Improving CPA Firm Profitability... with clients, strategy, unity, systems & people!

10 Ways to Recruit & Retain Valuable Employees

2011-02-03T12:05:00.000-07:00

Does your firm have a consistent hiring message and formalized training program for new hires?

Many CPA firms hire for skills and pay scant attention to how an individual will fit with the firm. We often hire an individual and then think that we can change the firm to meet their needs rather than insisting that the individual adjust their behavior and actions to the needs of the firm. I have seen firms with more than ten owners add one individual who completely upset and divided the firm. As the old saying goes “one bad apple”… you know the results. Stay tuned for our next post on Hiring Right, or Right now?

In the meantime, right now, RETENTION is paramount. Retention starts with attracting the right people, and finishes with treating them well.

Here are 10 tips to help YOUR firm achieve your hiring and retention goals.

Increase focus and efforts. Make recruiting a year-round focus, engaging both partners and employees in the process.
Build an employee referral network. Use it to find employees and offer your expertise to other accountants while spreading the word about the profession through speaking and writing engagements. Focus on reciprocity--make referrals for other firms and don't burn bridges.
Differentiate your firm. Build firm unity through consistent messages and a clear focus on external and internal service strategies--become an employer of choice in your market.
Work on the "good" clients. Evaluate your clients--employees want to do valuable work and be associated with successful clients.
Create a culture of success. It is not about work/life balance, but about work/life success. Find a way to make your employees feel more successful.
Turn good intentions into performance. Consistent communication that results in mutual benefits for everyone will create a culture of trust within a firm.
Define success for every member of the firm. Ensure that everyone understands where the firm is going and how they fit into the plans.
Set up a reverse mentoring program. Take the initiative as a leader to get feedback from those you supervise.
Reduce internal competition for resources. Create a system of governance to efficiently schedule and manage your people, and ultimately, better serve clients.
Eliminate negative talk. Move past the limiting negative attitudes by using a positive approach to solve the profession's staffing issues.

Profit Point #3 - Stop extending excessive credit.

2011-01-18T14:19:00.000-07:00

Your great clients don’t need it, while your not so great clients will readily take advantage of the credit, often leading to slow payment or no payment.

Remember for every dollar of accounts receivable written off, it takes three dollars of additional revenue to recoup your loss.

Instead of offering all of your clients credit, use scheduled payments for larger jobs (i.e. 30% each for three payments with the 10% final payment upon delivery of the financial statements) and offer budget payment plans to clients ("as a benefit to our clients we are now offering a budget payment plan").

Start the payments in the off season and offer a discount for participation (3%-5%). Of course these plans have to have the covenant that the budget plan is based upon the prior year’s fees and additional work required will be billed separately.

These steps will speed up cash flow and result in lower capital requirements for your partners while at the same time improving profitability.

Profit Points #2 - Handling Scope Creep

2010-12-30T12:21:00.000-07:00

Are you subscribed to Profit Points yet? It's a short, easy, 1-tip read that can help you, the partners & employees get the most out of your firm.

Profit Point # 2 - Handling Scope Creep

During this great recession it has never been more important to manage client expectations.

Remember you get to set your fees.

Unfortunately out of scope work very often becomes a negotiation with the client when it should be a simple change order.

Change the wording in your engagement letters
from “If any matters come to our attention that will increase the scope of our work…”
to “When we discover matters that require us to increase the scope of our work we will discuss the situation with you, amend our engagement letter and increase our fees accordingly.”
Then act promptly when these situations arise.

Standardize your change order process and have materials readily available for everyone’s use.

Realization and profitability will increase... guaranteed.

We recommend having all of your employees and partners sign up for the weekly blast and start your firm profit improvement efforts now!

Profit Points #1 - Stop quoting in ranges...

2010-12-13T18:11:00.002-07:00

We've got a new weekly, 1-minute profit tip you can subscribe to!

Get useful tips that you and your entire team can start implementing right away to improve your overall profitability. They'll be posted here over time, but you can get them each week, in order, free!

Here's the first Profit Point:

Stop quoting a range of fees when clients ask about your fee, as the bottom of the range is irrelevant.

You seldom bill the lesser amount and lock yourself into a cap on your fees.

Rather than telling you clients that you estimate the fee to be $12K to $15K, tell them that your fee could be $15K or more and that you will keep them informed about the fees as the engagement progresses.

We recommend having all of your employees and partners sign up for the weekly blast and start your firm profit improvement efforts now!

We have also now completed our 2010 EMPLOYEE CAREER DEVELOPMENT SURVEY and the results are now available to the public... get yours, free, today!

We hope you'll subscribe to Profit Points! They are delivered on Tuesdays at 11am EST, allowing plenty of time during the week to share them with your teams and mobilize the troops to start improving profitability right away!

>>> Subscribe now!
http://www.SteveEricksonLLC.com/profit-points

The Current Economic Reality for Accounting Firms

2010-10-13T05:33:00.003-06:00

A message you must share with your staff!

During my speaking and consulting travels this year, partners and managing partners say they are frustrated with their staff’s expectations in spite of the effects the “Great Recession” has had on their accounting firms. Prior to the past two years, staff members became accustomed to receiving automatic annual salary increases while the economy was booming and are now having some difficulty adjusting as the economy has deteriorated. Unfortunately the market values for goods and services have declined and all of us must now deal with this new reality.

These challenging times require diligence, increased efforts and sacrifice by everyone in order to retain your current clients and remain competitive. Failure to do so could result in losses far greater than those experienced to date in this recession. None of us have ever experienced anything like this so now is the time to communicate clearly to your staff and then ask for their help and understanding.

Team Members: How you can help us build for the future and for your long-term success.

Since 2008 the accounting profession has experienced events that have had a profound impact on how firms must operate. The “Great Recession” has reduced the spending of countless millions which has a negative impact on the clients we serve. As a result, our revenues have been relatively flat or decreasing while our costs have continued to rise. This trend will have to be reversed if we are to remain viable and able to serve our clients successfully. Here are some of these major trends:

• Pricing has moved substantially from a cost-plus model, where a multiple of a person’s hourly salary was charged for services, to a fixed fee for many of the services we provide at a time when regulatory agencies are imposing ever increasing requirements and standards. As a result, our realization has decreased on many engagements due to budget overruns that cannot be billed to our clients. Since our clients are also experiencing the downturn in the economy many have requested fee decreases from us.

• Competition for off-peak seasonal work has become extremely intense as firms vie for those few engagements where work can be done over the summer and fall months to keep their staff busy which has resulted in net realized fees that are extremely low during this time of the year. Staff utilization rates continue to be a concern within the entire profession due to the seasonality of our work and our inability to keep everyone fully utilized during the June to December time period.

• Employee costs and benefits have increased over the years and now in many firms exceed 50% of net revenues which is an historic high. As a result of the down economy and client fee pressures we have been very limited in our ability to give pay increases to our employees for several years and in some cases we have had to adjust our staffing levels and salaries. Dealing with the effects of the recession has not been pleasant or easy. Our objective has been to keep as many people working as possible.

