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Time to Tune Your Firm's Financial Engine

Every CPA practice has its own rhythm but all practices should be sure that their financial engine is tuned to optimize key performance achievements. As you take steps to calibrate your engine, the following should be part of your settings:

 1. Accounts Receivable Turnover – Cash is king and the kingdom is always happy when funds are available. A healthy CPA firm will turn its receivables six to eight times a year. A prudently managed firm will bill at least monthly, and set a condition to clear a percentage of Work in Process above a particular threshold.

2. Project Turnaround – Prompt service is a primary magnet and retention lever. Every project should be programmed and tracked for a specific turnaround timeline. Turnaround, at the busiest times of the year, can be a challenge – planning in advance of the season for turnaround cycles will allow you to budget for human capital and client commitment. Many practice management software packages have scheduling and tracking modules, which will be invaluable for your turnaround program.

3. Leverage – The output and profit of a CPA firm is heightened by delegating to talented individuals and utilizing your staff to their full potential, and best use. A typical CPA firm will have owner charge hours ranging from 30 percent to 40 percent of the total charge hours. Firms with high owner charge hours and low employee contribution have a misleading profit margin, and one that will possibly haunt them in future merger/sale situations.

4. Pipeline - A healthy practice will retain clients each year. The traffic of client transition should be driven to, at a minimum, keep the profit of the firm intact and to push the practice to a higher caliber of client satisfaction, and an enhanced level of professional satisfaction. Defining your model client and setting a business development process, where there is a constant pipeline of new opportunities, is vital. The pipeline should be more robust in the fall and winter and less active in the spring and summer, but nonetheless, active all year round. A budget for total opportunities and closed opportunities should be set and monitored.

5. Average Rate Per Hour – The bottom line in every business starts with its top line. Every firm is geared to production per hour; therefore achieving an appropriate rate per hour is essential for firm profitability and an overall economic comfort zone for owners and employees. Setting individual billing rates, in a competitive and value centric manner, will support generating a healthy and realistic firm-wide average rate per hour. In a typical CPA firm, the overall average rate should be at least 50 percent of the owner rate, presuming the rate was properly set.

6. WIP Conversion – The inventory of an accounting practice is its WIP. It is essential to bill WIP each month, and to set a target so that the Work in Process turns multiple times each year. There are strong production time periods when WIP is going to be high – setting a general ceiling on unbilled WIP of 15 percent to 20 percent of the volume is a solid benchmark.

7. Referrals In – The catalyst for new clients is a productive referral base. Tracking the number of opportunities by the referral source, and the money closed by source is important for prioritizing referral relationships and benchmarking the standard to expect from lead generators. Furthermore, capturing the successful trend for referrals is valuable as well – closing a lower percentage of one referral sources leads to another, and merits investigation and resolution.

8. Referrals Out – Stimulating new opportunities for a CPA firm is a function of many factors, including how many opportunities you feed to your referral sources. A healthy CPA firm will be part of a strong new client traffic pattern, where business is being referred in and out to the right places. Quantifying how much good you have done for a referral source, and advising them of your efforts is often an effective tool to make your referral sources step up to the plate, instead of continuing to linger.

9. Non-Billable Time – Every accounting practice requires administrative time, but a crucial directive is to be efficient and effective with non-billable time. Practices should be capturing non-billable hours in detail to determine whether personnel is being inappropriately deployed, and whether the work is being effectively managed, or can be pushed to people who are not billable.

10. Return on Marketing Investment – Image and awareness are important factors for the continuity of an accounting firm. The time and dollars committed to marketing must be tracked, along with new business closed, new business inquiries, and contact from new staff and new referral sources. Time and money are precious resources so their utilization for marketing must be justified. Budgeting both marketing time and expenditures should also include budgeting for success, in terms of dollars and headcount.

Your firm's financial engine should be humming at all times, especially during busy season. As you plan for this coming busy season, make sure that you tune your engine to the right standards, and that you know how the standards of high performance should be measured.

Ira S. Rosenbloom
Ira S. Rosenbloom, CPA, is the Chief Operating Executive at Optimum Strategies, LLC, a consulting firm focused on helping small and medium-sized CPA firms enhance business performance, profitability and foster practice continuity. Ira can be reached at: [email protected] or at (215) 694-8084
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