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What’s going on in accounting firms?

I have been concerned for a while now that the 2008 global financial crisis has hurt accounting firms. Recently reading the Good, Bad and Ugly report (a survey of 272 NZ accounting firms) has confirmed to me that accounting firms are indeed hurting – but it’s not because of the financial crisis. It’s because costs are on the rise, and firms are struggling to control them.

Here are four key differences between firms of 2008 and firms of 2012:

  1. The average fee per client has only dropped $45 per client or 2%.
  2. Total number of clients per firm is almost the same.
  3. Total employees per partner has actually dropped 8.3%.
  4. In spite of this, profit per partner is down. At the median level the profit is down $23K or 10.5%.

So what’s going on? Accounting firms still have the same amount of clients as they did in 2008, they’re charging roughly the same amount per client, and they’re doing it with slightly fewer staff.  But profits are still down. Here are a few things that are causing costs to march upwards:

  1. Firms are not getting very good return on their investments of employee time. The most productive firms surveyed were making an average of $128k per year per full-time employee. If you assume each employee is doing 1,600 chargeable hours a year, that means they’re effectively making $80 an hour. Since the most productive accountants surveyed claimed they charge an average of $250 an hour, they’re only operating at 30% efficiency. Or, put another way, they’re losing 42 minutes out of every hour they charge — and those are the upper quartile of accountants. The majority of accountants are charging less than this and making less per full-time employee, which means they’re operating even less efficiently.
  2. Overheads and labour costs for accounting firms are rising but partner income isn’t keeping up. In the top firms, partners earn an average of $301k per year. If a partner bills the above-mentioned figure of $250 an hour, he or she could theoretically make $400,000 a year without even hiring staff. By hiring staff, partners freeing up capacity to take on more clients – but the increased revenue isn’t matching or overtaking the increased spending that staff require.
  3. Accountants spend too much time on low-value clients. The top accountants had an average fee per client of $2863 a year or $238 per month.  I think the minimum fee a client should pay is about $250 per month, but an average of $238 a month indicates that there are big clutches of clients who pay less than this, offset by the few clients who pay more than $238 a month.

Where to from here?

So how do accountants stop or reverse this trend? The key is in improved efficiency through better technology and systems. Offices need to shrink as people start working from home; more work needs to be done through outsourcing and less full time salaried people. The old, expensive resources of printers, servers and desks need to disappear in favour of the much-cheaper laptop, mobile phone and internet connection. Printers are dead, as are servers and desk phones.

Some of the fundamental processes within firms need to change, too. For one, accountants need to move to monthly fees. Monthly fees bring debtor days down, which is a huge expense for lots of firms.

Firms also need to focus on getting clients who bring them at least $250 in revenue per month – either by bringing on clients who are prepared to spend this much or by offering more value to clients who are currently paying less than $250 a month. The reason they need to do this is because there are certain fixed costs per client. By making sure each client is worth at least $250 a month, firms can ensure that those fixed costs are always worth it.

The good news is that lots of firms are well on their way to this model of working, which gives the rest of the industry something to work towards.

How are you making your practice more efficient?

 

Read more about Accountants

 

8 comments

Richard Francis
21 November 2012 #

The GBU report is a real warning sign that firms are STILL doing the same old for the same clients. The squeeze is happening because we are not moving fast enough on technology time-savers on the one hand and being relevant to market needs with our service offerings.

Your remedies are spot on Hamish – and I saw just today the proof of the pudding with 3 Australian firms who are streamlined, value-adding, paperless and flexible. That’s the kind of firm that will prosper and attract like-minded clients.

Hamish Edwards
22 November 2012 #

Could not agree more Richard. I think that firms that do not move to the new model, will continue to see a downward slide of their profits and the gap between average performance and exceptional will get even wider.

Richard Adams
27 November 2012 #

We completely agree. So much so that we’re just launching a new service for clients where they get their compliance work for free.

Accountants cannot continue doing what they did before. It’s not only archaic but also of no value to the client on the whole.

We are UK Xero partners and will be looking forward to adding Spotlight Reporting to our service package in the new year. Keep up the good work all round!

Accountancy Firms Dublin
30 November 2012 #

yes! even I do not agree with this completely. I think it’s all the twists and turns of the economic conditions effecting the accountancy firms to enjoy low returns. Accountancy firms are not required to change their models of work and I Don’t think that nay performance gap will become wider.

Michael ‘MC’ Carter
7 December 2012 #

Totally onboard with your recommendations for change Hamish. There is a major barrier for most firms effecting these changes, however.

As Richard Francis’ recent Modern Practice Survey affirmed, 93% of practitioners *want* value-added services to be a key offering of their firm, yet 68% acknowledge they “could do more”, and only 18% confirmed that Management Reporting & Forecasting, for example, generates significant fees for them.

That is a huge gulf between intention and achievement. We call that The Value-Add Chasm that most firms never cross. The only firms that cross this chasm are the firms (practitioners) that learn how to communicate value (code for “learn how to SELL”). A handful of practitioners do this naturally. I’m guessing you’re one of them. For most, they need to learn how to sell.

Otherwise things like:
- moving clients to monthly fees
- getting clients who bring them at least $250 in revenue per month
- Management Reporting & Forecasting
- and all value-add/non-compliance services

… will remain merely an intention, never achieved. As far as value-add services are concerned, a practitioner never gets to deliver what they never sell.

Thankfully, “learning how to sell” is an easy footbridge across the chasm, for those practitioners brave enough to walk it.

Stuart Jones
9 December 2012 #

Our profession has a huge problem – we are operating at 30% efficiency and we have a massive, uphill struggle to correct this. Over the years we have improved our practices and given away the savings to our clients. We still accept “rubbish records” (and I don’t use the term lightly) and charge too little for what we do.

Sadly, our clients will not pay the rate we deserve. A 70% waste cannot be down to our inefficiency, it’s because we don’t charge the “time cost” for the work. It’s just not possible to improve our efficiency to recover all of the lost 70%.

We need to only work for clients who supply us with decent accounting records. That way our efficiency isn’t compromised by our clients’ inefficiency. If we are going to improve our client’s bookkeeping though we mustn’t repeat the past errors. We must differentiate this “new” service from our practice and “sell” it for the correct price otherwise we’ll be swapping one type of inefficiency for another.

Michael ‘MC’ Carter
12 December 2012 #

I second that Stuart. I love seeing firms that, for example, not only insist that new clients move onto Xero, but who have structured education and training programs for their clients, to teach them how to better run their business — including record keeping, streamlining paper(less) flows, etc. Growthwise.com.au do an awesome job at that.

robert green
8 December 2013 #

The fact is most accountants do the same as the one down the road (they report on things that happened last year that no one cares about) so the cost of the job is paramount in the mind of the client. Therefore you have no difference you can offer, the accountant is a risk averse creature so their business advise in worthless (so you cant add that to the suite of services you offer). So what do you do? You recommend software packages to clients that give kick backs to accountants for the sales lead, you recommend packages that do the work for you that you used to have to do for the unprofitable clients? How about offering a valuable service, one that your client would be happy to pay more for, talk to your clients more often and see if you can do anything extra for them, that will add value to their business (which in turn adds value to yours). After the bank manager your accountant is the last person you want to talk with as both only seem to be interested in what is best for them

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