• Our need for technology has continued to increase requiring substantial investment by the partners of the firm not only for equipment but also software, training and the loss of efficiency while employees are learning how to apply the new technology. Software vendors continue to look for ways to increase their revenues from their software which has put further pressure on our cost structures.

• The aging demographics of our profession and our society. Baby Boomers represent approximately 25% of our population and they are just now starting to retire. This is having a direct impact on the services required by clients and our ability to provide those services as many CPAs, 50% of which are baby boomers, begin to retire. The resulting “brain drain” is concerning as we want to give our clients the very best advice and service possible while creating opportunities for everyone to grow professionally.

The good news from all of this is that there will be an ever increasing need for certified public accountants in the future. As the economy picks up there should be many opportunities for growth. There are many ways you can assist us during this time of change and uncertainty. Following are a few ways for you to help and at the same time enhance your career in public accounting:

• Have a great attitude and be a person that others want to be around. Negativity is not helpful or productive and we need to be in a positive state of mind to be creative and provide solutions to our clients. Take responsibility for your own career satisfaction by consulting with mentors and getting the information you need to be successful in your career. As you experience greater feelings of success you will be more positive and our clients will receive better service which will benefit all of us.

• Take responsibility for your assigned engagements and tasks and be accountable for successful outcomes. The key idea here is to communicate timely and effectively so that everyone involved in an engagement knows exactly where the job stands. This will allow for collaboration and timely problem solving by your engagement team which will be helpful in limiting cost overruns and client write downs.

• Manage your time. Email, voice mail, social networking all take time and can be disruptive when trying to do work requiring critical thinking skills. Block out time to devote to your client work exclusively. While at the office work with intensity and then go home on time to be with your family. In the long run this approach will make you happier in your career and also at home.

• Talk positively about our clients. They need our services and we have an obligation to provide those services in the most professional manner possible. Clients are not a burden. They are the life blood of our firm and allow each of us to provide for our families. We have the responsibility to communicate our needs and manage their expectations for a great outcome every time.

• Leverage your knowledge. In this way you become much more valuable to the firm and will assist in the “institutionalization” of our clients. Holding on and hoarding work that is beneath your level of expertise will limit your ability to grow at some point in the future. If you really want job satisfaction make sure you are doing work that is commensurate with your experience and value.

• Help us get the word out in the community about our firm. Everyone has an opportunity to participate at this level and should choose to do so in order to get new clients and achieve our mutual goals. If you belong to an organization participate actively. It will not only be more personally satisfying, it will also show everyone else that you approach your work with purpose and dedication which clients see as great qualities for an accountant.

Working together we will get through these times, serve our clients more effectively and make our firm a satisfying and rewarding place to work. We must be prudent in our business practices while at the same time be innovative and creative in serving our clients. Help us make our firm and our profession even better. We need you! Hopefully with these efforts we will all benefit economically and personally in the future. Thanks for all of your hard work and understanding.

Serve More, Sell Less. It Works!

2010-03-23T12:29:00.003-06:00

During this current economic crisis I have seen many articles emphasizing the need for increased sales and marketing efforts and virtually none on improved client service and strategies to differentiate accounting firms from their competition. While extraordinary client service is not a substitute for marketing or making sound and persuasive presentations to current and prospective clients, it is a mindset that gets everyone in the firm thinking about how they can better serve and cross serve their clients. Serving clients in a selfless, trusted advisor manner always focused on each client’s value proposition. A rare and valuable commodity in these hectic times as it requires time and intentional action on everyone’s part at a time when there are so many people competing for our time. A client centered service strategy in your firm will not cost any money yet will differentiate your firm and blow away your competition. If you want to have meaningful value added conversations with your clients you must first have a high level of trust in your relationship.

Trust in professional relationships is built through participatory positive experiences that benefit both parties so it is very important that your client interactions be as positive as possible and focused on solutions that create value for the client. If the majority of your conversations with your clients are about the late delivery of your products and services and misunderstandings about fees it makes it difficult for the clients to trust that you can provide truly exceptional service and value to them. Accountants must get past these most basic administrative matters to move into the trusted space of their clients. Failure to do so may result in the client thinking that you are trying to “sell” them when you offer them additional services. Many opportunities will be created with your clients when you are able put these routine matters to rest and then focus intently on their specific needs and wants.

Here are a few places to start:

1. Most accountants’ idea of client service is to react when the client calls. Unfortunately this strategy fails when too many client requests are made at the same time and their ability to react quickly and meet the client’s expectations is limited as everyone in the firm is busy. Of course the clients really don’t care that you are busy as they just want their needs satisfied. The first step to extraordinary client service is to manage client expectations by scheduling their work and then delivering on time. A very simple concept, however, it is difficult to implement due to the many matters that compete for your time and attention. This is without a doubt the #1 challenge facing accounting firms today and one that must be overcome if a winning client service strategy is to be successfully implemented. Sit down with your staff and discuss how everyone can make this happen. Successful implementation will take innovation as well as some restructuring of your processes.

2. Place yourself in situations where you can have meaningful conversations with your clients. One study at UCLA found that communication is 55% body language, 38% intonation and volume and only 7% the spoken words. You cannot communicate effectively and you risk losing 93% of your nonverbal communication effectiveness if you do not meet with your clients. In today’s competitive business world be very careful when you use email as it’s great for distributing information but horrible as an effective communication tool. Meet with your clients face to face. There is no substitute!

3. Learn about your client’s perception of value. Start by asking them questions about the decisions they will be making at some point in the future and then listen carefully. The following are but a few examples:

a. What business decisions will you be making in the future? (Month, year(s) etc.)
i. Equipment, personnel, product lines, locations, etc.
ii. Sale, acquisitions, merger, etc.
b. What are your personal goals and what decisions do you need to make to get where you want to be?
i. What are your plans for retirement?
ii. Where are your children going to college?
iii. Are you comfortable with your liquidity and reserves if your business experiences a downturn?

4. Assist your clients by helping them make the decisions that make their life better. The cognitive process (how we think) results in the acquisition of knowledge, experience and problem solving ability. When you participate with your clients in making decisions their experience with you will be positive and they will want to repeat the process when the next decision needs to be made. You can participate by:

a. Furnishing pertinent information.
b. Analyzing and synthesizing complex financial information to make it more understandable to the client.
c. Giving your clients your best selfless professional advice. (Independence for your attest clients must also be a consideration)

5. Remember that we think as we speak so I recommend that accountants start talking more about “service” and a little less about “selling” when discussing how to implement an extraordinary client service strategy. Get everyone in the firm involved and make sure they understand their roles and responsibilities for exceptional client service.

Once you develop and implement an exceptional client service strategy in your practice you will soon find that clients are happier, making more referrals and gladly paying their fees. It could well be the most important strategic decision you ever make to truly differentiate your firm. Your competition will not know what happened or how to compete effectively, guaranteed!

