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Making Your Firm 20% More Profitable · Consulting: It’s What Your Clients Want Survey by...
Transcript of Making Your Firm 20% More Profitable · Consulting: It’s What Your Clients Want Survey by...
Making Your Firm 20% More Profitable
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The Rosenberg Associates • Marc Rosenberg, CPA, President
• Over 20 years consulting to CPA firms
• Consultant, author and speaker to CPAs
• 1,000 client firms from coast to coast
• Named one of the most recommended CPA firm consultants by INSIDE Public Accounting
• Top 100 Most Influential People in Accounting Profession – Accounting Today
- 13 consecutive years
Our proprietary consulting methods, handouts, checklists, and intellectual capital are captured in each of these monographs.
TITLES
1. Managing CPA Firm Staff- Your #1 Asset 2. Partner Compensation: The Art and Science 3. Partner Retirement/Buyout Plans 4. CPA Firms Mergers: Your Complete Guide 5. How CPA Firms Work: The Business of
Public Accounting 6. Partner Retreats: Do-It-Yourself Guide 7. How to Bring in New Partners 8. What Really Makes a CPA Firm Profitable? 9. CPA Firm Management & Governance 10. CPA Firm Succession Planning: A Perfect Storm 11. Strategic Planning & Goal Setting for Results 12. How to Operate a Compensation Committee 13. Effective Partner Relations & Communication
Order monographs at:
www.rosenbergassoc.com
Rosenberg is active with CPA firms:
• Partner compensation & buyout plans
• Mergers
• How to bring in new partners
• Succession planning
• Facilitate retreats
• Expert witness testimony
The Rosenberg Associates
1000 Skokie Blvd. Suite 555
Wilmette, IL 60091
Phone: 847-251-7100
Fax: 847-251-4622
“To Make Millions Happy”
Income or profitability
should never be the
primary driver
Achieving Profitability: 2 Perspectives
MICRO
• Income per partner
• Fees per partner
• Fees per person
• Staff to partner ratio
• Realization
• Billing rates
• Billable hours per person
• Overhead expense/person
• Admin to total ratio
MACRO
• Marketing
• Management
• Leadership
• Staff development
• Succession planning
• Partner relations
• Quality service
• Effective processes
• Partner accountability
• Technology
Why CPA firms benchmark
• Increase profit
• Measure performance against other similar firms
• Identify areas going well & exploit
• Identify areas needing improvement and resolve
The 3 steps of benchmarking
1. Measuring
2. Analyzing
3. Changing… This is the key!
The Rosenberg MAP Survey Our Process
• 18th year – 372 firms
• Sweet spot: $2-30 million in annual revenue
• 81% repeat rate
• On-line input
• 3 CPAs review data
The Rosenberg MAP Survey Our Process
• 40% error rate; we contact firms for better data
• We compute all ratios
• 40 page narrative analysis
• Data sorts – firm size, market size, geog. region
• Every participant gets a 1 page custom report
• Row-by-row data, all firms – over 100 metrics
Demographics: Fee Size of Firms
33 firms over $20 million in fees
65 firms $10 – 20 million in fees
225 firms $ 2 – 10 million in fees
24 firms under $2 million
25 firms – solos
372 firms total
Demographics: Population Size of Market
187 firms – population > 2 million
66 firms – population 1 - 2 million
76 firms – population 250K - 1 million
43 firms – under 250,000
372 firms total
A Few Definitions
Definition: FTEs (2000 hours is a normal year)
1000 hours a year: 0.5
1600 hours a year: 0.8
2800 hours a year: 1.0
-one person can never > 1.0 FTE
Other Definitions
• Partner (equity partners)
• Partner income and IPP (not just cash paid)
• Revenues or fees
• Total work hours
• Cash vs. accrual basis
One thing to remember about MAP surveys:
The statistics are
averages only.
