[IMGCAP(1)]One of my partners once was asked to recommend an accountant who could do corporate tax returns for a very large company.
He was told it would take about 20 days and the fixed fee was an amount that was about a third of our normal rates. My partner was going to refer a CPA that sublet from us who seemed to have the time and he asked me if I thought the accountant could do it.
This was the beginning of January and was the morning after I put together our budget for the year and, as usual with our practice, our projected revenues were short but were made up with special work which we always got plenty of. However, in January it looks pretty bleak—in August it seems like a piece of cake.
Well, I walked into the office wondering how we would make up the shortfall when I was asked this. I asked about the work and since it would cover about 40 percent of January’s budgeted extra business, I said we should do it. The argument against it was that it was far below our regular rates, but I pointed out that we would not have to hire anyone extra and could cover it with who we had, with some overtime for the staff and extra hours by us, with most of the fee dropping to our bottom line. I also added that it would reduce the pressure for extra work for January.
When we met with the client, we were shown the prior years’ returns and we noticed that the returns had a major error. The corporation, which was quite large but able to be on the cash basis, had an accrual basis balance sheet—a terrible mistake. When we pointed it out and explained the consequences, they of course got very upset and ended the meeting saying they needed to consult with the Big Eight accounting firm that prepared the return.
Our findings were confirmed, and we were then asked how much we would charge. We quoted our normal fee, which was about three times greater than they expected to pay, but still lower than the Big Eight firm charged the prior year and substantially higher than two other firms. But we were the only ones that “knew what we were doing.” We did some bargaining and got the work for about 2 ½ times what they originally said they wanted to pay.
The takeaway here is that when you are in business, you should not summarily turn down work because of low fees if you do not need to increase overhead or have added substantial costs attributed to that work. Every “extra” dollar goes straight to the bottom line.
Obviously you cannot run a practice successfully without minimum rates or fees, but an occasional special job at a low fee will not upset your revenue structure and will add to your profits.
A final comment is that I don’t consider this a lowball fee since the client clearly laid out what they wanted and the price at which they already had two firms willing to accept the work. Also, our fee was the opposite—it was much higher!
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, email@example.com.