2010-03-17T11:17:00.001-06:00

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Clients Want to Talk About Fees!

2010-02-10T10:57:00.003-07:00

During this busiest time of year it is very important that CPA firms focus on client service as a large percentage of client interactions will take place over the next few months. Great client service is all about managing your client's expectations about your fees and then doing what you say you will do rather than having them form in their mind their expectation of your services and fees. Why leave this to chance? Most client disagreements involve fees. In this first of several articles on client service I discuss fees and their impact on client expectations and client service.

Fees

Most conversations with clients about fee disputes occur after the engagement has been completed which puts many accountants on the defensive. Have you had some of these discussions?

"I had no idea it was going to cost this much".

"You said the fee would be between $20,000 and $25,000 and now you're billing me $40,000".

"My fee was $7,500 last year and now you're billing me $10,000".

Clients don't like to be surprised with your fees just as you don't like to be surprised by professionals you engage. Here are five things you can do immediately to substantially eliminate the confusion and misunderstandings with clients about your fees.

1. Stop quoting fee ranges. The moment you quote a range you are setting your client's expectation for the maximum fee. Rather than say "We estimate our fee will be between $10,000 and $12,000" use the phrase "We estimate our fee could be $12,000 or more". This dialog helps to eliminate the upper limit fee expectation and allows you to have a discussion with your client if additional fees are warranted. In all of my years of practice I very seldom experienced an engagement where we were at the lower end of the fee estimate so why even include it in your quote. If a client insists on a maximum fee be sure to build in the contingencies you might experience during the engagement. Fee estimates always need to be realistic rather than overly optimistic.

2. Initiate the conversation about fees with all of your clients. Draft a general letter about fees that you can include with your engagement letters and in addition formalize and distribute a copy of your firm wide credit policy. The general letter about fees should start with a discussion that you want every client to receive the maximum value for the fees they pay and that there are certain instances where this can occur. Follow with examples of how additional fees are often incurred. These examples might include incorrect accounting records, incorrect accounting methods, failure to provide agreed upon information and starting and stopping work. If you need an example please send an email to Steve@SteveEricksonLLC.com with the subject line Fee Letter and I will send you one.

Another essential document is a Firm Credit Policy. It should cover your receivable policy, interest on unpaid balances and the fact that the firm will stop work if payments are not made as agreed to in your engagement letter (this is not a substitute to having a stop work clause or receivable terms in your engagement letters) simply it is a document that partners can use to take the edge off of fee conversations with long standing clients. "The partners of the firm have agreed to abide by our firm credit policy. I have no ability to override the policy". Of course you want to be sure that your credit policy is in compliance with the laws of your state.

3. Negotiate the scope of work not your fees. The moment you agree to unilaterally reduce your fees you then have lower fees. I'm encouraging my clients to negotiate the scope of services rather than just lowering fees without consideration. If clients continue to insist on a unilateral fee reduction consider calling the reduction a "2010 Recession Rebate" so you don't permanently reduce your fees. I know that times are tough out there but firms really have to look at their pricing decisions strategically for the long-term viability of their practice.

4. Use scheduled billing techniques. The only thing worse than doing work for a substantially reduced fee is doing the work and not getting paid. Firms need to stop extending excessive credit. Get retainers (50% of estimated fee is due before starting work, the balance is due upon delivery of the product) especially for new work. Use scheduled billing techniques for larger engagements (i.e. 30% now, 30% in one month, 30% in 2nd month and 10% due upon delivery of the product) to mitigate your risk. Before discounting your fees please consider how you have to pay just about any service provider you engage. I can't think of too many that don't get some money before they start work. After you deliver the work many clients think there is no rush to pay until they need more services.

5. Call before sending an unexpected bill. The absolutely biggest fee mistake an accountant can make is to send a client a big bill that they didn't expect. I've actually seen cases where clients refuse to pay anything until they have the invoice adjusted in their favor. If you find yourself in the situation where you have cost overruns that have not been discussed with the client rather than just sending the invoice (I call these letter bombs) and wait for the client's reaction make a call before you send the bill. The conversation might go something like this, "Mr. Jones I was just going through the time on your engagement and wanted to explain why we were over our budget estimate. (explanation here) Before I prepare the bill I wanted to make sure you understood what happened". At this point there are three possible outcomes.

a. The client tells you they understand and to send the bill. You get paid.

b. The client wants to negotiate the overrun. You agree on an amount, send the bill and get paid.

c. The client informs you that your engagement letter stated that you would inform them before incurring any fees in excess of the estimate. You did not inform them and they will not pay for the excess. Send the bill for the estimated fee and get paid. Evaluate the client relationship and decide if you want to provide further services.

For many years I have contemplated why it is so difficult for accountants to discuss fees with their clients and have come to the conclusion that most don't like conflict and don't want to risk their client relationships. In my opinion not talking about fees with your clients leads to a much greater likelihood that misunderstandings, hard feelings and the loss of clients will occur. It is very important that both the client and the accountant feel they are getting a fair deal if the desire is to perpetuate a long-term relationship.

It takes a little time to deal with client fee issues but the rewards are well worth the effort. Become not only a great biller but also a great collector of fees and watch your stock in your firm soar. Here's wishing you a prosperous 2010.

Time, Time, Time is on Your Side. Yes it is!

2010-01-25T08:22:00.004-07:00

Use it to your advantage and watch your profits soar!

This past weekend I was listening to an old Rolling Stones song, Time is on Your Side, and it brought to mind that time is the most precious asset we have and yet too often we waste it or give it away. Given that this is a new year I always like to reflect on the past and make plans for the future. Positive things I can do that will make my life and the lives of those around me a little better. It would be appropriate at this time to have the same type of conversations in accounting firms in addition to the discussions about charge hours, job budgets, realization and efficiency. I thought it might be timely (no pun here) to offer a few ideas and share my thoughts on how you can get more value in exchange for your time during this next year.

1. Take control of your calendar and appointments. Too often appointments are scheduled in such a manner that there is open time between appointments but not enough time to dig into a project. The result, idle unproductive time which usually leads to working later in the evening or on the weekends. To the greatest extent possible try to schedule appointments consecutively. Remember just 20 minutes per person per day billed and collected is over 5% of your annual revenues. These little things have a profound impact on profitability.

2. Block out time to work. How many times have you gotten to the end of the day and said “What happened today, I didn't get one thing done that I planned to do”? You can avoid much of this frustration by blocking out undisturbed time to work. Consider it an appointment with yourself. If you don’t value your time others will certainly not value your time. If someone interrupts you, ask them if you could schedule a time to meet with them later because you don’t have time right now. If anyone approaches you with a client question, ask for the client number and tell them you are going to charge your time. Soon you will have fewer interruptions. Believe me, this works!