Watch for MVP Slides
Don’t Automatically Measure Profitability By
Income as % of Revenue $2-10M Firms
(225)
$>20M Firms (33)
Average revenue $5.4M $34M
Partner income as %
of revenue
33.3% 29.2%
Prostaff to equity
partner ratio
4.7 7.1
Income per (equity)
partner
$364,000 $549,000
State of The CPA Industry By The Sweet 16
Allan Terry Gale Tamera Angie August Sam Rita Koltin Putney Crosley Loerzel Grissom Aquila Allred Keller
Chris Carl Marc Art Jeff Jennifer Roman Rob Frederiksen George Rosenberg Kuesel Pawlow Wilson Kepczyk Nixon
Consensus of Sweet 16
1. “People” still biggest issue keeping MPs awake at night.
2. Merger frenzy continues with no end in sight.
3. Succession planning unsolvable for 80% of all firms.
4. Long-time CPA firm operating model outdated / relevancy.
5.
6.
7.
8.
9.
10.
Outdated CPA Firm Model Examples
1. Partners FMG mentality causes neglect of mgmt and staff mentoring.
2. Partners work way too many billable hours.
3. Partners work like silos, each doing the same work a different way.
4. Too much book of business mentality/ little teamwork.
5. Billing based on hours worked vs. value provided.
6. Same services for umpteen yrs; not enough “shiny new stuff.”(Crosley)
7. Too much focus on compliance and not enough on consulting.
8. Generalists vs. specialists.
9. Market limited by geographic borders.
10. Takes way too long for staff to make partner.
11. Firms don’t walk the talk on treating staff as important as clients.
12. Flexibility for the staff.
Consensus of Sweet 16
1. People still biggest issue keeping MPs awake at night.
2. Merger frenzy continues with no end in sight.
3. Succession planning unsolvable for 80% of all firms.
4. Long-time CPA firm operating model outdated / relevancy.
5. Turnover on the rise.
6. Increasing focus on consulting, more at large firms than small.
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10.
Consulting: It’s What Your Clients Want
Survey by Panalitix of 428 clients of accounting firms
• 62% of clients want more face-to-face contact with their accountant.
• 61% of clients want their accountants to offer more services to improve their business and to focus on the future than the past.
Rob Nixon, CEO of Panalitix (Australia) Author: “Remaining Relevant”
Consensus of Sweet 16
1. People still biggest issue keeping MPs awake at night.
2. Merger frenzy continues with no end in sight.
3. Succession planning unsolvable for 80% of all firms.
4. Long-time CPA firm operating model outdated / relevancy.
5. Turnover on the rise.
6. Increasing focus on consulting, more at large firms than small.
7. Organic growth up nicely; stronger than last year.
8. Epidemic of mid-60s partners not wanting to retire.
9.
10.
Mandatory Retirement
BENEFITS OF MANDATORY RETIREMENT
1. Protects the firm’s largest financial asset – the clients.
2. Provides for orderly transition of the firm.
3. Attracts and retains top talent. Your best staff will leave if they feel aging partners will never retire.
LACK OF MANDATORY RETIREMENT
1. Emboldens aging, somewhat unproductive partners to hang on.
2. Partners feel that at 65 or so, they are in good health, productive and they love their work. Why should they be forced out?
3. Aging but still productive partners make money for the firm. Why stop this?
Consensus of Sweet 16
1. People still biggest issue keeping MPs awake at night.
2. Merger frenzy continues with no end in sight.
3. Succession planning unsolvable for 80% of all firms.
4. Long-time CPA firm operating model outdated / relevancy.
5. Turnover on the rise.
6. Increasing focus on consulting, more at large firms than small.
7. Organic growth up nicely; stronger than last year.
8. Epidemic of mid-60s partners not wanting to retire.
9. Glut of new, young MPs who have not been mentored.
10.Partner comp systems continue to migrate to comp committees, away from formulas.
