CPA Firm Profitability: Best Practices

At a recent monthly roundtable group of 25 MPs from most of Chicago’s largest local firms, these highlights emerged.

The use of compensation committees to allocate partner income continues to increase as more and more firms realize that this is the best system for recognizing important, if not critical partner achievements in areas other than production such as staff mentoring, firm management and teamwork.

Several firms have targets for new business origination for promoting a non-equity partner to equity.  The targets ranged from $375-750K.  This keeps the bar high for what it takes to be an equity partner in the firm.  Growing existing business counts as much as new clients for many of the firms.

Mergers were the biggest cause of revenue growth in 2011 among most of the firms.  When asked if the mergers increased their firms’ profitability, the resounding response was “yes,” though some qualified their reply.  One firm said it required a large upfront investment but it paid off in the long run.  Another said that profitability didn’t come right away due the time it took to merge cultures, a long learning curve by personnel from the acquired firm and the time it took to get realization up.

Impact of not-for-profit (NFPs) on profitability:  Mixed reviews.  Some do well with them and others keep them to a minimum.  One firm said: “For a firm to be successful with NFPs, the partners have to accept the fact that their profitability will be lower than on for-profit clients.”

“If we don’t have to hire additional staff to handle a NFP, then we’ll go after it.  But we won’t hire people just to do NFPs,” offered another firm.

One partner whose firm is comprised of  “working partners” (partner billable hours in the 1,400s) stated that “when partners work as hard as we do, we don’t want to work on small clients because they we to give these clients less attention, which often leads to unhappy clients.”  But he acknowledged that “it takes a little professional backbone to turn down NFP jobs.”

Practices for improving realization percentage:  (1) Consulting work such as litigation support should be billed at much higher rates than accounting work; (2) When your realization rate gets close to 100%, it means your rates are too low; (3) Another indicator that your rates are too low is when the gap between partners and professional staff gets too close.  (Data from The Rosenberg MAP Survey  shows that on average, standard partner rates are 45-50% higher than manager rates; also, realized partner rates are 1.7-1.8 times higher than firms’ overall net billing rate); (4) Focus on the efficiency of your processes; (5) A big cause of write-offs is partners and managers doing low level staff work because they don’t have the staff to push the work down to.  By hiring kids right from school, you solve this problem:  The cost of their supervision and training is far exceeded by reducing write-downs on the time of partners and managers.

Tactics for increasing staff-to-partner ratio:  (1) “We focus partners on what they do best and not on doing chargeable work for the sake of posting higher hours;” (2) “Every time one of our partners works on a job, the firm’s growth suffers.  So, we put senior staff on jobs with the goal to keep partners off the job.” (3) “Don’t let a partner do work that someone else can do.”  (4) “We hired more staff to reduce partner charge hours.” (5) “Over the past several years, we have experienced higher turnover among experienced people we hired compared to kids right out of school.  So, we have changed our recruiting strategy accordingly.” (5) “You have to over-hire to anticipate staff who will leave.”

Collecting receivables.  Firms had these suggestions:  (1) Put past-due clients on credit hold; (2) Have an admin person make collection calls, thereby taking the process out of the partners’ control – they don’t like being the bad guy; (3) Get past-due clients on a payment plan.