four considerations for effective client culling

2023: the year “cull” was no longer a four-letter word for cpa firms.

by bill penczak

it finally happened.

for at least the past dozen years, i’ve heard cpa firm partners’ bold talk about culling their clients in order to ease staffing issues, focus on larger, more profitable engagements, or rid the firm of the pita clients, which has nothing to do with animal rights and more about protecting their people from those who are a pain ____  _____  _____ (complete the next three words on your own, and you can skip wordle for today).

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a recent study was published that indicated only 1 percent of cpa firms could adequately staff their engagements. and while more firms are migrating to offshore models to get work done, more are actually culling clients, but without a measured process for doing so.  

here are some suggestions for successful extrication of clients who are wearing down the profitability and the morale of firms: 

1. raising fees and/or rates is a mixed bag for client culling efforts. wage inflation is still rampant in public accounting, and your original fee arrangements, even with periodic adjustments, likely lag the initial engagement profitability plan. for starters, firms should determine the true cost of completing a return or an audit, recalculate what the fees should be, and present that pricing to the client now before it is too close to busy season to give clients enough time to find a replacement firm. don’t be shy about charging what you and your people are worth – there’s a lot more price elasticity in public accounting than you might think. one firm – primarily a tax firm – increased the minimums for all 1040s and 1065s by approximately 20 percent last year and had very little client attrition. and the handful of clients who did leave came back when they discovered what other firms were charging. so, the point is that this approach might cull the cheapest of the cheap, but it won’t be a panacea for culling clients to the degree you might think. 
2. align with a smaller firm with a different cost structure. one of the concerns of culling clients is kicking them to the curb without a replacement option. because firm partners typically don’t want to leave their clients in a lurch (even the pitas), having a soft landing with a firm with lower rates and high work standards makes the transition easier for the client, helps another firm and can assuage the guilt of firing a client. some might question the wisdom of helping a competitive firm, but i contend there’s enough business to go around these days that it makes less difference than it might have in leaner times. 
3. establish margin minimums as a partner group and hold everyone to them. in a previous 卡塔尔世界杯常规比赛时间 article, i wrote about the only two things that matter, one of which is margin contribution. establishing margin goals by partner book allows for some flexibility in the client base, but it’s more likely to force the culling behavior that’s requisite to remain profitable. the tougher aspect of this approach is that it will force partners to take action by examining their overall margin as opposed to the realization and utilization that, while important, are only part of the inputs to profitability. this approach will also force partners to examine the efficiency of their own people in terms of keeping engagements on schedule and on budget, which is admittedly difficult. purging unprofitable clients who are eternally late on their pbc documents, are error-prone, cause scope creep or other factors is only one half of the equation. how well firms are managing their people and their engagements is the other half. 
4. decide in advance what to do about unbilled wip for clients about to be culled. unbilled wip, along with a constant diet of cheese crackers for lunch, are the two silent killers in cpa firms. partners are astonishingly reticent to bill for legitimate work that is out of the original scope but nonetheless justified. ten percent of gross billing in unbilled wip is not unheard of, all of which could potentially drop directly to the bottom line. so, before you have the conversation with a potential client-culling prospect, first have the conversation about not getting paid for the work you have completed and not billed. their response and the tone of the conversation will be telling about whether this client is interested in receiving services for a fair fee or whether they only want a one-sided transactional relationship. you can still part amicably, but give the client the opportunity to have that conversation before the firm walks away from unbilled wip.  

for the sake of your sanity, the quality of life of your people and ultimately firm profitability, culling the clients who no longer fit is okay in this shifting economy and labor market. be bold to take the steps now, before the busy season sets in, and then it’s too late.  

posted on october 18, 2023