Strategic Planning for Small Accounting Practices
By Elfrink, Jack | |
Proquest LLC |
Insights on Services and Satisfaction front the
As a group, accounting practices are still recovering from die Great Recession of 2007-2009. Individually, some practices are growing more quickly than others-specifically, the growth rate of small, sole-proprietor practices has paled in comparison to their larger competitors. Small accounting practices reported growth in net client fees of only 1.5% for 2011, whereas average growth was 5.6%. This means that, on average, anall practices grew at roughly one-quarter the rate of larger firms. The difference highlights the importance for small firms of benchmarking the operations of larger firms.
This article draws distinctions between the operations of small, sole-proprietor accounting practices generating less than
Comparisons are based upon the data collected in the 2012 National Management of an
Differences in Fees
The most effective strategic expenditures for any accounting practice not only support the greatest sources of fees but also the engines of growth. Consequently, a sole proprietor must anticipate changes in the relative importance of the many sources of fees important to a growing practice. Exhibit 1 lists 18 sources of fees identified in the 2012
As an accounting practice grows, net fees from all sources also grow. Despite the increasing variety of services offered by today's accounting practices, however, one subset constitutes the core services offered by firms of all sizes. Approximately 92% of net fees come from just six fundamental services, regardless of firm size. Exhibit 2 shows the percentage of net fees attributable to these six types of services for each firm size (where size is measured by net client fees).
Although all six core services are important sources of fees in practices of any size, they are not of equal importance. For example, the single largest source of fees for firms of all sizes is tax services-accounting for nearly 60% of net fees in small firms. These six core services also differ in their growth potential. Consequently, their relative contributions to the mix of total fees change as a firm grows.
Among the six core sources of fees, only individual tax and assurance services are truly dynamic in their importance to growing firms. The importance of the remaining four core services does not change much with growth, as illustrated by Exhibit 3. This does not, however, mean that these services, or even noncore services, should be ignored or even deemphasized. For example, consulting services account for only 8% of sole proprietor fees and even less for larger firms; nevertheless, the massive layoffs during the recent recession and continuing high unemployment represent an opportunity for growth. The many out-of-work financial professionals, including CFOs and controllers, may help improve and expand the consulting arm of an accounting practice. Decisions about the viability of such an expansion strategy for any particular practice should be based on the owners' goals and the demographics and demands of the firm's market.
Among the she core services, the relative importance of audit/attest/assurance services increases the most rapidly as firms grow, eventually contributing as much as tax services for the largest firms. In addition, while the various forms of assurance engagement become increasingly important for growing firms, the importance of individual tax work, relative to other services, drops precipitously, as shown in Exhibit 4. In fact, over 95% of the decrease in the importance of individual tax work to the mix of fees can be explained by the growth in assurance services, principally auditing.
Exhibit 4 should not be interpreted to mean that individual tax services do not grow with firm size; on the contrary, the importance of fees from individual tax services to a growing practice cannot be overestimated. But Exhibit 4 does show that fees from individual tax services decline as a percentage of total fees with firm size. Because these services are the largest source of fees for small firms, it is important to note that these fees grow at a somewhat slower rate than the firm as a whole. Nonindividual tax services are the second latest source of fees for the sole proprietor (after individual tax). But this type of service grows at a faster rate than individual tax work and more closely matches the growth rate of the firm.
Fees from audit/attest/assurance services are significantly less than those from either category of tax service, but as accounting practices grow, the importance of assurance services grows faster than any other core service. (See Exhibit 5 for a comparison of the growth in importance of these core services by firm size.) The important thing to note for sole proprietors is that assurance services grow in importance at a faster rate than any other core service, but by virtue of their size, tax services are still responsible for more growth in total fees than any other service.
Billing/Accounts Receivable
Sole proprietors also differ from larger firms in how fees are billed and col- lected. The primary billing method used by sole proprietors, like all firms, is hourly billing, comprising roughly 75% of all fees. But there are a couple of notable differences in how the remaining 25% of fees are billed. The three most important nonhourly billing methods for all firms, in decreasing order of importance, are fixed-fee billing, value billing, and pertax-form fees. Sole proprietors employ two of these nonhourly billing methods at different rates than larger firms. Larger firms are more than 25% more likely to use fixed-fee billing, and although pertax-form fees are only used by 22% of sole proprietors, firms with over
From a strategic planning perspective, it is worth noting that while fewer than one quarter of even the smallest practices are billing clients using per-tax-form fees, nearly 60% of fees come from tax services. It is critically important to know the market and competition. One interpretation of the MAP survey data is that most accounting practices do not see themselves directly competing with the huge, tax-preparation franchises where per-tax-form fees might be more commonplace.
Another notable billing-related difference across firm sizes is in the management of accounts receivable. The average accounts receivable balance for practices of all sizes is about 17% of annual net fees, with bad debts around 1%. Sole proprietors are doing a better job with timely collections; they reported that 58% of their receivables were current at year-end, compared with an average of only 45% for all other firm sizes. Over 40% of sole proprietors' accounts receivable are more than 30 days old, yet larger firms are almost 80% more likely to charge interest on delinquent receivables.
In addition, at year-end, sole proprietors possessed, on average, half of the unbilled work-in-process of larger firms, expressed as a percentage of annual net fees. Assuming that this doubling of unbilled work-in-process for larger firms is due to increases in demand for particular services (i.e., assurance services) a sole practitioner must plan for the implied increase in working capital needed to sustain growth in these areas.