3. Conduct better meetings. Here are a few tips to make your meetings more productive.
a. Have an agenda. It doesn’t have to be fancy. Include length of the meeting, the objective for the meeting and the decisions that will be made.
b. Don’t use meetings to push out information. Distribute the information before the meeting and then use the meeting to answer questions and make clarifications.
c. Don’t allow others to automatically schedule meetings on your calendar. Remember you control your calendar.
d. Participate in the meetings you attend otherwise why are you there?
e. Cancel nonproductive meetings. You know which ones are nonproductive.

4. Limit your time dealing with email. Email is one of the greatest time wasters in business today and according to a recent article 80% to 97% of email traffic is junk. Turn off the dinger so it doesn’t distract you from your work. The vast percentage of email doesn’t have to be answered immediately. Also create folders with rules for important projects to get your emails to the right place. Use email as the wonderful tool it is rather than letting it be a diversion that wastes your time.

5. Write time sensitive bilateral engagement letters. Include important matters:
a. Date or period of time the work will be performed
b. Date by which you must receive required client information
c. Mutual responsibilities to include required documentation
d. Dates for expected payments (Limit the extension of credit and get paid earlier, a retainer if possible)
e. Premium rates for work that is late, incomplete or difficult personally. If you would like to see a few ideas for sample wording send an email to steve@steveericksonllc.com with the subject line Fee Enhancement and I will send them to you.

6. Shorten the work process cycle. Over 20 years ago one major CPA firm conducted a study of their practice and found that the longer a job was in the office the less profitable it became. Time is directly related with efficiency and profitability as anyone that has practiced public accounting for any period of time knows. Many practitioners fail to review files timely and thus become a bottleneck in the process while sending the message to their employees that getting work out the door is not a top priority. Work with a sense of urgency and move projects along by saving time every day for review or if you can’t find time get someone else to do the review which is just about always better than letting the project sit on your shelf for weeks. One of the biggest complaints that I hear from managers and staff is that partners wait far too long before reviewing their projects which further contributes to their own inefficiency. Move work through your office faster, competently and efficiently and I guarantee you there will be fewer upset clients and even fewer discussions about your fees.

7. Leverage and then leverage some more. Don’t do lower value work you shouldn’t be doing. If you continue to perform these lower level services you clients will eventually value you less. For the last 15 years or more I have asked accountants about how much of their work could be delegated to a lower level and consistently get back that over 50% could be delegated. As total personnel and benefit costs are now approaching 50% in many firms significant thought needs to be given to find ways that labor costs can be reduced through using processes that allow less experienced personnel to do the work while maintaining high quality. Every person in every firm should be asking themselves continually “Could someone with less experience and less cost be doing this task”? It is only through questioning our current processes that significant improvements can be identified and implemented. If you are complacent you face the risk that some of your clients will make the decision to use another accountant.

Remember just 20 minutes per person per day billed and collected represents 5%+ of your annual revenues. If you are diligent with the use of your time I’ll bet you could easily pick up an hour a day in productivity! Use the time you have on your side for your clients and they will “keep running back” for more of your great client service. Wishing all of you a most productive and fruitful 2010!

Actively Manage Your Practice for Higher Profits in 2010

2009-11-29T14:07:00.003-07:00

Many accounting firms are managed by continually looking at past events to analyze their practice and make business decisions. Whether it is discovering job overruns in their work-in-process that can’t be billed or reading their financial statements 3 or 4 weeks after month end only to discover that significant losses were incurred the previous month. These events are history at that point in time and cannot be changed. The conversations between partners and employees usually focus on finding fault and to blame the guilty parties. Have you had many of these conversations lately?

• “Why do we have all of this extra time in the ABC audit”?

• “We did this return in 8 hours last year. Why did it take (pick a time) this year”?

• “What happened last month? I had no idea we were going to lose so much money”.
• “Why did (pick a name) only have (pick a number) charge hours last month”?

• “Why did we have such a bad year”?

• And the list goes on

These are not productive conversations. It takes time, spends emotional energy and costs money to measure and respond after the fact or event, waiting to see what has happened and then reacting. Passive management is very costly, especially during these economic times when business decisions need to be made sooner rather than later.

It is most difficult to run any business successfully without current information, defined roles and responsibilities and communicated decision rights. Yet in many public accounting firms this is the case as typically there isn’t the availability of current information, especially concerning hours, budgets and production, roles are confused and in many instances people in the field defer significant responsibility for the job to the partner or manager back in the office. This lack of responsibility does not work in these times of rapid change and economic turmoil as significant economic events often take place quickly. To support this fact you only have to look at what has taken place in the profession since the end of tax season last April. In many firms revenues are off 5%-20% for the year as clients hold back on their discretionary plans and transactions and limit their spending for accounting, auditing and especially consulting services. Requested fee concessions have become routine. In many cases relationships between accountants and their clients have become strained as loyalties have been set aside as competing firms bid for the work at ever lower fees. Where will it stop? I don’t know but I do know that salaries and benefits are now approaching 50% and in some cases exceeding 50% of net collected fees and utilization percentages are near an all time low. The present accounting firm fee structures and costing strategies cannot be sustained in the long term. 2010 is the year to start actively managing your practice for profitability and success.

Active Practice Management

Active management techniques do not require more people or ever increasing layers of management. It does require individual accountability and self-management. Start your profit planning process now by gaining agreement on what needs to be accomplished in 2010 and how it will be done. Here’s what I consider are some the most important profit improvement steps.

Take Action Now

1. Have every partner prepare a plan for 2010 by month which includes net fees by month, hours managed by month and a budget of their time by month. The total of these partner plans will equal the revenue and production budget for 2010 by month. If you need examples of a plan email me Steve@SteveEricksonLLC.com with the subject line Partner Plan and I will send you a detailed excel worksheet.

2. Have every employee prepare an annual plan for 2010 by month that includes charge hours, marketing hours, admin hours and personal time.

3. Prepare a firm wide budget by month for 2010. As the months pass add on another month and make a rolling monthly budget your format.

4. Adopt a firm wide credit policy. Profitable firms must not over extend credit in these difficult times. Also collect your money sooner by using a payment schedule to get payment in advance of the work rather than after the fact. Make sure you are using “stop work” clauses in your engagement letters to limit losses for those clients that can’t pay.

5. Adopt and implement a change order process and use it! “Scope creep” is rampant in auditing and you must manage the process and your clients’ expectations.

6. Prepare budgets for all jobs. Make sure that everyone in your firm understands what is expected of them. Schedule weekly and make sure everyone has something to do.

7. Manage and limit time wasters. Meetings and email waste more time than just about anything else. Hold more efficient meetings and teach your staff how to manage their time and email.

Take Action Monthly in 2010

1. Drive monthly revenue and production goals by managing weekly performance by partner, employee and job.

2. Modify the budget for changes and unforeseen events that invariably happen.

3. Schedule! Schedule! Schedule! Resource management has never been more important. On average the loss of 20 minutes per day per person represents over 5% of your net revenue. The little things have a huge impact on profitability. Keep people scheduled and working.

