According to a recent Good Bad Ugly benchmark report from Business Fitness, one of the best indicators of profitability for accounting firms is simply leverage – the number of staff per partner.
The report concluded that “Building on the trend in recent years, leverage continued to appear to be the best driver of both revenue and profit, with those firms who had higher leverage producing roughly four times the revenue and net profit per partner when compared to less leveraged firms”
The Good Bad Ugly report also observed that:
- Whilst firms with higher leverage had a lower net profit percentage, partners in these firms took home substantially more money (that is, net profit per partner);
- Higher expenses and salaries as a percentage of revenue were also associated with firms with higher leverage, and so were partner charge out rates and staff turnover. These more highly leveraged firms were paying their staff more but had higher turnover and
- Whilst partners in firms with higher leverage had more clients under their management along with a higher average fee per client, the average hourly rate in these firms was lower than in firms with lower leverage.
From a practical perspective, leverage is of course more than simply increasing the number of staff per partner. It’s all about effective delegation of administrative, workflow management and client relationship responsibilities. The partners of firms that successfully achieved this have moved their focus away from control to engagement and empowerment … and their staff have flourished as a result.
Some practical tips and hints to consider for partners and managers of accounting firms:
- Don’t be afraid to delegate client relationship responsibility, but do so with a clear focus on the behaviours required to maintain client confidence – proactivity, reliability, responsiveness and professionalism.
- Give managers full responsibility for management of their workflow, from the calling in of work to invoicing of clients. Set clear billing targets and give them the opportunity to achieve those targets.
- Establish a strong client administrative focus within the firm, with administrative staff responsible for non-technical client support services.
- Constantly ask clients for feedback on what’s working and what could be improved. Make each manager in your firm responsible for the feedback received from their clients.
Remember, profitability actually has nothing to do with productivity – in fact, the Good Bad Ugly benchmark report makes the same observation, year after year … ‘the results again this year reveal no correlation between productivity and profitability.’
So, the challenge your firm faces is to focus on effective leverage and measure what matters!
Learn how to leverage your firm!
Upcoming 2 part Online Program – Leverage for Profitability – February 2015.
For further practical insights into how to effectively leverage your firm (whether you have 5 or 50 staff), register for Training Beyond Accounting’s upcoming 2-part series ‘Leverage for Profitability.’
This program will provide practical tips based on 14 years of actual results working with accounting firms of all sizes to improve leverage and profitability.
Dale Crosby, Director, Training Beyond Accounting