that reported an accrual basis balance sheet. i stated that they could lose the ability to report on the cash basis if the irs audited them. the big 8 firm agreed with me. i have no interest in rehashing the tax issues now, some 30 years after this event took place, so do not comment on what the tax law says and who is right or why i was wrong. i do not care and won’t respond.
7. however, if you have questions on why i would take work at very low fees, you are welcome to comment or contact me.
8. again, thanks for reading what i write and commenting.
charles read
i fully agree with ed. it’s worked that way for my firm for the past 10 years.
j lee
i disagree with the thesis of this article.
some people actually want quality of life, and not everything is about the company bottom line.
20 days of work is a pretty large commitment, and coupled with the fact that you charged below rate is almost a slap in the face.
i mean sure, if you’re a new firm starting out or have staff that are in need of work, it makes sense.
but really, what accounting firm needs more work nowadays?
and at what point is the workload ever enough?
kim
way to think about your staff on this one (that was sarcasm).
to assume they will just happily work overtime right before tax season and to assume the client will have everything ready to get done over 20 days of work.
maybe it’s hours totaling 20 days worth but actually takes a much longer amount of time.
we are on the same boat as you with special projects that come later on in the year except that we do our best not to burn people out before, during, and after tax season. this includes making sure we have good clients who aren’t super fee sensitive and are understanding they could be charged more depending on additional work we may need to do for them.
so i am in complete agreement with robert on being picky with clients.
we have had some awful clients in the past and since we have been picky, our overall quality of life has dramatically been better and has not hurt our bottom line.
just because other firms were willing to go for whatever that fixed fee was, doesn’t mean it wasn’t a low ball offer. we take pride in our work and our clients appreciate our work and advice so they don’t have a problem with our fees.
robert balter
i really really disagree.
i believe in being picky about clients, very picky.
and every time i violate that, i regret it!!
being picky can keep you out of trouble, mostly with the client– assuming you would either be or become competent.
robert messa
i couldn’t agree more robert. i guess the first name robert must mean something…. we are in the business of relationships and when you start out being a discount provider and being the downstream smaller cheaper accounting firm, you are not establishing a good start to a relationship. i don’t agree that there is ever extra time enough to take time from the clients who treat us generously and have done so for most of our careers in order to make a quick buck. we should give or donate time to the clients that got us where we are and strengthen those relationships before we take on a new guy on the block at a cut rate to make a quick buck.
lee cordon
you say this client had an accrual base balance sheet but you don’t say if it was an accrual base taxpayer. did it have a cash basis income statement? was part of the engagement to convert them to a cash basis?
philip c seltzer
what is the problem of having an accrual basis balance sheet but being on the cash basis for income tax purposes? the adjustments on schedule m-1 would reconcile accrual basis income with cash basis income.