4. Make sure everyone in the firm knows their assigned roles and responsibilities.

5. Revisit your plans regularly and adjust the rudder. People are dynamic and plans need to be dynamic to make sure they continue to be relevant.

Profitability will soar by managing in the present and making sound decisions for the future. Yes we learn from the past but we want to keep the cost of that education (school of hard knocks) to a minimum. Wishing you improved profitability in 2010!

IMPROVING ACCOUNTABILITY IN YOUR FIRM

2009-08-10T08:02:00.006-06:00

Improving partner and staff accountability is essential in these economic times. I think many partners associate accountability with increased conflict and typically shy away from addressing the issues. As a result most accountability discussions take place after the fact when there is no possible chance of changing the results. These conversations usually focus on fault and blame and in most cases are not productive and in some instances have had a very negative impact on partner and staff relationships. There is a better way to improve accountability which starts with individual motivation.

MOTIVATION

In Abraham Maslow’s book, Motivation and Personality, he discusses two types of behavior, coping and expressive. Coping behavior is where an individual is reacting to the behavior of others while expressive behavior is doing what is important to you. He further states that an individual cannot be motivated when they are coping with another person’s behavior and will only be motivated they are in an expressive mode of behavior. Of course it is impossible for us to avoid both of these behaviors every day of our lives but what we do want to focus on as effective leaders is to make sure our people are in the expressive mode as often as possible to improve their motivation.

In public accounting the work and in most cases the feedback concerning that work is given after the fact. Review notes about the job, annual performance reviews and in many cases discussions concerning why a promotion or a raise is not going to happen because some unknown expectation has not been met. The one excuse given to most staff when they are not getting a promotion is “You’re just not ready yet” but in most cases they have not been told what it takes to be ready. In effect we place most of our employees and in some cases even partners in the coping mode much too often. If you want your employees more accountable you have to have to define success in advance of the task or period of time by using what I call success plans.

SUCCESS PLANNING

Smart younger individuals joining the accounting profession have in most cases been very successful in their educational pursuits and are not used to failing. This typically is not the case in their first few years of public accounting as it’s not uncommon to feel a little inadequate for the first few years in the profession. I know I felt like I didn’t know much when I first joined the profession and was reminded of it constantly by those above me. Everyone wants to be successful but to do so they have to know how to achieve that success in advance of their performance. Our profession in general does a very poor job of communicating performance expectations according to a national survey of non-owner accountants I conducted several years ago. A significant number of the respondents replied that they did not know exactly what was required to get a raise or get promoted nor did they get the feedback they felt they needed to be successful. What is needed is a formalized process to communicate the requirements for a specific task or position and how success will be measured. If improved accountability is the goal all parties need to know what is required in advance. Review notes and backward looking evaluations might well have some influence on future performance but do not have any impact on what has already taken place. There is a better way to get to get your partners and staff to take ownership and agree to be accountable.

THE CYCLE OF ACCOUNTABILITY, PERFORMANCE AND SUCCESS™

To begin the cycle of accountability, performance and success (CAPS™) the person in the supervisory roll must clearly communicate the ultimate goal and help develop a plan to achieve that goal. Whether the task is doing a tax return, auditing cash, responsibility for an entire client engagement or annual job performance the time needed to complete the cycle will vary significantly but the CAPS™ process follows the same flow.

Too often we try to shortcut the process and then are disappointed when we don’t get the result we wanted because our expectations had not been clearly communicated and success had not been clearly defined.

DIRECT AND SUPPORTIVE SUPERVISION

Staff accountants with less experience need more direct supervision as they haven’t been exposed to the complexities of public accounting before. Specific instructions concerning the steps to be performed, the time expectations and frequent checking and feedback are needed to make sure you get the result you want rather leaving it up to chance.

Supportive supervision techniques are used with those individuals that have more experience. General instructions are given as to expectations and we generally tell the experienced accountant that if they have any questions to please let us know.

Using an inappropriate supervision technique can lead to not getting the job completed timely or successfully or in some cases it can demoralize your experienced staff. Inexperienced accountants getting supportive supervision don’t know when they have a question and experienced accountants will accuse you of micro managing if you use direct supervision techniques with them. You should always consider the individual and the task to be performed to determine which supervision technique to use during the course of the project.

IMPROVE ACCOUNTABILITY IMMEDIATELY

Here’s how you can immediately improve accountability and performance in your firm:

• Communicate your expectations clearly
• Discuss the plan to accomplish the goal
• Make sure the plan is understood and agreed to and that success is defined
• Use direct or supportive coaching/supervision techniques appropriately
• Give timely feedback
• Celebrate success

In future articles I will be discussing success plans for partner and employee annual performance, job performance and career coaching. Please feel free to share your thoughts on these subjects by emailing me or on my blog.

CONTROLLING LABOR COSTS IN CPA FIRMS

2009-07-24T12:29:00.009-06:00

Salary and benefits expense as a percentage of net revenues is approaching and in some cases exceeding 50% in many CPA firms at this time. Fifteen years ago these expenses averaged around 35% of net revenues. The revenues of accounting firms have not increased at the same rate as salaries and benefits during this period when technology was supposed to save time and help accountants be more efficient. In order to address this issue I think we first need to understand the changing dynamics in the profession and the past events that have brought us to this point.

DEMOGRAPHICS OF THE PROFESSION

The following chart reflects the age and gender demographics of AICPA members:

Source: Misean E. Reed Manager - Diversity, Work/Life & Women's Initiatives, AICPA

For many of you this is not surprising as there has been much discussion in the media and at conferences about the aging baby boomers and the succession crisis. What I would like point out is that the vast majority of CPAs are now 46+ years old, experienced and expensive yet still doing much the same work they did 10 or 15 years ago. The value of the work has not kept up with the salary costs of trained professionals. Yes, a number of individuals have become partners and provide high value services, however their numbers are relatively small when compared with the total number of CPAs. At conferences and meetings where I have given presentations most accountants tell me that at least 50% of their work could be done by someone with less experience. It is no wonder that salaries and benefits as a percentage of revenue are at an all time high as many accountants are not providing commensurate value for the fee being charged. The recent downward pressure on partner income will only become greater as time passes if we continue this current trend. To further understand this problem we have to look at the staffing models and client service strategies presently being used in many firms.

STAFFING MODELS AND CLIENT SERVICE STRATEGIES

When I ask partners why they are doing work that could be done by someone with less experience I typically get two answers, “there is no one to give it to” or “because I have the relationship with the client”. As a result of this type of thinking, the staffing model in many firms looks like an inverted pyramid or an hour glass that is bigger on the top. Using a high cost relationship service delivery structure to provide routine compliance services is typically not economically successful. To demonstrate my point, if a doctor practiced in the same way many accountants do they would call the patient in from the lobby, take their blood pressure and temperature, do the examination, write prescriptions, do the billing, collect the fee and schedule their next appointment. Just think what impact this would have on the cost of healthcare! The accounting profession needs to change from the labor intensive models of the past to a more process driven model that will take advantage of the time and labor cost savings when technology is used correctly. Please note that I am not saying that client relationships are not important, they are extremely important. It’s just that the work needs to be done in a more cost efficient manner.

