Why Revenue Growth is Old School
Once upon a time, staff were abundant and CPA firms made plans to grow revenue every year. Life was good! Then one day, a staffing crisis hit our industry and took many of the staff away. Revenue growth became harder and harder without staff. Partners worked more and more hours until…
“I can’t and won’t work as many hours as I did last busy season.” I am hearing this from more and more partners these days. With fewer staff, many firms are struggling to serve existing clients, much less grow revenue. What’s a partner to do? Revenue growth has historically been a safe path to bettering your firm. No more.
Capacity is King
With the staffing shortage, capacity is playing a primary role for my clients in all the strategic plans I am doing this year. A lightbulb moment has occurred for multiple firms when they asked themselves: What if we managed for profit before adding more revenue?
If you manage for revenue growth, hours need to go up correspondingly. This may be unappetizing or impossible.
If you manage for profitability, you may be able to shrink revenue and/or hours and still make more money. This sounds intriguing!
Some simple math illustrates the point.
Let’s assume it takes 3,000 chargeable hours at an average rate of $350 per hour to generate $1M in gross revenue for one partner. To grow that to $1.5M, you’d need to put in 50% more hours. That’s the traditional model – when adding capacity wasn’t an issue. It may no longer be possible. However, you can still get to the same profit level (in this case we’re looking at net revenue and assuming net income margins are constant) by improving your billing rate and realization. You can reduce the charge hours significantly by focusing on those levers.
Grade and Cull Your Clients with a Smile on Your Face
How do you take action on this idea of managing for profitability? A very practical first step is to grade your client list from A, B, C, D and F. The AICPA’s Private Companies Practice Section (PCPS) has a free tool that’s a great start for what criteria to consider. Make sure profitability is one of your criteria. Then consider whatever other criteria matter most to your firm for each client and give them a grade. Let your staff help! They know who is a pain and who is a pleasure to work with. D’s and F’s have to become A’s and B’s; otherwise, it’s time to transition them out.
Partners are often hesitant to fire any clients, and then relieved when they realize that their worst clients are very easy to let go of. Working with a CPA is a two-way street – you are used to honoring and respecting your clients and providing great service, and it is right to expect that your clients will treat you and your staff with the same dignity and respect and will reward you appropriately.
Our book, What Really Makes CPA Firms Profitable? addresses the essence of CPA firm profitability • accountability and acting like a partner • 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 • 40 great ways to improve CPA firm profitability.
Raise Your Rates (Then Raise Them Again)
Another quick hit for many firms to enhance profitability is simply to raise pricing. We benchmark firm pricing (and other key performance metrics like income per partner) using the Rosenberg Survey data. That gives firms a view of what comparable firms are charging nationally and locally in their size range. Don’t let modesty reign supreme! CPAs are a special few these days, and we should be proud and walk with our heads held high (with prices that correspond).
Partners are often more hesitant to increase pricing than clients are to pay it. One thing that can help is to explain (to yourself first, and then to your clients) where the CPA industry has been and why appropriate pricing is a must:
– Baby boomers are retiring, leaving a gap in the labor market across all industries.
– Fewer and fewer students are majoring in accounting, shrinking our already inadequate pipeline of talent.
– Inflation has been high in recent years.
– The cost of labor has soared (for all the above reasons).
– The cost of technology is going up rapidly for CPA firms.
– While accounting is becoming more automated, interacting with a real human who is a CPA is a premium and necessary service if you have any level of complexity in your tax or financial situation.
This is why you will need to charge appropriately. If they don’t like that, they are welcome to shop around (and are likely to hear a similar tale from other firms).
Getting your pricing in line doesn’t take more billable hours, but it adds to the bottom line (or gives you money to enhance operations – like improving on staffing and technology) rapidly.
Revenue growth is great – if it’s not wrecking your team. Responsible, sustainable and profitable growth is what firms are moving towards to survive and thrive. What will you manage towards this year?
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