Basic principles to improve profitability at your firm

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We all know that improving profitability on a sustained basis generally is a long-term play that requires significant planning, discipline, accountability, implementation and patience.

Unfortunately, the senior partners at many small and midsized CPA firms do not possess all of these attributes and therefore are unable to make significant strides in their bottom-line distributions to their partners. While it’s an uncomfortable scenario, it’s a reality and almost understandable as many small and midsized CPA firms are thinly managed and do not have the leadership necessary to change the inevitable path of merging up.

While improving long-term profitability is a complex challenge, there are several basic principles that have the potential for significant operational improvement. Once they’re applied, many small and midsized firms can incrementally move the needle on the bottom line. Nevertheless, we have found that even these basic principles, tried and true, aren’t consistently used at many small and midsized CPA firms because of a lack of organizational discipline.

Here are the basic principles to improve operations:

• Strive for a shared vision of your firm’s future and strategies (with partner accountability) that will help achieve success.

• Promote a “firm first” culture that rewards collaboration.

• Reach for a high degree of institutional partner loyalty and team effort by placing greater emphasis on firmwide coordination of decision making, group identity, cooperative teamwork and institutional commitment.

• Create a foundation of fairness and a lack of cronyism. When your firm says that certain things matter and they actually do matter, it goes a long way in establishing trust in your firm’s leadership.

• Insist on a sound economic model that rewards consistent performance.

• Insist on sound corporate governance that “walks the talk” when the rubber meets the road.

• Require consistent and persistent leadership by senior partners with a no tolerance view on individual partners who think that they themselves are “stars” and much more important than the firm itself.

• Take a hard look at your partner compensation model and ensure it contains enough transparency and supports your firm’s core values and strategic decisions.

• Attract and retain first-class partners who understand how to build lasting business relationships with clients and contacts.

• Develop partner goals, holding partners accountable for delivering results, and rewarding compensation when goals are achieved both individually and collectively.

• Drive industry specialization (the key to a value proposition that differentiates) into your firm’s DNA.

• Emphasize growth on the top and bottom lines at satisfactory rates (say, 6 to 8 percent per annum) through cross-sells and new originations.

• Create a business development culture that includes everyone within their capacity and skill set.

• Demonstrate that your firm is different by bringing value to clients that is measurably better than competitors. This is readily achieved when your firm institutionalizes its approach to client service (client expectations) by consistently providing byproducts of compliance services such as observations to EBITDA and working capital improvements.

• Approach client service with multidisciplinary client service teams of audit, tax and advisory professionals.

• Make it well known that the firm wants marquee clients who build brand awareness and credentials and not simply volume for volume sake.

• Emphasize that long hours and hard work demonstrate high involvement and commitment to the firm.

• Place an emphasis on continuous education on firm policies, procedures and protocols.

• Look for smart mergers and lateral hires that add to a firm’s strength, improve its weaknesses, and expand its footprint.

Implementing these principles does not require brain surgery or dealing with complex longer-term strategies. Nevertheless, many small and midsized CPA firms cannot implement many, if not most, of them on a sustained basis. It comes down to a lack of organizational discipline. Many firms pick and choose a number of these principles and treat them as the flavors of the month. Emphasis is pushed through the firm for one or two months and profitability improves. That’s the good news. Now the bad news: After one or two months of C-suite muscle, management’s attention wanes and the foot is taken off the gas pedal. Slowly people get the impression that leadership no longer is interested in the initiative. If leadership isn’t looking, many professionals will go back to their bad or ineffective habits. It’s human nature.

These basic operating principles are tried-and-true tools for improving profitability. They can be viewed as low-hanging fruit. They work. If your firm does nothing else, take the list of basic principles, prioritize it for your firm and start driving the most impactful through your operation with persistence and consistency. The key to improved profitability is organizational discipline and determined leadership.

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Practice structure Partner compensation Business development Dom Esposito