PROCESSES AND TECHNOLOGY

In most industries, the use of technology replaces labor intensive activities or allows less experienced labor to perform tasks previously performed by higher cost employees. Just the opposite has happened in public accounting. As CPA firms have increased their investment in technology their labor costs have increased to an all time high. This has happened because most CPA firms have evolved and are designed around people rather than processes. When I inquire about certain processes in many of the firms I visit I usually get back the response that “Joe does that” and when I further inquire to see if what Joe does is written down, the answer is “no”. If Joe leaves the firm that part of the process handled by him goes with him. If the firm can’t find another person with Joe’s skills, which is often the case, they split his duties among several different employees making their processes ever more complex! I cannot begin to count the number of times I have seen processes in CPA firms designed to meet the needs of employees instead of designing a process and then hiring staff at an appropriate level to perform the needed tasks. It is time to reengineer CPA firms in a way that will allow for sufficient time to develop and maintain client relationships and provide value-added services while still being able to produce a quality product back at the office in a timely manner. Our industry needs to start thinking about how we can incorporate the “front office/back office” model used in many service industries.

A SUCCESS STORY

I recently gave a presentation at a meeting of an international accounting association on the subject of benchmarking and profit improvement. As part of this presentation I analyzed the member firms financial results for the past year and found one firm that was bringing 50% to the bottom line. This piqued my interest so I had the managing partner from this USA firm explain to the other attendees how they had accomplished this achievement. He stated that he and his partners had started over several years ago and decided that they were going to do business differently. Their oldest staff accountant is 28 years old and their salaries and benefit costs are about 30% of revenues. Partner income is on par with the top 100 firms yet they are about $3 million in size. This is quite a success story and one that can be replicated in most CPA firms with persistence and improved processes.

DON’T TEAR UP THE HOUSE

I told you this wouldn’t be easy but before you tear up the house and make drastic changes let me caution you that this is a journey not an event. Process improvement takes time and thought. If you set a goal of 2% improvement per year for 7 years, a 36% netting firm would become a 50% firm at the end of that time. The important thing is to start this profit and process improvement journey now in order to institutionalize the value of your practice. Here’s where I would start:

Standardize EVERY process in the firm that can be standardized
Document all standardized processes
Deal with exceptions individually, don’t change the process
Gradually reassign appropriate work and tasks to lower level staff
Actively manage the delegation process to insure success
Use non-CPAs whenever possible
Analyze the contribution margin for all clients and develop a profit improvement plan which includes using less expensive labor to perform some of the services
Don’t get side tracked. Keep moving the agenda forward

HOW TO REALLY DIFFERENTIATE YOURSELF AND YOUR FIRM

2009-07-13T13:45:00.005-06:00

When I’m working at a retreat, a seminar or speaking at a conference just about everyone in attendance rushes out of the door at the break and immediately calls their voice mail. Once they come back in the room I usually ask them why they are so tied to their voice mail and now email. The answer is always the same, “To provide my clients with great client service” but is this really the case? More often than not there eventually will be a client service failure when an individual tries to use a reactionary client service strategy. This is especially true as an accountant grows their practice and their managed work increases significantly. I wonder how an accountant can go to the office every day with the client service strategy that they are going to react to 50, 100 or even more clients they are serving.

EMERGENCY ROOM SERVICE MODEL

The reactionary service model is used in emergency rooms in hospitals; they staff up and wait to see who comes through the door. If you have been to an emergency room lately you have seen that during certain times there are few patients but on the weekend, especially during the night, the waiting area is overflowing and patients are upset about the length of time it will take to be seen. Does this sound like how it is around your office during the middle of tax season? We have the best of intentions however at these times we are just not able to deliver our services to our clients as well as we would like. Almost universally, managing partners tell me that the quality of their client service is not where they would like it to be.

There is one very big difference between our work and the work performed in an emergency room; our work is not dealing with life or death. Some client work might be urgent but most of the work we do is routine, predictable and can be scheduled. Why then are we using a very expensive and hard to manage client service model to deliver our services?

I DON’T KNOW WHEN THE CLIENT WILL GET THE INFORMATION TO ME
The greatest pushback I get from most accountants is that they simply don’t know when their clients will get required information to them. As a result most accountants must react to the actions of their clients rather than execute their own client service strategy which can be very risky. I like to improve my odds of being successful more often rather than less often. In my opinion outstanding client service is the one true differentiator of compliance based practices. Outstanding client service involves defining and then managing your client’s expectations about your services. If you don’t take the time to tell them what to expect they will develop their own expectations which in many cases is not reality.

MANAGING CLIENT EXPECTATIONS

Several years ago my wife had to have some very serious surgery and was understandably worried, concerned and anxious. On the morning of the surgery her young surgeon visited her in the pre-op area of the hospital and we both listened intently as he told us about the surgery and how he planned to accomplish it successfully, what would happen in the recovery room, the pain management epidural in her back that would be used for 3 days and how she would experience significantly increased pain when they removed it and finally, how they would use oral pain medications to again control the pain. He literally painted a picture of the process and clearly managed our expectations and on the third day after surgery when they removed the epidural and she began to experience significant pain I was able to reassure her that it was only temporary and to try to relax and not panic. This young surgeon was a master at managing client expectations; wise beyond his years. It then struck me “This is one reason we don’t always meet client expectations in public accounting because we don’t tell them what to expect”. How could anyone know exactly what our services are and how they will be provided unless we tell them?

SETTING EXPECTATIONS

Partners tell me that they aren’t able to communicate client service expectations to their clients mainly citing three reasons:

1. My clients will not comply with my expectations as to when I will receive their information so why try.
2. If I try to hold my clients accountable and responsible for their required information they might choose to use another accountant that won’t have such a requirement.
3. What happens if we can’t perform as promised?

After hearing these excuses I usually ask them what would happen if they had a dental appointment today and called their dentist stating they couldn’t be there for today’s appointment but will be able to be there at the same time tomorrow. Of course they laugh and say that’s not possible as it might take a month or two to get another non-emergency appointment. This is just my point. The dentist and for that matter most other professionals are better at managing their client’s expectations. Would we change dentists if they told us we couldn’t have another appointment at the same time tomorrow? Of course not as we value the relationship we have with them. As a profession we need to get much better at managing our routine services and not making every engagement a fire drill. Getting the work done becomes too stressful, our employees burn out and our client service suffers.

DIFFERENTIATE YOURSELF AND YOUR FIRM
Delivering a quality product is the minimum ethical and legal requirement for CPAs. Delivering that minimum requirement makes a firm just like everyone else. I do know that a few firms have quality issues but that is clearly a much greater problem than being differentiated in the marketplace. If you really want to stand out in the crowded world of public accounting you have to have client service at a level significantly higher than your competition.