Top 10 Findings in Our Survey
1. Revenue growth 8.1% vs. 6.7%.
2. Mergers 28% of growth.
3. IPP at $406K, 3.6% higher.
4. Dramatically stronger leverage.
5. Slight reduction in # of partners.
Top 10 Findings in Our Survey
6. Shocker – small decline in female ptrs.
7. Consulting up, mainly at large firms.
8. More comp comm, fewer formulas.
9. Partner aging leveled off.
10. New partner buy-ins at $163K vs. $144K.
Polling Question #1
What is the #1 metric your firm uses to measure firm profitability and overall financial performance?
Rosenberg plays Sherlock Holmes:
How I investigate firms
Variation in Growth Rates
2015 2014 Change
Over $20M 11.8% 8.7% +3.1%
$10-20M 7.0% 7.1% -0.1%
$2-10M 7.9% 6.0% +1.9%
Under $2M 2.2% 2.2% 0%
All firms over $2M 8.1% 6.7% +1.4%
Impact of Mergers on Growth
Firm Size
Total Growth
Rate
Organic Growth
Growth From Mergers
Amount % of Total
Growth
Merger Growth
Last Year
>$20M 11.8% 8.1% 3.7% 31% 16%
$10-20M 7.0% 6.3% .7% 10% 28%
$2-10M 7.9% 5.4% 2.5% 32% 33%
All firms > $2M
8.1% 5.8% 2.3% 28% 30%
A Stunner: Organic Growth Slowing??
• Losing big Baby Boomer clients
• Limited staff capacity
• Mergers taking away firm’s marketing focus
• Partners working longer, not building their book
PM $359,237
350,000
369,000
365,000
354,000 360,000
366,000
386,000
382,000 392,000
406,000
300,000
310,000
320,000
330,000
340,000
350,000
360,000
370,000
380,000
390,000
400,000
410,000
420,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Inco
me P
er
Part
ner
Income Per Partner : 2006 to 2015 (Firms Over $2 Million)
Correlation to Income Per Partner
Rank 2015
Rank 2014
Metric
1 2 Fees per person Rates and
leverage
2 1 Fees per partner
3 3 Partner billing rate
4 4 Ratio of prostaff to partner
5 7 Partner billable hours
6 6 Total partner work hours
7 5 Realization
8 8 Staff billable hours
9 9 Utilization percentage
10 10 Ratio of admin to total personnel
Elite Firms (79 firms with IPP> $500K)
Elite Firms
2015
$10-20M
Firm Group
Averages
$2-10M Firm Group
Averages
Net revenue 13,679,000 13,617,000 5,391,000
Income per partner 680,000 471,000 364,000
Staff to partner ratio 7.2 7.2 4.7
Partner charge hours 1,179 1,104 1,155
Staff charge hours 1,501 1,510 1,496
Partner billing rate 362 324 294
Fees per partner 1,986,000 1,693,000 1,153,000
Fees per person 214,000 173,000 172,000
Growth 12.0% 7.0% 7.9%
Bigger is more profitable
• Critical mass – COO, marketing, HR, IT
• More active and sophisticated marketing
• More specialization
• Attract larger clients
• Attract more and better staff
• Better leverage
• More training resources
• More merger opportunities
• More sophisticated and leading edge technology
• More accountability
• Stronger firm management
Why bigger is (usually) better
Fees Per Partner
2015 2014
Over $20M 1,920,000 1,769,000
$10-20M 1,693,000 1,560,000
$2-10M 1,153,000 1,089,000
Under $2M 602,000 656,000
Does your firm have the right number of partners and the right amount of business for each partner?
High fees per partner results from:
1. Partners are “account managers” 2. Good staff to delegate TO 3. Good at bringing in business 4. Good mix of large & small clients 5. Partners avoid admin like the plague 6. High standards-who makes partner 7. Aggressive billing rates 8. Low write-offs
Fees Per Person
2015 2014
Over $20M 197,000 194,000
$10-20M 173,000 175,000
$2-10M 172,000 168,000
Under $2M 151,000 158,000
How efficient is your firm? How many people does it take to get the work out?
