Wakeup Call to CPA Firms: Stop Writing Off Your Profits

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.

 

Drilling Down to Profitability

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.

 

Accounting Today: What’s your firm’s fuel efficiency?

Utilization is like your firm’s fuel efficiency gauge; it gives insight into how your firm’s resources are being used.

But when you don’t have real-time reporting on firm management metrics, utilization can be tricky to gauge. You know that your people are busy — at least you think they are. But how busy? Are they actually too busy?

One scenario that is all too common in CPA firms is known as “ghosting” hours, when a staff member spends time on an engagement without charging the hours to the client.

This scenario commonly results in:

  • Underbillings to the client;
  • Inability to assess the true effort required to properly serve the client;
  • Inability to assess the efficiency or skill level of the staff member who “ghosted” the hours; and
  • Inaccurate evaluations of productivity for that staff member and the department.

Here is another scenario, which is considered intolerable in most firms: the staff member who charges hours to engagements but does not actually work those hours. For the firm that is armed with up-to-date productivity metrics, this fraudster is easy to spot. They are the ones who lead the group in hours charged but never seem to complete their assignments on time.

Are you watching your gauges?

Your firm can avoid these negative scenarios by keeping a close eye on utilization efficiency. Consider these two key questions:

  • Does each staff member and each division have a specific productivity goal?
  • Are you (and they) regularly monitoring progress compared to those targets?

First, let’s discuss goals. There’s a reason every road has a posted speed limit. While some see the “limit” as a mere suggestion or even a minimum threshold, we all agree to gauge our speed in the context of that posted sign. The same goes for utilization — and any other firm management metric. If your people don’t know what goal they should strive for, then they don’t know whether they should accelerate or ease up on the gas pedal.

In our firm, every billable person has a monthly budget they can monitor their progress against. Using their personal dashboard, they are empowered to hold themselves accountable rather than wait for their supervisors to tell them how they’re doing.

When someone comes into one of our employee-counseling sessions, they already know whether or not they are meeting expectations. In a busy accounting firm like ours, meeting productivity goals typically isn’t a problem. But we do have to watch for the opposite problem — working too much. When we see someone consistently putting in 200 hours a month, we encourage these zealous team members to slow down. And this analysis indicates that we might need to bring in other team members to even out the load.

The point here is that real-time data — at the individual, group, firm and client levels — enables better management decisions. A good performance management system should let you zoom out to see the performance of each division and the firm as a whole, and zoom in to the individual and the client level.

For example: Is your audit group exceeding productivity goals but falling far short in realization (i.e., dumping time into jobs)? Does the tax work for a certain client consistently require just 75 percent of the time of similar jobs but at nearly 100 percent realization?

These analyses are enabled by real-time, actionable metrics. And these analyses allow you to make critical decisions about the most profitable path for your firm — before that path is determined for you.

This article was published in Accounting Today on March 27, 2019.

Beyond Integration: The Future of Practice Management Technology

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.

  1. 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.
  2. 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.
  3. 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.

 

 

 

Are You Driving Firm Profitability — or Merely Accepting It?

Would real-time, actionable metrics help you make better decisions? They certainly have in our firm. Like so many other accounting firms, we used to review firm performance metrics a few times a year — usually when we got invitations to participate in MAP surveys.

But now, we have implemented our proprietary performance management system, PracticePro 365. Backed by robust business intelligence, it has been nothing short of transformative for our firm.

Today, we can quickly analyze productivity and realization numbers by service line, by engagement, even down to the partner level. At any point during an engagement, we can see how profitable it is, so we can do something to turn it around if needed. As soon as billing begins, we have the numbers to tell us how profitable the engagement was, allowing us to make decisions about whether to pursue similar opportunities and how to staff them.

Yet in most firms, performance metrics are used as little more than a history lesson. And there’s a very good reason that most firms don’t review these metrics more frequently. Generating them typically requires pulling data from multiple systems and dumping them into standalone spreadsheets. Not only is this process time-consuming, but it can also be error-prone. The result is often outdated metrics, with different versions of the “truth” being generated by these disparate systems.

If you lack a single version of the truth, you are essentially driving blind. Without the real-time, actionable data you need to make good decisions, you could be heading down the road to an unprofitable outcome. By the time you realize it, it is probably far too late to make course corrections.

What’s Your DTA?

The truth is that any firm can make these performance metrics part of a regular review process. It’s a matter of priority.

Back in the 1980s, when I worked for Coopers & Lybrand, we had something called a Daily Time Analysis (DTA). Every day, each person on the job would post their time on a sheet of 13-column paper. The senior on the job maintained the DTA, spending at least an hour every day tabulating those columns and comparing with the budget. If the senior could not produce an up-to-date DTA upon request, he or she would be taken to task.

The point is that, even without technology, you can choose to make regular profitability analysis part of your expectations and standards.

Luckily, we do have technology today that can quickly and accurately generate performance metrics. Far more than the glorified time and billing systems of the past, today’s practice management systems integrate time tracking, billing, workflow management, customer service, sales and marketing functions into one integrated system. When these solutions are backed by robust business intelligence, they can quickly analyze all this disparate data to produce simple, powerful graphics illustrating the trajectory of the firm.

These practice management systems answer a lot of questions very quickly. How does the tax department realization rate compare to the audit division? How did billable hours compare to budgets on each engagement?

When departments or individuals aren’t performing well, you have the numbers to hold them responsible  and to give credit where credit is due. Accountability is key to performance management, and performance management is key to driving a profitable firm.

Remember that in today’s competitive environment, the only way to continue growing is to deliberately drive firm profitability and manage with a purpose.

Maybe you’d rather sit back and enjoy the ride, accepting whatever destination you happen to reach. Myself, I prefer to be in the driver’s seat.

Want to see how the next generation in practice management technology can move the needle for your firm? Discover PracticePro 365 today.