CLIENT SERVICE

As Susan Scott says in her great book Fierce Conversations, you must have great conversations to have great relationships. Break through service starts by having great conversations with your clients. When was the last time you sat down with your best clients off the clock and had a conversation like this?

I want to provide you with the absolute best service and the greatest value possible for the fees you pay me. In order to meet that objective I need to know what decisions you anticipate having to make in the near future and in the long-term with regard to your personal goals and your business?

These conversations are essential because they define your client’s current life situation and their value perspective. Without the conversation you can only speculate about what is really important to them.

After learning more about what they want and where they are going you can participate by helping them get where they want to go and achieve their goals. Your value will skyrocket in the eyes of the client as their perception of your service increases.

Action steps to differentiate yourself and your firm.

• Over deliver and under promise
• Explain your service to your clients
• Change your voicemail daily telling your clients about your availability
• Schedule time to meet with your clients to discuss their life and how you can help
• Pick up the telephone and call your clients to discuss your services. Email isn’t as nearly as effective
• Create a culture of client service in your firm
• Survey your clients and make it easy for them to give you feedback

There are many more ideas to improve client service but these should give you a start.

AS always I would very much like your thoughts and feedback.

THIS IS CRITICAL! TAKE IMMEDIATE ACTION!

2009-05-07T12:37:00.003-06:00

Client fee pressure is a reality at this time. I recommend that firms take the initiative and discuss this matter with their clients rather than setting back and waiting for them to come to you. When you wait you are placed on the defensive which is a difficult position as their expected response to their fee reduction request is “yes” and the discussion is then “by how much” or even worse yet your competition has already been there and you have lost a client.

Meet with your clients now to discuss their fees and your relationship. In many cases you might be able to reduce the scope or the amount of work you do which results in a lower fee to your client without giving away the store. It also gives them an opportunity to discuss their business concerns with you which in many cases might result in more value added services for more fees.

I call this current economic downturn “prime time” for the accounting profession. Everyone is talking about money, expense control and profitability, the very essence of public accounting. Take advantage of this time by meeting with your clients, discussing their fees and how you can help them in their time of need. This is your opportunity to shine in “prime time”.

Please share any ideas you have to increase the value of accounting services and how to discuss the fee issue with clients.

Trust Me on This One

2009-04-26T17:04:00.002-06:00

For the past few years I have noticed that more and more firms have started using words like integrity, trust and ethics to describe how they do business. We serve as “trusted business advisors” to our clients. We have “integrity” and operate with the highest “ethical” standards. When I see these words used to describe professional services my first thought is why do they feel a need to say this to the public. Has there been a problem with trust and integrity in the past at this firm? It certainly tells me that they have some questions about it and feel the need to communicate with others.

I can’t imagine going to my doctor and having her tell me that she practices with integrity and high ethical standards that can be trusted. We have never had this type of conversation but she had better practice in that manner or she won’t be practicing for long! The same is true for the accounting profession. We don’t need to be “telling” our clients about trust and integrity, we need to be “practicing” with integrity and letting our clients judge our trustworthiness which immediately makes me think of core values.

Many of the firms I have visited over the years have wonderful core value statements that are not practiced. “We have the highest level of integrity” but yet they talk badly about clients and coworkers. Promises are made to clients but not kept. “I’ll have it to you tomorrow” and then deliver next week, “I’ll call you right back” and then fail to call, “The fee will be XXX” and then send a bill for more than the client was expecting. “We value our clients” and then discuss how to fire them or call them the “clients from hell” as described recently in one publication. The conversations and actions in many accounting firms simply don’t support their flowery core value statements. Their employees see this and so do their clients.

Over the years I have found we think as we speak. If you want to be the firm that practices with integrity and high ethical standards that is trusted by its clients all you have to do is clean up your language and do what you say you will do. Rather simple concepts that will be noticed by everyone in contact with your firm. Your values and your actions will be congruent. Employees will have a higher level of respect for the core values and practice accordingly and clients will share with others that the firm practices with the highest level of integrity and can be trusted as business advisors. Trust me on this one.

Little Things Make for Greater Profitability

2009-04-13T10:37:00.005-06:00

I've had many managing partners tell me they run their practices are much like the cobbler that walked around with holes in his shoes ran his business. They know better and usually pretty much know what needs to be done. It's the execution that is the issue. How to herd the cats and get everyone marching in the same direction when everyone appears to have differing opinions on what needs to be done. I would hate to tell you how many times I have heard that "we tried to do that one time but I couldn't get everyone on board so I just gave up". Hopelessness creeps in and execution and accountability fly out the window. A very tough way to run a practice.

I find that success is the best motivator to change behavior so I recommend that partner groups start managing the "now" for success. Here are a few ideas:

Not getting charge time-Schedule weekly (see previous post) and monitor daily.

Partners won't bill-Pay a significant return on each partner's cash basis equity or if it still doesn't work only allow draws based upon cash basis equity (sorry partners this is a business, not a job)

Partners won't charge adequately for their work-Set minimum contribution rates per hour for each month of the year and schedule accordingly (contribution rates fluctuate based upon actual utilization each month. I'll have more on this in another post later this month.)

START PROCESS IMPROVEMENT EFFORTS NOW!

2009-04-10T08:59:00.009-06:00

The first step in your process improvement efforts is to survey your employees to better understand their perceptions about their job responsibilities and daily tasks. Where is time being spent and what tasks add value to your clients and which tasks don’t add value? It is my firm belief that you will be surprised by the amount of non-value added time that is being spent by high cost professionals in the months May through December.

Some of the tasks that come to mind are making copies, watching the printer, e-mail management, the internet and data entry just to name a few. As you can see these tasks do not add value to the client and a CPA license is not required to get them accomplished. Clerical tasks need to be performed by clerical staff. Professionals need to be leveraged. Triage the tasks in your firm and I assure you that profitability will improve significantly. By the way be sure to charge for clerical tasks.

Be prepared for the arguments and barriers put up by your staff by preparing your responses in advance of your process improvement efforts. Here’s a few that come to mind:

It’s easier to do it myself.
I can’t find anyone to do it.
They don’t understand what I want.
I like doing the work.
The client wants me to do the work.
I need the billable hours.

Notice that most of these excuses are put forward to avoid management and leadership responsibilities which are a huge issue in the profession at this time. As you go down the path of process improvement your will find that not only profitability improvement but also improvement in the management and leadership skills of your experienced accountants.

Please share your thoughts and questions concerning profit improvement and process improvement in your firm.

STOP EXTENDING UNLIMITED CREDIT!

2009-04-07T06:36:00.008-06:00

During these times every firm needs to be more prudent when extending credit to their clients because once the services have been rendered and the tax return or audit is complete your firm does not become a priority for payment for another year. Don't fall into this trap.

A life long friend and mentor who practiced law told me very early in my career to "Get your fee when they need services or risk not getting paid". Over the years this became some very sage advice as it played out several times during my career. In almost every case where I was not getting paid I could look back and see where I was not assertive in collecting my fee.

