Most Accounting firms are operating their business by default – not operating their business by design.
Most Accounting firms just seem to exist. They get through the years with a limited plan, they seem to ‘acquire’ a bunch of clients who are ‘hotch potch’ of make, model & size. They do not typically run the firm like a business, and worst of all the Partners typically operate the firm based on leanings from the Partners of the firms where they used to be employees.
This beast that you own is a business – not a practice. You own it. You take all the risk. Your name is on legal documents. Your name is on the insurance policies, the credit cards, the loans, the leases. Your entire team will all leave one day (they eventually always do) and you’ll still be there. Your clients are in the deal for their annual fee and their work done. Your team members are in it for their salary and career progression. You are in this thing for millions!
This thing that you own is not a community service or a charity. However, many firms operate just like that. They operate like a not-for-profit, community-serving establishment taking on clients they don’t like, doing work they don’t like and dealing with people they don’t particularly like either.
Remember, it’s your business and no one else’s. You should be the benefactor of the spoils and the one enjoying it the most. One of the key purposes of a business is to create wealth for the owners. How’s that going for you?
Although most accounting firms are operated by sole practitioners (one owner), by my educated guess there are approximately 3 partners for every accounting firm in the world. And from my basic research there over 1,000,000 firms in the world. So somewhere in order of 3,000,000 partners. Worldwide it is estimated to be over a one trillion dollar industry. That’s nearly the GDP of Australia!
That is a lot of accounting firms and a lot of owners of accounting firms. Far too many of both in my opinion!
So how do the partners become partners? Here are some typical (and perplexing) scenarios. As an Accountant goes through the ranks and learns their craft at some point in time they ‘make partner’ – as if it is their given right. Sometimes a team member puts pressure on the partners and threatens leaving if they do not become a partner – and the partners cave in. Sometimes current partners think they must elevate a team member to partner status just to keep them – so they do. I even know of partners who have become partners and they do not even know the financial situation of the firm they are buying into. Who would want to be in business with someone who did not understand the financial situation of the business they are buying into.
There are too many partners who are there for retention reasons – not good business reasons.
What about the partner who starts his/her own firm? These are the real Entrepreneurs in this industry. It’s interesting how they come to be. The individual in question starts life as a junior accountant or graduate, learns how to do that part of the job, stays in the current firm for a few years, gets more experience and then shifts firms. They stay at the next firm for a few years and then maybe shift firms again. All the way observing how each of the partners conduct business.
One day (maybe sometime in the persons 30’s) they wake up and say to themselves “I am sick of being an employee of an accounting firm. I’m a good accountant. I want to go out on my own. I want to start my own firm”. They have just had an entrepreneurial seizure!
Off they (you?) go believing that just because they are a good Accountant that they know how to run a successful accounting business that provides great accounting services. Nothing could be further from the truth. Being a technician (knowing how to do the work) and being a business owner (knowing how to run a business that works) are two vastly different scenarios.
Here’s the issue. How did this new entrepreneur learn how to run the business they have just started?
From the partners that they worked for. They learned by osmosis. And where did those partners learn their great (tongue firmly planted in cheek) business skills from? The partners before them. – and so on and so forth.
If you want to run a better business you must first become a better business person.
If you stick to the traditional model described in chapter 1 the only real way to create wealth in this business is to have less partners in your firm and a higher leverage of people per partner.
There are plenty of sole practitioners around the world who hire 20+ people and as such they are making $1M plus profit per annum. The issue of low profitability starts when you have too many partners and the leverage (people per partner) is low. It’s very easy to prop up profits in an Accounting firm – just have the partners charge more time. They have the highest (apparently) charge rates so all time charged by partners of theoretically all profit.
Recently I asked a simple question at one of my coachingclub meetings. “If you could wave a magic wand then the ideal business partner is someone who……?” And then got them to answer the question. This is what the group came up with. The ‘ideal’ partner in an accounting firm is someone who…
- Brings something to the table – complements existing partners
- Is a good cultural fit in the firm
- Is a good communicator at the partner level
- Is a good communicator with team members
- Is a good communicator with clients
- Is stable – emotionally and financially
- Is profit and growth motivated
- Has a good work ethic
- Is reasonably fit and healthy
- Is at the same stage in life mentally
- Shares similar values and ethics
- Has an ability to respect other partners
- Knows what they want – goal orientated
- Is supportive of new ideas
- Is flexible in their thoughts and actions
- Is a good business builder
- Is fun to be with
- Shares the vision
- Walks the talk not just talks the talk
- Acts in the best interests of clients and the firm at all times
- Can bring in new business.
How many of these 21 can your current partners answer favorably? Maybe some partners that you have are not a fit. Do you need less, more or different partners?
Maybe some change needs to happen in your firm at the partner level.
This article was originally published in my first book ‘Accounting Practices Don’t Add up’. My latest book ‘Remaining Relevant – the future of the Accounting profession’ is now available. Click here to buy.
This week the Accountants industry report from Business Fitness New Zealand – The Good, the Bad and the Ugly – was released. It is not good nor bad but it sure is UGLY what is happening to the NZ Accounting profession. You can buy your copy here. I was asked to write the opening remarks for this years report. My summary says it all.