Differences in Spending
Rather than siphon off increasing profits as the firm grows, successful practices plow those profits back into the firm at an increasing rate. Total expenses average 47% of net fees for sole proprietors, while the operations of their nearest competitors, in terms of size, consume more than 55% of fees, and that number increases for even larger firms. Sole proprietors must not only plan on tying up more of their net worth in the growth of the practice, they must also think strategically about the spending patterns most likely to foster growth. The 2012 MAP survey points to at least two areas of significant difference in strategic spending between sole proprietors and larger firms that should be considered for benchmarking: the client's experience and the employee's experience.
The client's experience. Location seems to be very important to growth, because growing firms increasingly invest in more expensive office space. Although the number of square feet of office space per staff member actually declines as firms grow, the total cost of space per person increases. Sole proprietors spend an average of
Sole proprietors also differ in their use of technology in ways that might impact a client's experience. The 2012
Larger firms are nearly 60% more likely than sole proprietors to accept credit card payments. Failure to accept this form of electronic payment may create a competitive disadvantage for sole proprietors. Sole proprietors do not operate with any more accounts receivable as a percentage of net fees than their larger competitors. In other words, sole proprietors are not financing work for clients at unusual rates, yet the majority also do not accept credit cards. These two conditions can combine to create undue hardship for clients by increasing their operating cash flow burdens, especially in times of economic recession. Unlike large corporations, many individual and small business clients continue to struggle with meager operating cash and tight credit markets.
In addition, increasing numbers of individuals and small businesses rely on credit card statements for documenting transactions in the same way they used to rely on checkbook ledgers. While the simple act of paying by check may be feasible for all, it may not be convenient for some. The bottom line is that client satisfaction is enhanced by the ease and fluidity of transactions, which may require accounting service providers to do business the way their clients do business.
Another potential competitive disadvantage for sole proprietors stems from thenlack of websites and client portals. The accounting practice is a service firm where the clients' perceptions of their experiences are an extremely important predictor of future fees. One thing that clients universally want from service firms is access. In fact, one of the chief competitive advantages of a small practice is its ability to create a sense of connectedness with clients and respond quickly to their needs, and this strength can be enhanced by how the firm prioritizes spending on technology resources. Sole proprietors are doing a good job of increasing visibility with the use of low-cost technologies (e.g., blogs and social media) but might be missing other important opportunities to leverage technology for improved client satisfaction.
For example, in addition to their obvious, direct effects on business, websites and client portals are also likely to positively impact fee growth indirectly by lowering new client acquisition costs and creating a stronger impression of access in the minds of clients. The strategic advantages of these two technologies mean that larger firms are 33% more likely to have websites and 20% more likely to have client portals; the likelihood of using these technologies increases with firm size. For example, 100% of firms with
The employee's experience. If clients are the most important asset of an accounting practice, then employees are the second most important. Among the most significant expenses for firms in the service sector are employee expenses, which include both the cost of direct compensation and the cost of employee benefits. As previously mentioned, expenses at larger firms constitute a significantly greater percentage of total fees than at smaller firms, and it should come as no surprise that much of the difference is related to employee costs. Simply put, sole proprietors find it more difficult to invest in staff.
Paraprofessionals earn salaries 16% higher working for larger firms than for sole proprietors. Similarly, clerical staff members earn salaries 14% higher. Besides the differences in direct compensation, smaller firms also offer fewer benefits, which are closely tied to employee satisfaction. The 2012
Lower investment in employee satisfaction reduces profitability in multiple ways. First, it leads to higher turnover; the employee turnover rate for sole proprietors is almost 50% higher than for larger firms. While increasing staff compensation may be difficult, the potential for savings via reduced hiring and training costs might make it worth the effort. Reducing turnover also increases profitability through gains in efficiency that come from having a more experienced staff with greater familiarity with and commitment to the firm, its clients, and its strategic plan.
High-quality support staff can also be leveraged into greater productivity of the owners themselves, providing another important incentive to increase investment in human capital. Larger firms (those generating
What Does It All Mean?
The leaders of a growing practice must be familiar not only with the most important sources of revenue, but also with how these change in importance as a practice grows. Leaders must also develop strategic investment plans that facilitate growth by increasing client satisfaction and employee satisfaction.
Growth requires retaining existing clients while acquiring new ones, and client retention depends upon their perceptions of value. One area of investment that can signficantly improve client satisfaction is technology. For example, websites can not only facilitate growth by increasing the firm's visibility to potential clients; they can increase current clients' access to the firm both in appearance and substance. Websites can link clients directly to secure areas (portals) where they can upload/download documents and even enter data directly, including tax, payroll, and credit card information. These client portals, another technological investment, provide a convenient and secure means of exchanging sensitive information with clients, who are more than likely already comfortable with their use-for example, anyone using online banking. Technological investment does more than just increase visability and efficiency; it is increasingly important to growth in an age where younger clients are more comfortable with digital communications.
Strategic investments must also be made to enhance employee satisfaction; this is especially important in small firms where turnover is disproportionately high. Salaries and benefits should be increased as quickly as is feasible, in order to maintain a firm's intellectual capital resources. Although small firms may have difficulty increasing employee compensation, such problems are not insurmountable. One way to increase recruitment and retention of talent is through fasttrack access to profit sharing or partner status. Another way is technological investments like remote-access networks, which make it possible for employees to work anywhere at anytime.
Rigorous strategic planning is vital to ensuring the sustainability and growth of any kind of business, and accounting firms are no exception. Anyone considering starting their own practice, as well as those who have already made the leap, must carefully evaluate their personal and professional ambitions and the market in which they want to compete: the rewards will be worth the effort. ?
Charles R Pryor, PhD, is a an assistant professor of accounting, and
Copyright: | (c) 2014 New York State Society of Certified Public Accountants |
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