How to Misinterpret CPA Firm Profitability Statistics

True story: A client of mine with long-standing profitability problems called after reading our latest MAP survey.  As usual, his firm lagged behind almost every industry norm.  But with great pride, he told me that his firm’s net firm billing rate was 20% higher than the industry average.  I had to puncture his balloon by telling him:  “Yes, you did well in this category.  But that’s because you have 14 partners and 10 staff!”

Calculated by dividing the total annual net fees of the firm by total firm-wide billable hours, net firm billing rate is dramatically impacted by the firm’s staff to partner ratio; they’re only relevant if your firm has a fairly standard  staff-partner ratio.

Here are some more examples of the incorrect use of statistics and metrics in managing a CPA firm.

Utilization percentage 

This metric is the firm’s total billable hours  divided by the total work hours of the firm, with all personnel included.  Firms also track utilization percentage for departments, partners, managers, seniors, etc.  I’ve never been a big fan of utilization percentage.

Why? Because it is easily manipulated by the total hours a person works and the extent to which people record all of their billable time.  I’m more interested in knowing how realized, billable hours per person or by department compares to budget than I am in knowing the percentage of billable to total hours.  You can’t take a percentage to the bank, but you can take hours.

Treating non-equity partners like “partners.“

The problem here is in the definition.  Many non-equity partners at the Top 100 firms out-perform and out-earn equity partners at smaller firms.  Most non-equity partners at firms below the Top 100 function and perform more like managers than equity partners.  Treating non-equity partners the same as equity partners for such metrics as fees per partner and ratio of staff to partner will usually distort these computations.  So, it is critical to treat non-equity partners as professional staff for purposes of computing “partner” ratios.