In 2001 I wrote the very first edition of the Good, the Bad and the Ugly of the Accounting profession. Back then 105 (Australian and New Zealand) firms submitted their numbers and the average profit per partner was around $160,000. Since then businessfitness was formed and my original work has been carried on in New Zealand for 11 consecutive years.
I am thrilled that I have been asked to write the opening remarks this year. It makes me proud that the commentary and analysis has continued. However, it does not make me proud what is going on in the New Zealand Accounting profession. In short, it’s going backwards.
All you have to do is take a look at my profit per partner analysis below of the last 11 years. In 2004 the actual median profit per partner was $176,163. In 2014 the actual median profit per partner is $190,409. Not only has the actual profit per partner declined in the past 8 years (from a high of $229,646 in 2007) but when you apply ‘CPI plus a bit’ of just 5% to each year since 2004 the then the 2014 comparison results are staggering.
The other numbers of WIP, Receivables, Write offs, Average Hourly Rate and Productivity have gone up, down and sideways. At the end of the day it’s the profit per partner that matters.
Every expense in a firm is increasing. Salaries and overheads are increasing and you should be running a better firm each year so applying 5% per year profit growth is a very conservative growth target. Based on 5% the median profit per partner in 2014 should be $286,951. Alas, this year it’s only $190,409. That’s almost a $100,000 difference per partner!
On $190k how can partners afford private school education, decent cars, reasonable holidays and still give back to the community? Most can’t.
And to make matters worse isn’t the Accounting profession supposed to be “The Trusted Advisor” – the primary business adviser? Most partners are making less than their clients yet they are advising them of business success! Hmmm.
So why is this happening? I think there are 3 primary reasons:
- Cloud accounting technology is driving efficiencies in the firm and the profession has been forced to reduce prices.
- Savvy clients have more information than ever before and they are asking more ‘price’ and ‘value’ related questions
- Nimble Accounting firms are promoting bundled and cheaper prices than ever before and thus ‘commoditising’ compliance.
There is more of this to come as well. To counteract these market forces the profession has not acted fast enough in marketing, value pricing and delivering business advisory services.
As the old saying goes “if nothing changes, nothing changes.” What that means is if you do nothing (strategy, process, tools etc.) then nothing changes. In this case doing nothing means everything changes. And a sharp decline in profit should be enough to motivate the industry to change.
I think there are 7 key things the profession needs to do to remain relevant and stop the leakage.
- Improve client service. One of the key reasons clients leave because of poor ‘service’. Adding value to what you are currently doing is critical.
- Train your team. Gone are the days when an Accountant who ‘processes’ compliance work can command the salaries they do. They must get new skills and add value to what work they are doing – otherwise the technology and off shore labour will replace them.
- Marketing every day. The profession has a lot to offer yet no one knows about the cool work you can do. Marketing is a must.
- Service offerings need to be increased. Just offering compliance or ad-hoc advisory is not enough. The profession needs to get involved in ‘financial coaching’ a structured way whilst staying close to the numbers.
- Pricing differently. Charging by the hour (especially in arrears) is so last century. You need to price in advance and preferably based on the value you create for the client.
- Sales skills. With increased competition and new services to sell the profession needs to learn how to sell.
- Cloud promotion. Due to social behaviour and technology companies driving change you cannot stop it. So join it. Promote cloud accounting & use modern tools to capitalise on it.
It’s not all doom and gloom. However if the profession does not do something different then who knows what the next 10 years will look like.
The graph below tells the story. I urge you to pass this onto every Accountant you know and let’s stop the decline. On January 20 2015 I will be doing a webinar in NZ to help stop the rot.
Most Accounting firms are on a quest for efficiency. They are focused on systems, process, people and equipment to get more efficient.How can we do the job more efficiently is the management mantra.
Accountants have been pretty good at getting efficient over the years. But at what cost?
If an Accountant ‘prices in arrears’ where the price is determined after the work is done (based on the time taken and a charge rate) then if the Accountant is more efficient then the time goes down and so does the price. Or worse you end up doing more work for the same amount of money. Some Accountants attempt to ‘write up’ the job to a more acceptable price. This is unethical as the business model said ‘time taken X charge rate = price’.
Unless you want to be penalized by being efficient the only right way is to scope the job out in advance. Then price the job, communicate in writing the price and scope of the job to the client and then be as efficient as you possibly can. Don’t go outside of the scope and if you see another project within the same job then communicate that to the client with a new project scope and price.
Pricing in arrears has got issues written all over it. And don’t get me started on driving utilization, productive time or billable hours – that’s the worst of them all. In another blog post perhaps!
It’s November and I have already ‘scheduled out’ 2015. I have added to my calendar all regular events:
- Date nights
- Bike riding
- Blog writing
- Kids drop off
- School holidays
- Rob & Nat Holidays
- Unavailable time
- Golf – practice & play
- Meetings – team, board, forum
- Conferences to attend
Anything that is known or regular is in the diary. So far 12 International trips for 2015. I then do any business around what it left. In my experience, if it’s not in the diary it won’t get done.