I have always tried to run my practice as the business that it was. As such, I used certain numbers or metrics to evaluate how I was doing. I did this when I started out and every step along the way as my practice grew.
I always had numbers—when I was moonlighting I kept “score” on six-column paper, which included the tracking of clients’ 1040 information through completion and the fee and a comparison to the previous two years’ fees. I also learned the importance of using and presenting the numbers when I had partners from one of my early bosses. One time I noticed the secretary typing an elaborate analysis from a large spreadsheet. I asked my boss why he had it typed when he could have more easily photocopied the spreadsheet. He responded that he thought the typed analysis would be treated with a greater respect and attention at their partners’ meetings, and they were. He told me that he got all his partners on the same page and by watching the numbers and appropriately responding, their bottom line had grown. Once he told me that, I started observing what they were doing more carefully and did see results; so I adopted that process and can credit some of my success to the metrics and its use and presentation.
Here are some of the metrics I feel accounting firms should get and use in addition to the typical financial statements and supporting schedules:
1. Chargeable and nonchargeable hours for each staff accountant and partner: Many firms are now requiring daily time entries. If you do not keep time records then many of these metrics would not apply. I do not want to get into a discussion here about the applicability of keeping time records, which I feel are necessary for most practices, but if you want the argument for why to not keep time sheets, read Ron Baker’s Implementing Value Pricing book.
2. Realization by client: This is the percentage determined by the actual collections, divided by the total time charges.
3. Realization by staff person: This is arrived at by applying the client realization percentages to the time each person spent on each client. An example is to assume the staff person worked on three clients where there was a 90 percent, 70 percent and 50 percent realization. If he or she spent equal time on all three clients, their realization rate would be 70 percent. Alternatively if they spent 60 percent of their time on the lower realization client and equal time on the other two, that person’s realization rate would be 62 percent. If the firm-wide realization rate was 70 percent, then there is a strong indication that this staff person was underperforming. If the numbers were reversed, where they spent 60 percent of their time on the 90 percent realization client and 20 percent on the other two, their rate would be 78 percent. I find this very helpful in evaluation staff, scheduling, work done off budget or where there is scope creep, a staff person being underutilized, and the quality of the leverage of higher-level staff and partners.
4. Collections per chargeable hour.
5. Collections per full time equivalent person working in the firm.
6. Ratio of chargeable hours to total hours worked.
7. A budget of expected retainers, recurring fees and fees from special assignments.
8. Family tree of referral sources and revenues.
9. Fees from industry and specialty niches.
10. Fees from top 10 clients and percentage to total revenues. In calculating fees from the clients include a grouping that includes all entities and individuals for each relationship.
11. Compare the current top 10 clients with who they were five years ago. Try to figure out the reasons for the changes.
12. Analyze the firm’s last 10 new clients including their source, industry and type of services they require.
13. Determine the referrals from your top 10 clients.
14. A five-year projection of fees and their niches and sources.
15. Consider using some of the absentee ownership listing I posted at https://partners-network.com/2017/05/11/every-owner-is-absentee-owner/.
16. How does your practice compare to where it was 10 years ago, and are you pleased with the growth or change?
17. Where do you think your practice will be in five years? Is this OK with you?
18. Most important: Is your personal wealth growing? How does it compare to a year ago? If not growing examine what you are taking out of your practice and also how you are investing your personal funds.
Some of this data can be assembled weekly or monthly and some semi-annually and annually. The important thing is to determine what is important and then use the data to run your practice more businesslike. FYI, when I ran my own practice I used all of these plus some more, and Withum does too. Get and use the numbers. You are in business—act like it!
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.