Staff To Partner Ratio
2015 2014
Over $20M 7.1 6.6
$10-20M 7.2 6.3
$2-10M 4.7 4.4
Under $2M 2.3 2.5
Are the partners leveraging themselves? Do they resist doing staff-level work themselves?
Partner Billing Rates
• Partner rates -barometer of all rates
• If partner rates are “high,” staff rates will be high.
–Managers a consistent 2/3 of equity partner rates. And so on…
So, we look at partner rates very closely!!
Partner Billing Rates
2015 2014
Over $20M 384 375
$10-20M 324 326
$2-10M 294 286
Under $2M 242 239
Upper 25% Partner Billing Rate
Middle 50% Lower 25%
Population
No. Of
Firms
Average Partner Billing Rate
IPP
Average Partner Billing Rate
IPP
Average Partner Billing Rate
IPP
>2M 187 422 573,000 330 426,000 257 320,000
1-2M 66 361 483,000 282 309,000 214 281,000
250K-1M 76 331 460,000 266 336,000 216 300,000
<250K 43 308 454,000 246 306,000 187 232,000
Partner Billing Rates
Is the firm billing what it’s worth? Or is the firm using low billing rates as their primary marketing tactic?
Polling Question #2
Which of these metrics is NOT one of the 4 metrics that correlates the STRONGEST with firm profitability?
a. Fees per partner
b. Staff billable hours
c. Partner billing rate
d. Ratio of prostaff to partner
Common Thread Be higher priced-lower volume firm instead of low
price-high volume shop
Charge Hours
Net Bill
Rate
Net Revenue
Fees Per Person
Total Headcount
Inefficient 40,000 $125 $5,000,000 $125,000 40
Much better
35,000 $160 $5,600,000 $170,000 33
Partner Billing Rates- Same City (Chicago) $7-11M Revenue
Partner Bill Rate Annual Fees ($000)
% Below Highest
Firm 1 460 11,020 Firm 2 380 7,264 -17% Firm 3 356 8,484 -23% Firm 4 350 9,073 -24% Firm 5 343 7,229 -25% Firm 6 340 9,249 -26% Firm 7 336 9,935 -27% Firm 8 328 7,279 -29% Firm 9 303 8,237 -34%
Firm 10 302 10,702 -34%
Partner Billing Rates- Same City (Chicago) $3-5M Revenue
Partner Bill Rate Annual Fees ($000)
% Below Highest
Firm 1 430 4,303 Firm 2 375 3,582 -13% Firm 3 340 5,080 -21% Firm 4 336 3,741 -22% Firm 5 330 4,606 -23% Firm 6 325 4,009 -24% Firm 7 315 4,722 -27% Firm 8 310 3,295 -28% Firm 9 264 4,180 -39%
Firm 10 250 4,946 -42%
Billing rates in general
Question: What’s the single biggest problem in CPA firm profitability?
Answer: Wimpy billing rates
Billing rates in general
Question: What do you want your clients to say about you?
Answer: “They’re expensive, but they’re good!”
Partner Billable Hours
2015 2014
Over $20M 1,028 1,063
$10-20M 1,104 1,078
$2-10M 1,155 1,168
Under $2M 1,092 1,194
Are the partners working IN the business instead of ON the business?
Staff Billable Hours
2015 2014
Over $20M 1,465 1,473
$10-20M 1,510 1,489
$2-10M 1,496 1,491
Under $2M 1,476 1,574
How productive are the staff?
31
54
76 80
85
0
10
20
30
40
50
60
70
80
90
100
> 1700 1600s 1500s 1400s < 1400
Nu
mb
er
Of
Firm
s in
Su
rve
y
Annual Staff Billable Hours
Annual Billable Hours for Prostaff (Over $2M Firms)
Realization
2015 2014
Over $20M 84.4% 84.4%
$10-20M 84.7% 85.0%
$2-10M 87.0% 87.8%
Under $2M 90.7% 89.5%
High realization billing rates are too low Low realization not billing enough of your time
Firms with higher billing rates have higher write-offs,
so they net the same as firms with lower rates.
