According to the most recent salary survey conducted by the National Association of Colleges and Employers, the average starting salary this past recruiting season for accountants was $45,656.With starting salaries at these levels, and escalating salaries for experienced staff, firms should be reviewing their economic model. Too often, partners and owners are busy working in the business rather than working on the business. Is your firm still using billing formulas that were developed prior to the current investment levels in technology and the shortage of accountants?
I often hear firms say they are using the old mark-up formula of three to four times the hourly cost. Are your margins shrinking, and do your partners understand the economics of managing a profitable firm in today's global economy?
Now is the time to start managing your revenue stream by evaluating pricing alternatives, including value pricing. Public accounting is no longer in an effort-based economy.
In an attempt to address some of these questions, let's make some assumptions about starting salaries and look at the economics as a whole. (Your firm's assumptions and assigned values may differ, but the premise regarding margins should be consistent.) People and firms generally don't change unless they are forced to, or they see their peers and competitors excelling under a different model. I believe that most of the changes we see today are driven by shrinking margins, improved management and increasing investments (i.e. technology, marketing, sales, office facilities, travel and communications).
The assumptions for this illustration are:
1. Base salary (average per NACE survey): $45,656 ($21.95 per hour).
2. Fringe benefits at 20 percent: $9,131.
3. Technology investment per person: $7,500.
4. Bonus or overtime: $5,000.
5. Total cost before training and overhead: $67,287 ($32.35 per hour).
The hourly amounts are based upon a standard of 2,080 hours. Many firms simply mark up the base rate by four times ($21.95 x 4 = $87.80) and round up to $90 per hour for a billing/pricing rate.
This may work in firms that are 80 percent chargeable, but is that realistic in today's environment? Are you aware that firms are only 50 percent chargeable?
This metric is based upon surveys that we conducted over the past five years of firms ranging from under $1 million to over $750 million in annual revenues (total hours worked for all employees compared to billed hours). This is partially because personnel who add value (i.e. technology, financial reporting and tax filing) often do not charge time to clients. Another quick calculation shows that the total cost at $32.35 per hour is 1.4738 times the base of $21.95 per hour.
In order to put this illustration into perspective, we must make some assumptions regarding charge hours. The table at the top of this page provides three scenarios.
The margins may at first appear adequate, but they don't tell the entire story or reflect the total economic model. Today's employees (male and female) are looking for work/life balance. Most do not want to work 2,500 hours per year (or even 2,300).
So we arrive at the question: At these rates, are you simply employing people, or are you developing a profitable and growing firm? Simply surviving and paying partners a decent salary is one thing, while developing an ongoing business and providing owners a reasonable rate of return is another.
While the purpose of this article is to make you think about your economic model in relationship to today's salary rates, there are strategies that will help you become more profitable. Some of these are:
1. Manage your head count based upon revenue per full-time-equivalent (net revenue divided by 2,080 hours). This amount will depend upon your market and other pricing strategies. The national average is approximately $130,000 per FTE. Think of this number much like one's golf handicap: Improvement should be the goal. Most firms that I know don't strive to be average - where the best of the worst meet the worst of the best. Again, your market will be a determining factor.
2. Utilize the capabilities of your time and billing system to calculate total costs per hour, rather than as a pricing model. Calculate clients by profitability and annually filter the low performers. We recommend the following five criteria: utilize, appreciate, reward, enhance and refer. We utilize a score of one to five on each criterion.
3. Consider moving to matrix pricing (fixed price), similar to what is used in the auto repair business. This works extremely well if you know your costs, have a strategy for desired margins and utilize strong engagement letters.
4. Improve engagement letters by fixing prices and defining the scope. Then, utilize change orders for extra services, like the construction industry. Remember that most clients don't buy pain relievers until they feel the pain.
5. Collect fees in advance in order to reduce work in process and accounts receivable. Adherence to good billing practices will improve cash flow and can enhance margins. Not all partners are created equal when it comes to pricing, billing and collecting. Successful retailers do not allow all of their managers to set prices, and neither should an accounting firm.
All of these strategies require management's time and accountability. Both firm management and accountability are becoming critically important. Knowing costs and margins in any business is also essential. Setting standard pricing matters, too. In too many accounting firms, people are pricing services without accurate cost accounting, while using assumptions that may be outdated.
Take time to calculate your metrics over the past three years and project them into the future (three to five years). Managing an accounting firm can unfortunately be lonely, because most partners are focused on client service. It requires planning, people and processes. With proper balance - and technology as the accelerator - your firm's performance can be enhanced.
Decide to be a transformation agent and avoid further commoditization.
Charge hour scenarios
Scenario 1 Scenario 2 Scenario 3
Chargeable hours 1,250 1,500 1,750
Billing rate $90 $90 $90
Revenue $112,500 $135,000 $157,500
Total labor cost from above $67,287 $67,287 $67,287
Margin $45,213 $67,713 $90,213
L. Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
