Art of Accounting: Small firms outnumber large firms 91 to 1

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There are around 46,000 CPA firms in the United States and the 500th largest firm has about 20 people and $3 million in revenue.

That means 45,500 firms could be considered small businesses. Much of what I do is directed at small firms that primarily want to grow. However, I believe many do not and are satisfied with their present size.

I have been around small firms my entire career. I only worked for small firms. I was a partner in three firms, two of which would be considered small, before merging with Withum. In between I built a 50-person firm with two partners, but it took some serious evolving, and a willingness to make the investment, to start doing things like a larger firm. Because of this, and also because of my almost 14 years with Withum, watching it evolve into the strong firm it is now, and also because of the many calls I get from colleagues, I’ve seen a lot of what works and what doesn’t. However, I have also come to realize that not everyone wants to grow. Many are content to stay where they are. Even in firms that want to grow, some partners do not.

I had lunch recently with a friend who has a partner and one administrative person. Their firm hasn’t grown in the 20 years they have been together. They see eye-to-eye on their priorities, which is to make a good, above average living, not to get involved in “teaching” staff, being able to work a reasonable number of hours and have plenty of time off in the summer, and to only take on work they feel they can control and do an excellent job on. When they feel they are starting to grow beyond their comfort level, they raise their fees and some clients fall out. If their client list starts to shift lower, they somehow, miraculously, get some new clients to bring them back to where they want to be. My father was like this and he had a happy life.

There are 30,000 firms that are peer reviewed. That’s a lot. We don’t know how they do, but all but 500 of them are small firms. Many are sole practitioners, with a small staff at best. They do audits and do well with them. Their infrastructure has to be somewhat costly, but the revenue stream likely justifies that. I know a lot of small firms that specialize in audits of specific industries such as broker dealers, captive insurance companies, not-for-profits, cemetery associations, auto dealers, school districts, government agencies, construction contractors, mortgage banks, nursing homes, hospitals, hotels and homeowner associations. Many choose to remain small and to be in complete control of what they do. They make a good living, have good lives and go home without worrying about the work they did or whether their staff followed up on what they were supposed to do.

There is a point here. Not every firm wants to grow, and there is nothing wrong with that…for them. However, they are businesses and have needs. On some level I do not feel these needs are fully met by many of the professional consultants or the organizations they belong to. I intend to identify some things that could help these firms and perhaps fill a gap that I surmise exists. Stay tuned for periodic columns on this topic.

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 along with the Pay-Less-Tax Man blog for Bottom Line. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. 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 emendlowitz@withum.com.

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Practice management Business development Small business Ed Mendlowitz WithumSmith+Brown