Right?
Firms with higher billing rates have higher write-offs,
so they net the same as firms with lower rates.
Right?
Yes. Firms with higher standard rates have higher write-offs, but they STILL net more.
Quartile
Standard
Partner Rates
Realization
Net
Realizable
Rate
Upper 25%
399 85.1% 340
Mid 50% 302 85.0% 257
Lower 25% 233 90.0% 210
Admin vs. Total Personnel
2015 2014
Over $20M 17.8% 17.7%
$10-20M 18.2% 19.2%
$2-10M 17.8% 18.2%
Under $2M 20.0% 18.9%
This metric decreasing as technology increases (And you ain’t seen nothing yet!)
Prostaff Turnover
2015 2014
Over $20M 20.5% 17.7%
$10-20M 18.1% 16.5%
$2-10M 16.7% 16.8%
Under $2M 16.6% 19.7%
All Firms 17.0% 17.1%
How good is the firm at staff retention? Is turnover too low because the firm accepts mediocrity?
Low Staff Turnover: Not Always a Good Thing
“We believe that staff turnover and revenue growth operate in sync. If we are growing the way we want to grow – say 10-20% a year – that may result in the firm outgrowing some of our staff each year. That aggressive growth can cause some turnover.”
Larry Autrey, MP Whitley Penn, Ft. Worth, TX $72M in 2015
Polling Question #3
Partner income as a percentage of revenues is the BEST way to measure CPA firm profitability.
a. Never
b. Not perfect but it’s as good as we have.
c. It depends. Neither true nor false.
Consulting as % of Total Revenue
2015 2014
Over $20M 20.5% 18.7%
$10-20M 15.3% 14.2%
$2-10M 13.3% 13.7%
Under $2M 9.3% 10.9%
Is the firm identifying the clients’ needs beyond accounting and tax?
Percentage Female Partners
2015 2014 2006
Over $20M 16.5% 16.2% 14.3%
$10-20M 17.6% 18.5%
$2-10M 16.8% 17.0% 13.9%
Under $2M 16.0% 17.0% 11.5%
All firms 16.3% 17.2% 13.6%
Midwest & Northeast
13% 13%
West & South 20% 21%
Percent of Partners Over Age 50
>20M 10-20M 2-10M <2M All
2015 59.5% 63.9% 70.2% 58.7% 65.2%
2014 58.5% 64.5% 67.1% 72.5% 64.1%
2013 58.0% 63.1% 67.0% 73.3% 66.0%
2012 58.8% 63.5% 65.8% 65.4% 65.3%
2007 49.7% 58.6% 59.4% 56.6%
2005 47.0% 52.0% 53.3% 51.5%
The Aging of CPA Firm Partners
Partner Compensation Systems
2
Ptrs
3-4
Ptrs
5-7
Ptrs
8-12 Ptrs
13+
Ptrs
2015
Total
Comp Committee 6% 16% 23% 53% 81% 32%
Formula 25% 39% 39% 21% 8% 31%
Paper & Pencil 3% 2% 4% 0% 3% 2%
Ownership Pct 3% 2% 6% 4% 3% 4%
MP Decides 13% 13% 13% 13% 3% 12%
Pay Equal 38% 5% 1% 3% 2% 6%
All Decide 12% 23% 14% 6% 0% 13%
Open 100% 88% 77% 59% 40% 75%
Closed 0% 12% 23% 41% 60% 25%
What does a firm’s Partner Compensation
Method Have To Do With Increasing Profits?
A lot!
