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Good, bad, ugly accounting

Each year Viv Brownrigg and the team from Business Fitness conduct a detailed survey of New Zealand accounting firms – The Good, the Bad and the Ugly of the New Zealand Accounting Profession. I consider this the best analysis of its kind and essential for accounting firms to gauge where they are at. Viv goes beyond reporting on the research and advises how to get KPIs heading in the right direction. This is gold for any accounting firm anywhere in the world.

Highlights for me:

1. The best revenue result by partner was a staggering $2.7m. But keeping this in perspective, it’s very unusual and probably better than what the big four firms do.

2. On average a firm generates $700k of revenue per partner and clears a profit per partner of about $220k (before partner salaries, interest and tax). That’s the baseline. You should be able to do better than this.

3. A reasonable average hourly rate seems quite low at $126. Those heading closer to $175 are certainly in a much happier place. Again, totally achievable.

4. Leverage models of 3-4 staff per partner are ok, but the better performers have 6-7.

5. Upper quartile productivity at 70% is reasonable when you include admin staff. Core accounting staff should be at 85%+.  I’m still confident that those firms using the quote, job tracking and workflow model do much better than those who simply bill on a time spent basis. Customers tend to prefer a quote too.

6. Upper Quartile firms have Partner productivity at 68%. I have always advocated that the less time a partner spends on billable work, the better. So this does seem high to me. However, Viv did point out to me that firms which do have partner billing at about 70% have much better profitability. While I don’t like the model, Viv’s right.

7. Even average firms now have write-off percentages that are lower than 10%. I totally believe that by using Xero for core accounting and compliance work, you should have net aggregate write-ons.

8. Debtor and Lock Up days still seem very high to me at 72 and 99 respectively for an Upper Quartile firm. Certainly room for improvement here. WIP is however respectful at just 15 days. What it means is we’re rather good at getting the invoices out the door, but bad at collecting the cash.

In summary the headline KPIs for most firms seem to be improving. Poor perception of value is reflected in lower than achievable charge rates, an absence of value pricing, as well as write-offs that have averaged 9%. Educating clients about value can be both challenging and scary for many accountants. Producing a monthly management report straight from the client ledger is easy and a quick way to give a client a taste of  the value that comes from a closer relationship.

Many practices have increased their average client spend by adding simple service layers, many of them seemingly insignificant. The compound effect of each service layer can be quite stunning. The bundling of services to increase the average fee really is working.

I recommend using Viv’s list of KPIs as a good way to measure performance each month and set the Upper Quartile from the GBU report as our minimum standard.

 

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4 comments

Margaret Holmes
16 November 2010 #

Are accountants measuring the right things? For accountants to improve their profitability they need to improve efficiency – the only measure for this is average hourly rate, i.e. fees charged/time taken. Once a benchmark is set the firm can then concentrate on how to do the job more efficiently – this is what clients want. Charging time encourages the firm to be inefficient – the longer it takes the higher the fee!

Imagine if your airline couldn’t calculate what they were charging you for your flight until after they had worked out the cost of your flight and allocated it between passengers. There would be no incentive to ensure the flight was full or even that they fly in a straight line between airports.

High debtors days is also a symptom of charging fees after the fact – setting the fee with the client before you start removes the argument about fees after the event and allows the firm to control payment terms.

I was talking to an accountant last week who told me that as a partner she was expected to bill 40 hours per week – no wonder younger accountants don’t aspire to partnership. If we want to have succession plans for our businesses we need to be looking for better ways to service clients and make partnership a benefit not a curse.

The world has moved on – it is time accountants did too.

Viv Brownrigg
18 November 2010 #

I couldn’t agree more with you Margaret. It’s high time the accounting industry got the subject of fees out from under the table and right on to the table. It’s not as scary as it sounds. All firms should be working under a clear client service plan with each client, with as much of the fee agreed up front as is possible.

On the debtor days front, you are so right. But there’s more to it than setting fees up front, debtors don’t come under control unless they get managed, and that’s something that the typical accounting firm just does not do.

And yes, how can we attract young accountants into partnership if we burn them off on the old and outdated model of ‘sit at your desk and just keep billing the client’ ?

Succession as an enormous issue is looming in this idustry. Time for us to get real about how attractive an industry it really is for the young and aspiring accountant.

Doug Edwards
19 November 2010 #

Accounting business is or should be enjoyable – value for happy clients and a better than average reward for the firm and its participants.

Its not rocket science, it is the delivery of a service for an agreed fee in an agreed time frame, with payment at an agreed date.

For the firm, measurment of efficiently ie average hourly rate achieved against a benchmark, and the use of a consistently prepared KPI report will highlight areas for action.

Cash is King – the job is NOT done until the gold is in the bank!

Accountant Queenstown
28 November 2010 #

I agree, the accountants I use now have a set fee for the work, this is great no more waiting for the the bill for end of years taxes, I know what it will cost before the work is done and the day it will be finished. This encourages them to be as efficient as possible.

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