The accounting profession is undergoing rapid change, but many of its greatest challenges are issues that firms have been wrestling with for years — among them, fragmented software solutions that do more to obscure the state of the firm than illuminate it.
This year’s BDO Alliance USA Conference provided an excellent opportunity to hear from CPA firm leaders representing about 80 firms across the U.S. In our discussions with these leaders, we confirmed that most practice management systems — rather than solve firm management problems — create additional barriers to running a profitable practice.
Technology provides today’s firms with unprecedented access to critical business intelligence: clients, engagements, billing, and firm performance can each be tracked in detail to provide useful information. However, when that data exists in separate silos, its value for driving business decisions is significantly diminished.
Practice management systems are designed to reflect the real-world needs of accounting firms, yet what we heard at the conference confirms our belief that most leave users spending too much time in exchange for poorly integrated data. The predictable result is a widespread sense of disappointment and frustration that the software doesn’t deliver the increased efficiency, visibility, and profitability firms had hoped to gain.
Based on our interactions at the conference, these are the three biggest frustrations that accounting firms find with their practice management systems:
- Multiple point solutions, each requiring “care and feeding.” Many of these single-function solutions do in fact perform their individual tasks well. The problem is that when relevant data is siloed and can’t be easily combined with the data in other systems, it’s impossible to make strategic decisions based on current information. The solution: Accounting firms need a client-centric, holistic ecosystem that provides a single source of the truth about their clients and their firm.
- No real-time insight into how a project is progressing. This lack of visibility leads to understandable frustration. Worse, it creates the potential to leave huge amounts of money on the table due to inadequate communication. Without access to real-time numbers regarding engagement data (billables, deliverables, actual time spent on a job versus projected time), isolated reporting makes it impossible for firm leaders and project managers to determine and pursue an optimal path. The solution: A practice management system that truly meets user needs must provide anytime, anywhere access to real-time work-in-progress data to inform strategic decisions.
- Lack of visibility into metrics that matter. Point solutions typically provide metrics relating to the function they perform. But they don’t begin to meet firm leaders’ need for performance measurement data. How is the engagement progressing in comparison to the original plan for it? Which types of engagements are the most profitable? Without being able to find answers to questions like these, isolated metrics have limited utility. The solution: A fully functional practice management system should include a dashboard with real-time, actionable business intelligence that integrates data from all sources, avoiding the need for error-prone and inefficient manual migrations.
Most practice management systems can yield answers to some of their users’ questions. But unfortunately the answers are too often incomplete, inaccurate or overly broad. Meaningful answers tend to require a granular approach along with access to data from multiple sources. To deliver full benefit, your PM system should be able to offer clear answers to questions such as:
- Are my billers getting bills out the door on time?
- Who owes the firm money?
- How much business have we done in each industry?
- What’s our work in process? By office? By business line? By responsible partner?
- Could a current engagement become more profitable with more or different staff?
- Are my operations as efficient as they appear at first glance?
Minimizing risk, knowing where the firm stands, and maximizing profitability aren’t new hurdles by any means. These are the frustrations, which we have experienced in our own CPA firm, that led us to develop PracticePro 365.
If your current practice management system can’t give you the answers you need, think about the opportunities you could be missing. Is that lost potential an acceptable cost? To learn how PracticePro 365 supports visibility, real-time insights and an integrated approach to managing key data, request a demo today.
How much money did you leave on the table last year? Based on industry averages, it was probably as much as 20% of gross fees.
Maybe it was higher this busy season, since this was the first tax season after the full implementation of the most significant tax reform in decades.
Most private companies and nonprofits are implementing the new revenue recognition standard this year, and then we have the new lease accounting standard in 2020. If yours is like most other mid-sized CPA firms, your clients are ill-prepared for these new standards. Are you prepared to bill them for all of the time you spend helping them get ready?
The truth is that running a profitable CPA firm is hard, and it’s only made worse by the fact that we seem to have this profession-wide delusion that writing off between 10% and 20% of our standard billings is totally acceptable.
We tell ourselves things like, “We put in too many hours on that job,” or “It’s too late to bill for those hours.” Also, “They are an important client, so it’s OK that we have a lower realization rate on audit and tax compliance work.” Why is this acceptable? After-the-fact rationalization does not replace upfront anticipation and communication. Unless you start doing things differently, you can’t expect things to get much better.
