Art of Accounting: Billing Methods
IMGCAP(1)]Pricing, billing and collecting fees for services are how accountants earn their livings.
One time, one of my fellow partners at WithumSmith+Brown, Peter Weitsen, billed a client for a lengthy phone call and a follow-up memo, and the client complained, saying that he did not realize he would have to pay for the work he did. Peter replied, “That’s how I make my living!” The client understood and paid the bill.
There seem to be many ways clients are charged for the work we do. And the value to the client is usually perceived differently than by the CPA.
I also have seen that the value to the client is always greater before the work is done than after, yet most accountants determine the fee and present the bill afterwards. Sometimes they even reduce it (before presenting it) because they think it is too high, only to have the client complain about the “high” bill.
Many accountants charge by the hour and don’t know what the fee will be until the work is completed and time calculated, with the corresponding rates for each person that worked on the assignment.
I have been in business a long time, and with the exception of some rare instances, never had a client tell me they wanted to buy X number of hours. What they do tell me is that they want to buy a solution to a problem or relief from a compliance matter. They don’t buy the hours; they buy the solution, yet they are charged by the hour.
A colleague, Ron Baker, developed an industry within professional services where a CPA (or any other professional) and client decide before the job starts what the value is to the client, what work is needed and the price and terms of the engagement. Before any work is started, the client knows what it will cost.
Many CPAs I know think this is crazy because how do they know how much time it will take? Well, Baker says it doesn’t matter. What does matter is the value of what you are delivering. If you cannot make money that way, then maybe you are in the wrong business.
Many years before Ron Baker, I started performing services for clients. Mainly it was moonlighting since I had a day job. Everything I did was priced beforehand (otherwise I would not have gotten the job). I figured what the value was to the client and used as a guide what my boss would charge if it was his client and came up with a number that was acceptable to his client and me.
At that point I had no overhead and everything I made went into my pocket, so I did well. I never kept track of my time—it didn’t matter. What I did keep track of was whether I was delivering value to the client and I always made sure of that by doing a little something extra—a midyear phone call or a pre year-end projection, or a heads up about a change in the tax laws.
Today, there is much controversy over whether value pricing is a good method, or whether accountants should stick to the hourly billing model. It is not so simple, but I do know one thing for sure: Every time a client gets a bill, they consider the value they received in exchange for their cost. Accountants must consider this too, and make sure they provide the value.
Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have at www.partners-network.com. He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329, firstname.lastname@example.org.