This is the 21st year of the Rosenberg Survey. It reports on over 100 financial and operating performance metrics of over 300 CPA firms. But instead of merely citing key statistics and analyzing them for you, today’s post analyzes 5 key metrics, first from a traditional perspective, followed by a more subtle but powerful analysis that guides firms on the true messages behind the data. Remember, the 2019 survey reports on 2018 data.
The Obvious. Firm revenues were up 7.7% from last year. Historically, this is considered a strong increase. As is often the case in analyzing most metrics, larger firms posted a higher growth rate – 10% – than smaller firms (under $10M) at 5-6%. Business is good for CPA firms.
The Subtle. Let’s look carefully at the 7.7%. 1.8% of it was due to mergers. 4% was from rate increases. That leaves about 2% for real growth. If you were an average firm (let’s define average as the two middle 25% quartiles for growth), are you really happy with a 2% organic growth rate? I hope not. Yes, I know many feel that growth could be better but the shortage of labor hinders growth. That may be partially true, but I think firms use this too often as an excuse. The market for CPA services is excellent. If your organic growth rate is only 2%, ask yourself: Are you trying hard enough? Do you have an aggressive marketing strategy to exploit your firm’s true potential? Sadly, if many firms are honest, the answers to these questions are no.
Bill Gates said: “We always overestimate the change that will occur in the next year or so and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.” CPA firms are on the verge of disruptive change. No one knows how long it will take for this disruption to occur in earnest. But make no mistake – it’s coming. The disruptions will be caused by technology and changing client needs. Substantially less audit work; more efficiently performed tax work. Dramatic increases in consulting to take advantage of demand and to replace the lost compliance work. Firms wishing to at least maintain a paltry 2% real growth increase need to start today to brace themselves for the full impact of these disruptions tomorrow. What is your firm doing? What should it be doing?
The Obvious. Average equity partner income (IPP) was $470,000, up 6% from last year. This increase was fueled by nice increases in staff to partner ratios, billing rate increases and revenue managed per partner. As Mel Brooks said: “It’s good to be the king.”
The Subtle. Complacency. What a horrible word. But it unfortunately describes the way partners at many firms operate. They manage a $1M+ client base. They love their clients and the clients love them. They are an owner in an entrepreneurial business with very little accountability. They’re busy all the time with interesting work. They make $470,000 a year (on average), many times what their parents earned and way more than they ever thought they would earn. Many partners will say: “If that’s complacency, I plead guilty!”
Well, consider these statistics if you will. The top 58 of the 300+ firms in our survey had average partner income of $833,000, a group we refer to in our survey as “elite firms.” How did they do it? A higher bar for equity partner, with average revenue per partner of $2.7M, 76% higher than average firms. Staff to partner ratio of 9.7, 60% higher than average firms. Partner billing rates of $392, 21% higher than average firms. Revenue increases of 10.7%. 57% more consulting revenue. Though all of these elite firm metrics are way higher than the average firms, they are not outlandishly high and quite reachable. The tombstones of average partners will never say: “Here lies Jane Smith. Wonderful wife and mother and a complacent partner at her firm.” But with a little effort, firms can narrow the gap between complacent and elite.
What Really Makes CPA Firms Profitable? Addresses►the essence of CPA firm profitability ►latest industry benchmarks ►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 doesn’t contribute to profitability ►partner relations: happy partners are productive partners and ►40 great ways to improve CPA firm profitability
MERGERS CONTINUE AT A HEALTHY PACE
The Obvious. Mergers accounted for a significant 23% of firms’ revenue growth of 7.7% The merger market is as heated as ever. The Perfect Storm of succession planning, which triggers the majority of the mergers, continues unabated: (1) Baby Boomers retiring in droves, (2) few or none to replace them, exacerbated by (3) a shortage of accountants and (4) woefully inadequate attention to developing new leaders by the partners. The aftermath of this storm is that aging partner groups have no choice but to merge up as an exit strategy.
The Subtle. The CPA profession clings to the need to measure revenue growth as both with and without mergers. It’s almost like growth from mergers doesn’t count. Most other businesses measure revenue growth, period. Growth via merger is just one of many growth strategies.
Even though there are hundreds of mergers every year, it’s a relatively small portion of all firms. Why aren’t more firms in the merger market? Many doubt that mergers work. But they do work…if you do them right. Doing them right means doing your due diligence, a process that, shockingly, many firms fail to do properly. Inane reasons given by firms why mergers didn’t work include poor quality work by the seller, marginal talent of personnel, lack of productivity and unproductive partners. As a merger expert, I’m here to tell you that ALL of these pitfalls are routinely sniffed out by smart firms who know how to do their due diligence. If firms did their due diligence properly, the 23% statistic (percentage of growth accounted for by mergers) would be much lower because firms would be rejecting more sellers because they fail to meet the buyer’s standards.
The message: Step up your activity in pursuing sellers. But…make sure you do them right.
NUMBER OF FEMALE PARTNERS
The Obvious. 23% of all partners were female this year, up from 21% last year.
The Subtle. Nothing I say or you think should take away from the impressive rise in female partners over the years. The good news is the percentage of female partners is double what it was a mere 10-15 years ago. Bad news #1: 60% of all professional staff is female, but only 23% of all equity partners are women. Bad news #2: Because women are at least as smart as men, firms are losing top talent. I read a great quote from a Big 4 MP years ago: “If I have 500 partners and 400 are men, I have 150 underqualified partners.”
So what’s the problem? Quite simply, some firms are still chauvinistic, they aren’t trying hard enough to retain great female staff, or both. 10-15 years ago, I led a roundtable group where a measley 4% of their partners were female. I asked them why this is the case. There was a long silence. Then, one of the partners (God bless him) said: “Are you suggesting the problem is us?”
CPA firms need to do more to stop the exit of great female talent and get that female partner metric up to 40% or so where it belongs.
WEALTH MANAGEMENT SERVICES
The Obvious. One-third of CPA firms provide these services. As is the case with many of our metrics, larger firms (those over $20M) pursue this best practice much more often than smaller firms. The biggest reasons given for not offering these services: (1) we’re not interested; our CPA practice gives us plenty to do; (2) risk of losing investment brokers as referral sources; (3) don’t want to jeopardize client relationships when the market goes down.
The Subtle. So, 2/3 of firms do NOT provide wealth management services, ostensibly due to the reasons stated above. Wow, talk about leaving money on the table! My consulting practice has put me in a position to see how lucrative wealth management services can be. My anecdotal data indicates that the profit per partner work hour for wealth management is more than double that of CPA services. I’m not suggesting that CPA firms divest themselves of accounting and tax work; instead, I am suggesting that the 2/3 of firms not providing wealth management services add these services to their service portfolio and create a win-win: You better satisfy your clients’ needs and your make more money, all without working more hours.