Many practioners tell me that the collection of fees is stressful as they don't want to upset their clients and risk losing their business. Go figure! This argument reminds me of the housing crisis mess and the number of mortgages that were given to people that couldn't afford the payments. Who is ultimately responsible? The one extending the credit of course.

I recommend that every firm adopt a firm wide credit policy to make sure every client is treated consistently. In this policy require payments in advance of the services being performed and if payments are not made the firm will stop work until the money is received. In addition make sure you have a "stop work" clause in your engagement letters to support this policy. Once adopted, publish it and furnish a copy to each of your clients. Do this now. Life will be less stressful and your firm will be much more profitable.

IT'S TIME TO "RIGHT SIZE" AND "RIGHT STRUCTURE"

2009-04-03T21:00:00.008-06:00

“I wish I had worked to change the framework, rather than to work within that framework”
Timothy Geithner looking back at his time with the New York Fed and how he addressed the banking crisis as quoted in The Washington Post, April 3, 2009

There are times in life when we just can’t get there from here. That was clearly the issue in the banking system and I assume the same could be said about many of our perceptions and traditional ways of doing business. Do we try to manage within our current framework or is it time to change the framework to address the challenges of our current reality? At this unprecedented time in our history I think accounting firms have reached this fork in the road. Is it business as usual or is it time for a new structure and framework for the practice of public accounting? Here’s my take the current situation:

Labor costs as a percentage of net revenues have continued to increase for the past 8-10 years now approaching 50 of net revenues in many firms.

Fees have not increased proportionately to compensate for this increase in labor costs.

Accountants consistently tell me that at least 50% of their work could be done by someone with less experience.

As the baby boomers retire there has been and will continue to be a loss expertise in our profession.

Many partners are more concerned than ever about the quality and timeliness of their services.

Utilization is a major concern in most firms.

Technology is not sufficiently leveraged in most practices. In many cases partners have become data entry specialists because they have the software on their desk.

I'm sure there are many more practice concerns that need some attention that I have not addressed but this list should give us a few ideas to begin the discussion. I want to help partners develop new efficient practice models and client service delivery systems that mitigate risk, provide for significantly improved client service and satisfaction as well as enhanced partner profitability.

Please share any thoughts you have about the current situation in your firm as well as any other observations about how this profession can be improved. It is only through public dialog and debate that we will find the solutions to these problems and allow you to achieve the professional life you desire and deserve. I look forward to taking the journey with all of you.

IS 50% PROFITABILITY REALLY POSSIBLE?

2009-03-27T13:26:00.002-06:00

Yes it is if you change the way that you do business. And this is what this blog is all about, finding ways to improve accounting firm profitability through process improvement, process efficiency, revenue enhancement and expense management. These improvements are necessary due to what I like to call the “perfect storm” that is now taking place in the profession: age and gender demographics, technology, labor costs and the commoditization of core services. CPAs will have to change the way they practice by better utilizing technology and redesigning processes. My premise is that as long as this transition is taking place why not seize this opportunity by redesigning the client service delivery model to increase profitability. Let’s start with some low hanging fruit.

Inefficiency

From current surveys of accounting firms the total utilization of all personnel in most public accounting firms range between 50% and 55%. This means that 45%+ of the total labor efforts in most firms is not being charged to clients and the value of these efforts are not being captured. Increasing the utilization by 5 percentage points (i.e. 50% to 55%) in a ten million dollar firm would drop an additional one million dollars to the bottom line.

The Question: What could you do to improve overall utilization in your firm?

My first thought is to schedule weekly to make sure everyone’s plate is full. After tax season you will start getting those “need work” emails usually from some of your less experienced staff. Keep them busy by requiring that more experienced people push down work that they shouldn’t be doing anyway. Hold a very brief scheduling meeting every Wednesday or Thursday afternoon for the following week. You want have everyone fully scheduled so they can hit the ground running on Monday morning. When firms implement this system 10% improvement in utilization is fairly common.

AUDIT FEES NEED TO BE ESCROWED

2009-03-26T10:57:00.002-06:00

Given the significant number of audit failures in recent years and now the meltdown of the financial industry in the United States the issue of auditor independence, audit fees and audit quality needs to be addressed. The relationship between auditors and their clients is a fee-based relationship that creates an inherent conflict of interest that can have significant influence over an auditor’s judgment and decisions, whether consciously or subconsciously, as a debtor-creditor relationship is created. In many of the recent audit failures I find they very often have happened due to flawed estimates and judgments. It is my belief that this inherent conflict of interest could be substantially mitigated or avoided altogether by escrowing the audit fees at the start of the audit engagement. This would remove the risk of not getting paid and lessen a clients ability to hold the fee hostage subject to the ultimate audit results.

Audit fees need to be escrowed with a third party in advance of the performance of work. This would minimize any negotiation of audit and accounting standards resulting in more independent and objective audits. There could even be oversight by a third party to make sure the audit has been completed in accordance with Generally Accepted Auditing Standards (GAAS) prior to the disbursement of the final fee to weed out those auditing firms that are not performing their audits in accordance with GAAS. This step alone would have been a real deterrent in some of the recently discovered Ponzi schemes and maybe could have saved investors millions if not billions of dollars.

What the public needs from the public accounting profession is increased accountability. Separate the decisions about money from the audit results and watch the quality of audits improve dramatically. The accounting profession needs to pass a standard that requires that audit fees be placed in escrow before the start of fieldwork. This would also have a positive impact on firm profitability.

All Business Is Not Equal

2009-03-23T14:51:00.002-06:00

About this time during tax return filing season, CPAs begin making a list of all the clients who have yet to bring in their tax return information. Then they begin calling and begging; “Please get your tax information in to us as soon as possible. If we don’t receive it by April 1st we might not be able to get your return completed by the April 15th filing deadline” (keep in mind there are no additional fees for this). Many clients ignore these idle threats, as they know that most accountants and their staff will work day and night, weekends included, to serve their clients and meet their expectations; even though they are incurring additional costs for overtime and other expenses. Much of this last minute work is in fact, less profitable than the work that can be scheduled in the ordinary course of business.

Most CPAs charge the same rate regardless of when work comes in, or when the services are performed, even when incurring additional expenses. All work is not the same, and CPAs should charge additional fees for work that is more difficult to complete because of client procrastination. Here's the policy I recommend you use to manage the last few weeks before tax filing deadline:

When clients wait until the last few weeks before the filing deadline to bring in their information, we incur additional overtime pay and expenses to get tax returns completed by the due date. Returns that come in after April 1st will be billed a XX% surcharge to cover these additional expenses. We sincerely appreciate your business and thank you for your understanding.

Typically accountants ask me what the surcharge should be. I suggest 50% as it would be enough to get most clients’ attention. Of course any clients that don’t want to pay the additional fee can simply bring their work in on time. Give it a try, it just might work!

If you have any thoughts or comments, or if you have any other ideas to get clients to bring in their information earlier, share your ideas.