IS 50% PROFITABILITY REALLY POSSIBLE?

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

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

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.