Tax season is upon us! Keep in mind that many CPA firms will make the bulk of their earnings during the busiest seasons, now and the fall. With all the hard work that goes into servicing clients, it is important to achieve the right financial results.
As you rev the production engine, the following barometers should be meaningful as you strive to achieve strong financial results.
Profit margin by service line. Concentrating on your most profitable services and understanding what makes them so profitable will allow you to prioritize that work, and figure out how to turn less profitable services into more profitable revenue streams.
Achieved hourly rate. The more efficiently people work, the healthier is the achieved hourly rate. Healthier achieved rates produce more potential for profit. This metric is typically available to benchmark from accounting industry surveys.
Average compensation/production for accounting staff. Profits are highly dependent on personnel costs. Depending on the nature of your practice, you may have a more sophisticated team or less, which of course influences salary, or you may have a more senior staff that is performing below their grade. Getting the optimum ROI requires a macro pulse on personnel costs and the expected production per person.
Average fee by service line. Each firm should know the average fees in your geographic market for the kinds of engagements you perform. Some firms with low average fees are driving profit by driving volume; this can be a very tiring process, or one that suggests the need to outsource to drive profit on cost. The higher the average fee by service line, generally the more secure the practice, and the more compelling the firm will look to new hires and suitors.
Fee concentration. All good businesses know how they generate the bulk of their revenues. Knowing where your fees are most prevalent by bandwidth of fee is important to figuring out a model client and the optimization of profit.
Strong profitability generates many dividends—not the least of which are comfort and security.
Today’s M&A market is highly influenced by profitability and performance. Keep your firm strong and you will have the win/win of money today and more exciting options if you are inclined to pursue a merger.