making your firm 20% more profitable · consulting: it’s what your clients want survey by...

Making Your Firm 20% More Profitable

04

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

[email protected]

“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



-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.


1. People still biggest issue keeping MPs awake at night.




5. Turnover on the rise.

6. Increasing focus on consulting, more at large firms than small.

7.

8.

9.

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”








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?








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!!


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


IPP


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


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?

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

http://www.rosenbergassoc.com/



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.

mailto:[email protected]

making your firm 20% more profitable · consulting: it’s what your clients want survey by...

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