Practice Perspectives | Fall 2023
Have It All: Better Profit Margin, Work-Life Balance, and Clients
Three key steps can transform your accounting practice’s business model and make it work for you.
President, Kuesel Consulting
Picture this: You’re running a small accounting practice and consciously decide to reduce your revenue by 20%, trimming the least profitable accounts. At the same time, you eliminate weekend hours in all but a very few cases, and even work fewer Fridays in the summer. From there, you come out making similar money with better work-life balance and a higher average profit margin. As an extra bonus, this transformation positions your practice to be more competitive in many ways going forward.
I know what you’re thinking—is this scenario even possible? Well, I’m here to tell you that the answer is yes, yes, yes—and yes!
Financially, there’s never been a better time in history to be an accountant. The last several years have seen strong gains in earnings for accounting professionals. Public accounting firms have seen double digit revenue (and profit) growth for two years in a row. But with this good comes some bad. We’ve worked harder than ever before, and thanks to a dearth of qualified talent amid strong demand for services, the cycle shows no sign of letting up.
So, let’s take a stab at creating a more sustainable model for the foreseeable future. Here are three steps you should consider to transform your practice’s business model.
1. TRIM YOUR LEAST PROFITABLE CLIENTS
While it may be concerning to deliberately cull clients (and their precious revenue), we all know that not every client is created equal, and not every dollar earned is worth it. You know that by just looking at the work in progress vs. billings—some clients earn a high realization rate (i.e., a better profit margin) and some clients earn a low realization rate. Imagine if your first hour of the week is spent on your high-margin clients but your last hour of the week is spent on your low-margin clients. Well, that’s not your imagination, it’s more likely closer to reality.
Here’s an overly simplified hypothetical to help explain. Let’s imagine that CPA Firm ABC & Co., which is a solo practitioner, has $600,000 in revenue, 1,800 in billable hours, $324,000 in profits (partner income), and a client stratification that fit these profiles:
20% of clients or $180,000 of revenue:
- Average fee $5,000/year with a profit margin of 75%
- Profits earned from most profitable 20% of clients = $135,000
60% of clients or $360,000 of revenue:
- Average fee $4,000/year with a profit margin of 50%
- Profits earned from the next 60% of the practice = $162,000
20% of clients or $180,000 of revenue:
- Average fee $3,000/year with a profit margin of 15%
- Profits earned from the last 20% of the practice = $27,000
In this scenario, we would trim the least profitable revenue of $180,000 and our profits would go down by only $27,000.
2. REDUCE YOUR BILLABLE HOURS WORKED TO MATCH YOUR SMALLER CLIENT BASE
Remember, we’re starting with 1,800 billable hours. Therefore, cutting 20% ($180,000) of our least profitable work should equate to cutting 20% of your billable hours, or 360 hours from your schedule. With this change, you’re now sitting at a much more comfortable 1,440 billable hours.
To reach this goal, start with cutting the weekend hours during busy season and then cut into the workweek—perhaps the Fridays in July and August. How liberating! Maybe you even add another week of paid time off in the summer. Remember, cutting these 360 hours will only cost you $27,000 in profits. These hours weren’t worth that much to begin with! Notably, some of you might even be satisfied with making a little less in exchange for fewer billable hours. But if you need to get back to your original profit total, continue to step No. 3 below.
3. SPEND MORE NON-BILLABLE TIME ON YOURHIGH-POTENTIAL CLIENTS
Now that your schedule is much more in balance, take advantage of the opportunity to spend more of your non-billable time (and previously billable time at low margin) with those high-potential clients in the 75% margin bucket. In theory, you’ll likely pick up some special projects and extra work to offset the $27,000 in lost profits. However, since these billable hours will now be at a 75% margin instead of 15%, it’ll take you considerably fewer new billable hours to arrive at the same total profitability as you were before you started the exercise.
Of course, there’s a caveat to the three steps mentioned above—they’re oversimplified scenarios. You should anticipate some pushback. For example, some of your clients may not accept being trimmed, or you may not have the heart to trim some of your clients. Additionally, some of your clients may accept a considerably higher fee to stay even if they remain at a lower than ideal margin. You also may not be able to cut down all weekend hours due to compression of the season. There’s also your recordkeeping, which may not support access to this data. And lastly, your high-margin clients may not need any extra services.
But even in the worst-case scenarios, seeking improvements in these areas will yield results. And the bonus? Your “new” practice will create similar or possibly more profit margin with less hours—and this means you could reinvest your time and profit elsewhere, having a more valuable asset on your hands when retirement looms.
Can you see it more clearly now? Are you ready to head out on this journey with me? I hope your answer is yes, yes, yes—and yes.