Improving Your Accounting Firm's Profitability
Many accounting firms have been feeling the effects of our lagging economy over the past few years. Start-ups are down. Consulting projects are smaller in scope. And, many new businesses are managing their own books with QuickBooks.
As a result, many accounting firms are reporting profitability levels that are at best stagnant, with many seeing declining profits. With the cost of insurance, computers, office space, labor, profit margins have been declining.
Does this mean that your accounting practice needs to be a low margin business? Absolutely not.
Generate New Business for Your Accounting Firm: Be Proactive
To change this phenomenon, accounting firms need to become more proactive generating new business and cross-selling into higher margin services. Passive approaches are the most profitable but do not generate enough new business to offset attrition. Proactive approaches targeted towards acquiring new business clients require an investment and cultural change for many firms.
Many established CPA firms struggle with investing in new business acquisition because it cannibalizes billable hours, most are not good at it, and some are too cheap. This paradox totally baffles me because it compromises the long-term health of the firm. To give you an example, how likely would you be to invest in a pharmaceutical drug company that spent all of it's resources on existing drugs in the marketplace and refused to invest in developing new products? The executive team of this pharmaceutical company argued that existing drug products have 90% profit margins and deliver all of the firm profits while new drugs cost millions in research and development with mixed rates of success. How successful would this company be in the long term by failing to invest in new business development?
Make New Business Development a Priority
To overcome this tendency to work on existing business, to the detriment of new business development, other industries have created dedicated new business teams. These dedicated new business teams have dedicated marketing budgets, are staffed with cross-functional team members, and provided with clear business goals. In fact, many companies that dedicate themselves to new business development assign a senior leader for the group, create unique reporting structures to top management so new business development does not succumb to existing business pressures, and empower the senior leader to blaze a "new" trail.
If your firm is caught in this trap, then create a dedicated team that focuses on nothing but acquiring new clients. That way, billable hours amongst existing clients are not compromised while a dedicated team is charged with the responsibility of acquiring new clients.
If you are a small accounting practice, dedicate particular days of the week to new client acquisition. Make plans to delegate certain aspects of your day-to-day work to junior staff members to free up your calendar. Without carving out a block of time dedicated to generating new business, the existing business will infringe upon new business development.
In the consumer products industry, the same challenges and tendencies occur. Existing brands pay the bills while new products require investment and often take a couple years before becoming profitable. Companies like General Mills, Proctor & Gamble, Nabisco and Gillette have overcome this natural tendency by creating dedicated new business teams. These teams are assigned a "rising star" within the senior management ranks to oversee new product development. The new product leader is then empowered with a unique reporting relationship into upper management (bypassing existing business management), provided with concrete budgets, and allowed to poach top talent from the existing business teams. To further define their unique charter, these new business teams are often relocated to a new office facility/location to ensure focus and instill teamwork. Technology driven companies take this approach as well.
For example, Gillette doesn't worry about new products cannibalizing old products. They look at new product launches as a vehicle to acquire more customers, raise refill blade prices, and demonstrate technical superiority in the marketplace. First it was Trac II, then Atra, then Atra Plus, then Sensor, then Sensor Excel, then Mach3, then Mach3 Turbo and who knows what's next. Each new product launch enabled Gillette to significantly increase refill blade prices, increase their market share within the premium segment of the market, increase refill blade sales while shrinking disposable razor sales, and dramatically increase profit margins. If they were worried about cannibalizing existing business, Gillette's top of the line product would still be Trac II.
The point is, new business development needs to become a priority within your firm to more than offset attrition. Companies that are successful with new product development are committed to it and separate the responsibility for new business from existing business management. They acknowledge that new business is the key to sales growth and increasing market share. They empower these teams, allocate budgets, and staff with top talent.
To generate top line sales growth, accounting firms need to become more adept at:
- new client acquisition,
- cross-selling existing clients additional services and
- extending the length of the average client relationship.
Improving Costs for Your Accounting Firm
On the cost side, accounting firms can benefit by becoming more efficient. Inefficient practices result in hiring more staff to compensate for inefficiencies, which in turn results in lower profit margins. In working with small and medium sized accounting firms, we are surprised to hear about the inefficient practices, staffing levels, and revenues per employee. For example, many accounting firms offer monthly write-up services as their core offering to small/medium sized businesses. Clearly, monthly write-up work and payroll are labor intensive and not very scaleable. There are more efficient and scaleable ways to work with small and medium sized businesses that generate higher net revenues per labor hour. Efficient operating practices generate higher net revenues per labor hour and significantly higher profit margins.
Last, accounting firms are starting to realize how important it is to develop an effective staff that is loyal and stable. Losing a valued staff member often results in client turnover, incremental hiring and training costs, and a net loss in productivity. Often, it is less expensive to develop programs designed to increase the tenure of highly productive employees than maintaining the status quo.
By Hugh Duffy, Co-Founder of Build Your Firm, Inc. MBA in Marketing, BS in Finance