Improving Firm Profitability

1. Improving Firm Profitability Presented by: William Pirolli CPA/PFS/CFF/CGMA Portland Maine, May 2019

2. Net remaining per owner Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

3. Net remaining per owner Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

4. Owner compensation Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

5. Owner compensation Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

6. Attributes of Highly Profitable Firms • Strong leadership • Committed to best in class business practices • Empowered management team • Strong partner unity • High Accountability • Transparent • Unified vision of growth strategy • Specialties and niches….go deep • Aligned compensation system

7. The Profit Wheel #AICPAENGAGE #PSTech

8. Market Forces UNDERSTANDING MARKET FORCES ENVIRONMENTAL SCAN • Local, Regional and National • Effects of technology (Blockchain, AI) • Consider a strategic planning retreat WHO IS THE CUSTOMER Firm Demographics WHAT ARE THEIR NEEDS • Shift in Service Model - Cloud WHO IS THE COMPETITION • Constantly changing with M&A activity • Pressure from outside the profession WHAT IS YOUR FIRM’S SKILL SET WHAT DO YOU LIKE TO DO AND DO BEST

9. EDUCATION WE NEED TO TRAIN OUR PEOPLE/PARTNERS IN THE BUSINESS OF ACCOUNTING – Firm Economics IMPROVE TRANSPARENCY THROUGHOUT THE FIRM EDUCATE THE CLIENTS ABOUT OUR SERVICES UNDERSTAND WHAT OUR KEY PROFIT DRIVERS ARE BENCHMARK AND IMPROVE THOSE DRIVERS • Education

10. TEACHING FIRM ECONOMICS • The following slides are from a presentation given to all new hires and the entire Firm on a regular basis • Firm’s need to improve transparency in financial and other areas of the Firm including path to promotion, path to partnership, Firm strategy for growth, business development efforts, professional trends and issues. • Everyone has a part in Firm profitability

11. Terms & DefinitionsThese are but a few of the hundreds of metrics that can be tracked • Realization (Net WIP billed/gross WIP relieved) • Measure of billing efficiency/profitability • Utilization / Productivity (billable hrs./total hours) • Measure of people management • Average partner managed billing • Measure of partner leverage • Revenue per full time equivalent • Measure of staffing leverage

12. WHAT WE DO…… • Find and develop the client relationship • Service the client’s needs • Gather time, invoice and communicate the value of the services we provide • Collect the billing to fund operations • Repeat the process

13. GATHERING TIME • 75% of all revenue in the profession is earned by the hour…..right or wrong. • 25% is either fixed fee (majority) or value billing (rare) • Keeping time is like cost accounting….it is a tool • Don’t just use a code….explain time, create a trail • Used to improve performance, understand work flow, allows benchmarking and creates accountability • The long journey from time entry to billing • The importance of timeliness

14. INVOICE FOR THE VALUE OF OUR SERVICES • Have up front value communications, price with purpose and before you do the work • YOU are the Trusted Advisor • Set clear scope specifications and avoid scope creep! • Collect retainers • Consider monthly/quarterly fixed billings • Always bill timely • Stop work until paid on past due amounts • Consider menu pricing/fixed fee arrangements (The Southwest Model) • Auto-draft payment agreements

15. COLLECT BILLINGS TO FUND OPERATIONS • Cash flow is the life blood of the firm • Timely billing leads to timely collections • Bill early and often • Stop services in the absence of payments • Allow for collections electronically • Go on the “payroll” for collections • Use ACH auto drafts • Yes, we take credit cards!!!

16. Firm Economics: Major Cost Centers • Salaries and Benefits — Can make up more than 70% of total expenses and 40% – 45% of fees • Wages and statutory taxes • Health insurance and other benefits • Occupancy – 7% • Technology and Software-4% • Training and Education-2% • Marketing & Business Development-3%

17. Realization Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

18. Utilization UTILIZATION BY DEPARTMENT

19. Net client fees per owner Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

20. Net client fees per FTE professional Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular

21. Sources of Firm Revenue Our Service Mix 60% Compliance 40% Consulting

22. Where we spend our money(% of total dollars –exclusive of partner compensation)

23. The Power of a Quarter Hour • For 2017 we had 62 FTE • If everyone found .25 hour per day that would translate to…. $570,000 in billing • Calculation: • 62 x .25= 15.5 hours per day • 15.5 x 5 days=77.5 hours per week • 77.5 hours/week x 42 weeks=3,255/year • 3,255 x $175(average net firm rate) = $570,000

24. CLIENT SELECTION POOR CLIENTS PRODUCE POOR RESULTS DEVELOP INTAKE FILTERS THAT WORK IS THE CLIENT STRATEGIC? • (IMPORTANT OR ESSENTIAL TO A PLAN OF ACTION) DEVELOP INDUSTRY VERTICALS STOP BEING ALL THINGS TO ALL PEOPLE KEEP THE BEST, FIRE THE REST (PCPS CLIENT EVALUATION TOOL) • Client Selection