Comp Method and Impact on Profits
Comp Method Ramifications
Formula • Eat what you kill • Ignores “team” • Ignores intangibles
• Paper & Pencil • All partners decide
• Leadership lacking • Too much democracy
• Ownership percentage • Pay all partners equally
• Not performance-based
• Comp committee • MP decides
• Strong leadership • Balancing productivity w/
intangibles • Aligns comp with strategic plan
Managing Partners’ Data
Annual Revenues
Over $20M $10-20M $2-10M
Annual bill hours-all partners 1,028 1,104 1,155
Annual bill hrs for MPs 545 827 1,039
Client base managed – all partners
1,920,000 1,693,000 1,153,000
Client base managed for MPs 1,331,000 1,413,000 1,174,000
Can a MP with a high amount of client duties also be effective at managing the firm?
What MPs Should Be Doing
DUTY HEAVY MEDIUM LITTLE
Management, leadership & visionary
Mentoring/coaching partners
Herding cats / keeping the peace
Holding partners accountable
Focus the firm on growth
Profitability
Develop a great staff
Rainmaking – personal (if MP has this skill)
Size of client base managed
Billable hours
Admin duties
Dictator
Partner Compensation Ratio of Highest To Lowest
2015 2014 2010
>20M 3.8 3.8 3.6
10-20M 2.4 2.5 2.5
2-10M 2.2 1.9 1.9
< 2M 1.3 1.3 1.3
Partner Retirement Systems
2-4 Ptrs 5-7 Ptrs 8-12 Ptrs 13+Ptrs All -2014
Multiple of comp
30% 44% 49% 58% 42%
Book of business
9% 11% 9% 3% 9%
Owner Pct. 28% 19% 9% 8% 19%
AAV 18% 18% 18% 17% 18%
Fixed 12% 5% 13% 8% 9%
Equal 3% 3% 2% 6% 3%
Firms with
NO plan
27% of total
10% of total
13% of total
10% of total
17% of total
Multiple Used To Value Internal Partner Goodwill Buyouts
Overall Valuation Percentages
(as % of Fees)
Over $20M $10-20M $2-10M Under $2M All Firms
2015 73.4% 76.9% 79.4% 88.2% 78.8%
2014 68.5% 77.8% 80.6% 85.0% 79.2%
2013 75.6% 81.2% 81.0% 82.2% 80.6%
2009 82.5% 75.4% 77.6% 82.5% 78.1%
Do firms reduce retirement payments if clients leave
after the partner retires?
Yes – 19% No – 81%
Non-Equity Partners
% of firms with non-equity partners
>$20M $10-20M $2-10M All
Firms
2015 73% 75% 50% 55%
2014 70% 81% 47% 56%
2013 72% 78% 46% 54%
2007 47% 33% 37%
Is the bar high enough for promotion to equity partner?
Polling Question #4
What is the average valuation multiple used to value internal partner goodwill buyouts?
a. 40% or so of revenue
b. 60% or so of revenue
c. 80% or so of revenue
d. It’s always been one times fees.
New Partners
Compensation:
• >$20M $237,000
• >$10-20M $199,000
• $2-10M $161,000
Buy-in:
• Overall average: $163,000.
• Very narrow band for ALL size firms.
• 27 or 372 firms have buy-ins of $400K or more.
Mandatory Retirement
Size Range
Percentage With Mandatory Retirement
2015 2014 2013
> $20M 88% 88% 82%
$10-20M 72% 78% 75%
$2-10M
60% 58% 50%
<$2M 29% 24% 21%
1. People: Retention, training, mentoring, leadership development, etc.
2. Leverage. Leverage. Leverage. Avoid partners being too billable.
3. Strong billing rates. Be lower volume-high priced shop than the opposite.
4. Growth. Proactive marketing. ABS – always be selling.
5. Efficiency via technology and franchised work processes.
6. Hire COO to keep the MP and line-partners out of admin.
7. Benchmarking.
8. Teach your staff how the firm makes money.
9. Niches. Specialization. Consulting.
10. Strong, effective management to make all the above happen.
Recap of Best Practices For Profitability
To purchase a copy of the survey:
www.rosenbergassoc.com
$475
Phone: 847-251-7100 [email protected] www.rosenbergassoc.com
Marc Rosenberg, CPA
Thanks for taking the time to listen today! Let me know of any questions you have now or in the future.