I’ve noticed a surprising trend during my vast experience coaching CPA firms and negotiating buy/sell agreements. Many CPA firms operate without a clear understanding of their daily, weekly, or even monthly performance. It’s astonishing how often they rely solely on their checking account balance or if they’re fortunate, monthly financial statements. Many only get to see their year-end financials for their tax purposes. Definitely a case of the cobbler and his poor shoes!
I find in many CPA firms, practice management, and reporting are often lacking. Some don’t even track time spent on projects, leaving them clueless about their own or their staff’s engagement hours. Admittedly, this is an extreme case. Even firms that do track time often do so haphazardly, relying on team members to report chargeable time while using nonchargeable time as a plug to fill the gap. Even those CPA firms with decent time management systems still have room for improvement and miss out on easy profit-boosting opportunities.
A well-implemented time management system is essential for CPA firms. It provides vital Key Performance Indicators (KPIs) to management on a daily, weekly, monthly, and annual basis for each employee, client, and firm. These KPIs include chargeable and nonchargeable time, budget vs. actual, billable and nonbillable hours, write-ups, and write-downs. Moreover, management gains access to effective billing rates for each employee, allowing them to make informed decisions on pay increases and bonuses.
A CPA firm’s practice management system, like any other computer software, is only as good as the data entered into it. If it is managed loosely, it will give poor and unreliable information. However, when managed properly, it becomes a reliable resource for billing, budgeting, client retention assessments, and employee-related decisions such as hiring, firing, promotions, and compensation.
To illustrate the impact of time management, let’s consider this scenario: If an employee forgets to charge a client for 0.5 hours per day and their billing rate is $100 per hour, the firm loses out on $50 in fees each day. That amounts to $250 per week, $1,000 per month, and a whopping $12,000 per year. For a firm with just 5 employees, that’s $60,000 in lost revenue per year. Scale it up to 10 employees, and the loss doubles to $120,000 each year. These are missed opportunities and pure profit since the firm has already covered its expenses.
This example highlights just one aspect of the lost opportunities incurred by not effectively managing time management systems and overseeing your firm by the numbers. It’s crucial to start with the basics and educate your team on properly charging their work to clients, budgeting each engagement, controlling write-downs in billings, and closely monitoring and minimizing nonchargeable time. By tying these efforts to a performance bonus system, you’ll motivate your team toward success and achieve higher profitability for everyone involved.
After all, each team member and each client are their own profit center. But you will see the difference once your CPA firm’s practice management system is up to date.
Start maximizing your firm’s potential today!