Clients want proactive service and a reasonable cost estimate for services before the work is undertaken by the firm. Partners are supposed to anticipate client needs and communicate the level of effort required and the related cost. When this gets out of order, client satisfaction rapidly declines.
I would argue that a main reason for underbilling is because until now, we have lacked the tools to monitor and manage engagement profitability, including adjustments to billing arrangements, when it really matters.
Think about your firm’s budgeting process. Chances are it consists of a spreadsheet that allows each project manager to input the number of hours each team member is expected to spend on each task. But what if that person discovers they need more time to complete a task? What if they finish in less time?
This manual, static process is part of the reason we usually don’t find out until after the engagement closes that the staff had to put in many more hours than budgeted because the client wasn’t ready, and the staff had to help with prep work that the client was supposed to have done. The result: Unbilled scope creep.
One of the great ironies of our profession is that we don’t know what our true profitability is until after an engagement closes and we scramble for additional billing opportunities.
According to the 2018 Rosenberg Survey, the average firm with at least $20 million net revenue had roughly 83% realization. This means that the assumed 10 partners in that average firm left more than $4 million — or $400,000 per partner — on the table. Put another way, if they hadn’t taken those write-offs, those partners could have increased total partner compensation by about two-thirds.
How do we stop this cycle of writing off our profits?
First, CPA firm leaders must commit to the necessity of continuously monitoring engagement status and profitability in real-time in order to make the necessary adjustments in staffing and client communication. And then we need the tools that allow us to make changes before it’s too late. It is imperative that firms put tools in the hands of the people who are closest to the engagements — our project managers.
With our latest release, PracticePro 365™ brings these tools to the market. We designed our new Profitability Forecaster to provide visibility into planned and ongoing engagements, giving you the power to make changes that will increase profitability.
The Profitability Forecaster adds a new dimension to CPA firm engagement planning and performance. Not only does it show you who will be doing what on each engagement and how many hours each person is expected to bill, but it also shows when they will perform these tasks. And it makes it easy for team members and project managers to record changes in those estimates, so when circumstances change, so does your estimate at completion.
Armed with this tool, CPA firm leaders have the power to:
- Monitor and manage profitability of projects in process
- Project accurate estimates-to-completion
- Properly estimate engagement realization and create more accurate financial statements
- Prioritize their best clients
- Balance the supply of people with the supply of jobs, helping to smooth out peaks and valleys
- Avoid scheduling conflicts
- Identify and reward star performers, and identify team members who need coaching
The Profitability Forecaster is a tool — a powerful one that illuminates which jobs (and which people) are making money for the firm. But at the end of the day, it will only benefit those firms where the leaders have the courage, vision and energy to commit to act on the insights it surfaces and change the status quo.
Want to see how PracticePro 365 Profitability Forecaster can add a new dimension to your firm’s engagement planning? Schedule a demo today.
Chances are, you have a pretty good idea of how much revenue your firm generates from tax, audit and consulting. But do you know how profitable each service line is? Can you identify the partners who run the most profitable engagements?
What about industry-level profitability? Specialization continues to rank as one of the most popular growth strategies among Top 100 firms. But if you don’t have the numbers to illuminate the profit potential of each niche, then how do you know where to plant your flag?
The ability to drill down to departmental performance indicators provides firm leaders with the information they need to make decisions that drive profitability. When you have at your fingertips the relative profitability of each line of business, industry and partner-in-charge, you can zero in on what (or who) needs to be improved. And then you can make those changes before it’s too late.
By and large, accounting firms lack practice management systems that are capable of such granular analysis. Many of the most popular CPA firm practice management systems aggregate all of a client’s time and billings into a single account. Firms using those systems can’t easily see, for example, whether the audit work or the tax work for a particular client is more profitable.
What’s Masking Your Profit Problems?
This lack of visibility can obscure deficiencies. I used to audit a large homebuilder that appeared profitable because the owner had access to cheap tracts of land. However, those low land acquisition costs were masking inefficient building operations. When the cheap land ran out, so did the profits. Do you have the equivalent of cheap tracts of land in your firm that could be masking inefficient operations? If so, wouldn’t you want to know?
