12 Ways to Truly Drive CPA Firm Profitability
In bowling, a perfect game is 300 but the top professionals average around 230. In baseball, you’re a star if you get a hit 30% of the time. In CPA profitability, if every aspect of managing a firm was optimized, the income per equity partner (IPP) would be roughly $1.5M. The actual average, per the latest Rosenberg MAP Survey is $520,000 for firms with annual revenue ranging from $2M to $30M.
The point is that perfection in virtually all life’s endeavors is not possible but a CPA firm can still be a star while being less than perfect. In this blog, we present 12 time-honored management practices that have the highest impact on firm profitability. No firm rates an “A” on all twelve. With the right attitude, effort, talent and leadership, partners can achieve lofty income levels that they never thought possible when they graduated college.
- Strong management and leadership. We’re leading with this because it drives all the other eleven tactics. Effective leaders clarify expectations, hold partners accountable and provide firm personnel with the support and structure to be all they can be. This includes having a COO, HR director, etc. to keep line partners far away from firm administration so they can concentrate on driving the firm’s success in two ways: Taking great care of clients and staff.
- Effectiveness in all staff areas. Achieving success at a CPA firm is all about people. Recruiting, training, mentoring and leadership development. The firm is driven to make it a great place to work where all firm personnel are engaged at high levels. Partners are highly effective bosses that are committed to, and held accountable for, helping staff learn and grow.
- Partner behavior channeled in a positive direction. As the partners go, so goes the firm. This does not mean that staff are unimportant. But partners are the drivers. There needs to be partner accountability for performance and behavior. Partner relations must be collegial and team-oriented, with conflicts promptly resolved.
- Proactive business development. Bringing in business is the most difficult of all partner duties that is also the hardest to be successful at. At the average firm, only 20% of all partners are effective business-getters. Firms need to be totally committed to growth, and that includes ensuring that there is a high level of business development activity by firm personnel.
- Exploiting the potential with your existing clients. This could be combined with #4 above, but it’s so important we have listed it separately. The best and most effective way to increase revenue is by forming close relationships with clients and tapping into the potential for expanded services from them as well as getting their referrals to prospective clients. Of course, to do this, a high level of client satisfaction and service excellence must be achieved. Also, firms need a diverse portfolio of services so that clients’ needs can be satisfied in many ways.
- Specialization. Yet another item that could be combined with #4 but it’s too important to risk being overlooked. The power of specialization is extraordinary. Clients will pay higher prices when they know they are hiring an expert. Marketing efforts are more focused and cost-effective because firms stop trying to be all things to all people. And finally, specialization enables CPAs to practice their favorite form of business development – answering the phone or reading their email – because when you are an expert, your reputation causes prospects to call you instead of you chasing them.
Our book What Really Makes CPA Firms Profitable? Addresses ►the essence of CPA firm ►profitability ►benchmarking ►marketing and the bottom line ►strong management and leadership: the most reliable path to profitability ►25 best practices that move firms from good to great ►what does not seem to be important to firm profitability ►partner relations: happy partners are productive partners and ►40 great ways to improve CPA firm profitability.
- Partners leveraging their time. Partners do partner-level work, delegating staff-level work to staff. Most well-managed firms believe that it’s more important what partners do with their non-billable time than their billable time. Non-billable activities include business development, training and mentoring of staff, firm management, teamwork and more.
- Establishing a high bar for equity partner. Until several years ago, droves of firms promoted staff to equity partner either as a staff-retention tactic or a reward for long-time staff who put in their dues, or both. These practices have largely gone by the wayside with the increased usage of the non-equity or income partner position. The position of equity partner should be reserved for those who drive the firm’s revenue, profits and overall success.
- Growing revenue per partner. Of all the performance metrics in MAP surveys, the statistic that correlates the strongest with profitability is revenue per equity partner. Achieving a high revenue per partner number is much more than simply having fewer equity partners with whom to split the profits. It’s also made possible by strong leveraging by the equity partners; they can only manage a large client base if they delegate as much work as possible to staff, train the staff to do high-level work and provide staff with opportunities to build strong relationships with their clients.
- Instituting high billing rates, especially at the partner level. CPAs are notorious wimps when it comes to billing clients. Many reason that because they are weak at business development and don’t like doing it, that their lower fees will cause prospects to hire them. Others lack self-confidence in the value of their work and are all too eager to discount their time. Clients rarely fire their CPAs because of high fees. The work of CPAs is extremely valuable and should be billed aggressively. Ask yourself: If you raised your rates by 20%, would you lose 20% of your clients. Most would say no.
- Productivity. Rather obvious, but critical to profitability. Many firms limit their definition of productivity in terms of billable hours, which certainly is a valid measure. Better managed firms understand that there are other aspects of productivity such as managing an increasingly large client base, achieving goals, time management, efficiency, delegating and supervising work, training and prioritization of duties and tasks.
- Benchmarking. A fundamental tactic in improving profitability in any business is comparing its performance to the competition. There are two types of benchmarking: (a) statistical such as MAP surveys and (b) participating in roundtable groups and conferences where attendees rub shoulders with their counterparts at other firms and in so doing, learn not only best, but better practices.
New Second Edition! Several dozen high-impact techniques for maximizing profitability; 25 best practices for moving firms from good to great; what is NOT important to profitability; BONUS: current CPA industry benchmarks from The Rosenberg MAP Survey.Learn More