Critical Factors That Affect a Partner’s Accounting Practice Profit
The five most critical factors affecting a partner’s accounting practice profit are:
- The fees per partner
The average suburban practice now has $1,000,000 fees per partner. This is the level of fees you should aspire to as it will give you a profit of $400,000 – $500,000 pa, and you will have a capital asset you can sell for retirement worth $1,000,000. Partner practice profits typically average 30-50% of fees per partner. So if a partner only has $200,000 of fees, they can only expect $60,000 -$100,000 of profits pa.
- Industry average fees for common services
As a minimum a practice needs to be charging its clients the industry average prices for the various services provided. Charging clients below market rates (i.e. discounting) kills profitability as income is greatly reduces but labour and overheads are basically the same as the industry average. The only possible outcome of this strategy is low profits per partner. In contrast, the most profitable practices in the industry charge their clients above average prices for various services (which they can do as the clients perceive them as adding more value or providing higher quality services).
- Average turnaround times for common services
The average turnaround time for business client’s work is 21-30 days. This means accountants need to ensure that the time from the client interview until the returns are lodged doesn’t exceed 30 days. If you take any longer you can be sure that the clients notice and won’t feel like they have received good service (even if everything you have done for them is amazing). Unfortunately, one of the ways clients rate our service is on speed.
- Average weekly hours worked
The average principal/partner works 41.5 hours per week for 46 weeks of the year (less 4 weeks annual leave and 10 days holidays). Of course the hours worked this time of year may be more for some partners depending on their practice type, but averaged over the 12 month period it is only 41.5 hours per week. Staff work an average 35-40 hours per week with most firms now acknowledging that overtime is a thing of the past. The key to performance of course is working productively on the important things. If we are working more than 41.5 hours per week on average, we need to think about how productive we really are, and whether we are spending time on stuff that is not important and adds no value.
- All staff productivity
For all staff, whether accountants or support staff, the average productivity is $150,000 pa (which is the fees invoiced to clients). If staff employment costs average say $50,000 pa, this ties back to the 3 times fees benchmark for staff productivity. Labour is the biggest cost in an accounting practice so you should review your staff productivity to ensure this is occurring and you are getting the required return.
It’s your practice and your business, so you need to manage it to achieve the performance and results you desire. In some cases this means making changes; we cannot stand still and continue doing everything the same way we always have. Just like the joke about the definition of insanity, doing the same things over and over, and expecting different results.