On the flip side, drilling down to understand the profitability of each service line can illuminate opportunities. Our CPA firm decided to double down on 401(k) audit engagements because we have the numbers to show that we perform those engagements efficiently and profitably. That opportunity would have flown under the radar if we didn’t have the metrics on each service line’s profitability.
Managing engagement profitability in CPA firms is largely a guessing game, since most firms lack the ability to assess in real time how engagements are progressing against the original plan. Some firms generate budget-to-actual reports by extracting data from multiple systems and dumping all of that data into a spreadsheet to run the calculations. However, manual migrations are typically inefficient, prone to errors, and the information is out-of-date almost from the time the report is produced.
From 10,000-foot View to Street-Level
What accounting firms really need is a tool that enables us to drill down from the 10,000-foot, firmwide view all the way to the “street level” of the individual engagement. This hierarchical view of the data would allow firm leaders to zoom in on what’s working and what’s not, and make changes that will either stop the blood loss or seize opportunities for more profitable work.
That tool is a practice management platform that unites all the silos of firm performance data into a single version of the truth. Firms that deploy such a tool find that they have the ability to not only make better decisions to drive profitability today, but they can look ahead and make decisions that maximize revenue and mitigate risk in the future.
Technology enhancements such as machine learning and advanced analytics are enabling such predictive exercises. The firms that have in place a single, unitized practice management platform are in the best position to harness the power of predictive analytics, because they have a treasure trove of current and historical data that make those predictions smarter. Does an engagement need more or different staff to maximize profitability? Is the project heading for an over-run of time? If the client signs off on those additional hours, will the engagement close with a higher realization rate than would have been possible if the client was surprised by a higher-than-expected bill?
The possibilities truly are endless when you understand profitability at a granular level. But to unlock those possibilities, firm leaders must commit to the importance of drilling down and the imperative of finding the right tool for the job.
Want to see how the next generation in practice management technology can move the needle for your firm? Discover PracticePro 365 today.
I was quoted in a recent AccountingToday article about the state of practice management software. One of the themes in the article is the importance of integrating workflow, CRM, and other technology point solutions to reduce redundancy and improve accuracy and efficiency.
As I read and re-read my colleagues’ comments, it struck me that this line of thinking is short-sighted. I believe we can unlock the potential of technology to catalyze our firms to the next level of profitability, but first we have to break free from a pervasive mindset that is holding us back.
- Integration is not the answer. For years, CPA firm leaders have been talking about the need to integrate platforms used to manage time and billing, workflow, sales, marketing and client service. Rather than the answer to our problems, these labor-intensive integrations are a big part of the problem. In addition to being costly—in both time and money—aggregating information from different silos introduces duplication of effort, inefficiencies and human error that can damage or disrupt client relationships and ultimately obscure the true state of the practice.
- What we need is a 360-degree, unobstructed view without the silo walls created by point solutions. Rather than trying to integrate the information held within separate silos, a unitized practice management platform encompasses the critical functions across the entire client lifecycle, from acquiring the client to serving and growing the client relationship. A centralized and systematized way to capture data provides a single source of the truth that enables informed decisions about the health of your practice.
- Thriving firms will have headlights into the future. Profitability in a competitive landscape requires the ability to look ahead and make decisions about the future that maximize revenue, as well as minimize risk. What construction contractor would build a high-rise building without keeping a close eye on the estimate-to-complete? And yet, the very CPAs who audit these contractors’ financials lack the ability to project their own profitability at the end of that audit engagement. Today’s technology advancements such as machine learning and advanced analytics are changing this. Firms that embrace a unitized system for managing their practice will have the advantage. The more data they collect via a centralized system, the smarter its assumptions get and ultimately, the better-informed their decisions are about the future of their business.
Making a change can feel risky. But isn’t it even riskier to continue operating in the dark? Sticking with old, stale technology can be the riskiest decision of all, especially when it obscures your vision of where the firm is losing money, where it has opportunities to grow revenue, and most importantly, where client service may be suffering.
Want to see how the next generation in practice management technology can move the needle for your firm? Discover PracticePro 365 today.