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:
- The average fee per client has only dropped $45 per client or 2%.
- Total number of clients per firm is almost the same.
- Total employees per partner has actually dropped 8.3%.
- 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:
- 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.
- 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.
- 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?