by Roger Russell

Revenues for small and midsized CPA firms are still growing despite the slowing economy.

Last year, firm revenues increased at an average of 8.1 percent, a respectable showing, said Wilmette, Ill.-based consultant Marc Rosenberg, CPA, who prepared the survey. However, the rate of growth was below the 11.8 percent and 12.1 percent increases, respectively, over the previous two years.

"Most of the decrease is probably due to the slower consulting business due to the economic slowdown," said Rosenberg. "But we found that compliance services continue to grow at a robust pace."

The fourth annual edition of The Rosenberg Survey, is a national MAP (Management of Accounting Practice) survey of CPA firm statistics. The 2002 version, based on 2001 figures, shows that income per partner was $240,000, up from $218,000 recorded in the 2001 survey. Higher billing rates and greater staff-partner leverage account for this increase.

Easily the most disturbing statistic, according to Rosenberg, was the continuation of the industry’s steep decline of annual staff charge hours; this figure has dropped from 1,622 in 1999 to 1,576 in 2000 to 1,531 in 2001. Income per partner was $277,000 in large cities versus $138,000 in cities with population under 250,000.

"That’s a major event," said Rosenberg. "What’s continuing to show up is that the profession has been struggling to deal with a shortage of experienced staff. They’re doing everything they can to attract and keep good people, but like so many situations in life they overreact. Firms are very reluctant to speak to their staff about increasing their billable hours, because they fear their staff will leave."

"Part of the problem is that the partners have a paradigm in their own minds of low expectations. They hear so much about staff not wanting to work as much as the partners did when they were younger, so they assume that the staff wants to work lower hours."

For most firms, the biggest negative factor affecting job satisfaction is tax season, said Rosenberg. "Consequently, firms have staffed up to make tax season easier, but then they have too many people for the rest of the year. Partners are very reluctant to dismiss under-performing staff for fear they won’t be able to replace them, so firms have been accepting sub-par work and sub-par productivity levels."

No matter which way you measure profitability, Rosenberg said, such staffing practices will have a negative impact. He noted that the accounting industry doesn’t have a consistent way of measuring firm profitability. The two most commonly used measures are income per partner and partner income as a percentage of fees.

"Both are flawed because they are directly and significantly impacted by the number of partners in the firm," he said. "For example, if a firm earns $1,000,000 and has five partners, its income per partner is $200,000. If the firm promotes a staff person to partner and earnings are $1,100,000, the income per partner falls to $183,333. Is the firm less profitable simply because it added a partner? Of course not."

Using income per partner as a measure of profitability for want of a better indicator, Rosenberg sifted the data to find which statistics correlate the most with firm profitability. To maximize firm profitability, he said, partners need to leverage themselves as much as possible, and maximize the amount they charge for services.

"The tried and true way to increase profit has always been leverage and rates - to the extent that a firm can get a group of people bringing in the business and delegate the bulk of work to other people, they’re making leverage work for them. They need to resist the temptation to do the work themselves.

"The other major factor - rates - is something on which CPAs historically have been very wimpy. They need to know they’re good people who provide an important service and they should charge for it. Whenever I make a suggestion to a firm to increase its rates and they do, clients are more than happy to pay.

Many firms, ascribe to the philosophy that they want to provide good services at a reasonable price. "I’ve never understood the emphasis on a reasonable price," Rosenberg said. "By no means do I suggest that a firm rip off its clients, but the point is that CPA firms have undercharged their clients for years, and they just need to charge a competitive and proper rate. Those firms that do make good money at it."

Although maximizing partner charge hours may produce slightly higher profits in the short run, Rosenberg said, it almost never produces long-term results. "Partners that are so busy doing billable work don’t have time to market, develop new services, nurture the staff and leverage their work," he said.

Larger firms tend to have higher profitability, said Rosenberg, because they "get leverage and higher billing rates working for them much better than smaller firms. He noted that the ratio of staff to partner falls off sharply for firms under $2 million.

"Many of us often speak of various thresholds that firms have difficulty penetrating before they can propel themselves into the next size of firm. One of the most important obstacles to overcome is leveraging. Until the partners of a firm figure out how to leverage well, they will always be limited in the size they can attain."

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