25. SERVICE SCOPE • Service Scope THE RELENTLESS PURSUIT OF PERFECTION IS THE DEATH OF PROFIT STANDARDS ARE MEANT TO BE MET…NOT HURDLED. AVOID SCOPE CREEP IN THE NAME OF CLIENT SERVICE. ENGAGEMENTS CHANGE….BILL ACCORDINGLY CONSTANTLY IMPROVE AND STREAMLINE YOUR PROCESSES

26. MANAGING STANDARDS/SCOPE CREEP Review your engagement letters to determine if the scope is adequately communicated and understood Educate your team to communicate issues and lost time. Create separate engagements for different services • Pre-audit adjustments • Audit services • Tax services • Consulting services Invoice with clarity and in phases Invoice engagements separately Most poorly performing engagements are service opportunities to generate Trusted Business Advisor engagements. Sell value! • Service Scope

27. BILLING • Billing & Collecting IF YOU ARE NOT GOING TO BILL AND COLLECT, WHY COME TO WORK STRONG BILLING AND COLLECTIONS KEEPS YOUR FIRM SUSTAINABLE COMMUNICATE FEES AND BILLING ARRANGEMENTS UP FRONT AVOID THE “HOW MUCH WILL IT COST” TRAP (Average Firm Rate) THE DIFFERENCE BETWEEN VALUE PRICING AND VALUE BILLING BILL EARLY AND BILL OFTEN – PHASING FORM A BILLING COMMITTEE MENTOR UNDERPERFORMERS…TEACH GOOD BILLING HABITS BE ACCOUNTABLE

28. COLLECTIONS • Billing & Collecting HAVE STANDARD POLICIES AND FOLLOW THEM SET CLEAR PAYMENT EXPECTATIONS UP FRONT CONSIDER FIXED AUTO-DRAFT STOP SERVICING CLIENTS WHO DO NOT PAY….DON’T MAKE THEIR PROBLEM YOUR PROBLEM GO ON THE PAYROLL….CREDIT CARDS / PAYPAL / WEB PORTAL/ BITCOIN SEND STATEMENTS…MAKE THE CALL LET ADMINISTRATION HANDLE IT GO TO COLLECTION

29. FAVORITE BILLING MYTHS • Billing & Collecting THE CLIENT IS FEE SENSITIVE • ALL CLIENTS ARE FEE SENSITIVE. YOU HAVE NOT COMMUNICATED YOUR VALUE WE ARE DISCOUNTING THIS WORK IN HOPES OF GETTING MORE • YOU HAVE JUST SET THE BAR THAT YOU WILL DO WORK CHEAPLY THE CLIENT HAD A PROBLEM, I DIDN’T WANT TO TAKE ADVANTAGE • THE CLIENT HAD A PROBLEM AND WE CAME TO THE RESCUE. COMMUNICATE, VALUE BILL AND HELP THEM FIX IT. SELL A SERVICE WE WILL MAKE IT UP NEXT YEAR • YOU WILL NEVER MAKE IT UP…..DO THE MATH. ARE YOU KEEPING A RUNNING TALLY SO YOU CAN TELL?

30. FAVORITE BILLING MYTHS…..ROUND TWO • Billing & Collecting WE NEED TO LOWER OUR PRICE, WE KEEP LOSING BIDS • SOMETIMES TRUE…ALSO A CRUTCH FOR LACK OF BILLING COURAGE OR INABILITY TO COMMUNICATE VALUE. ARE WE OVER PERFORMING ON SERVICES? IT IS OFFSEASON WORK…WE ALREADY HAVE THE OVERHEAD SO IT IS ALL PROFIT • PARTIALLY TRUE….BUT WHY IS EVERYTHING PRICED AS OFFSEASON WORK? DO WE HAVE AN ON-SEASON RATE? BECOMES THE NORM. DOES THE CLIENT KNOW? STAFF HATE WORKING ON LOSERS IT IS GOOD FOR STAFF TRAINING • SEE ABOVE THE CLIENT IS A GOOD REFERRAL SOURCE • GREAT…MORE JUST LIKE THEM!!!

31. 2018 Average billing rates Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular Supporting copy goes here, Arial Regular *Information not available due to limited responses

32. FIRM WIDE HOURLY BILLING RATES NATIONAL 2016 MAP SURVEY #AICPAENGAGE #PSTech

33. LEVERAGECLIENT AND STAFF EASIER TO EXPAND SERVICES TO AN EXISTING CLIENT THAN TO GET A NEW CLIENT ALL THE NEW BUSINESS YOU NEED ALREADY EXISTS IN YOUR CLIENT BASE…GO SELL SOMETHING. CREATE BILLING LEVERAGE, SELL VALUE ADDED SERVICES DEVELOP VALUE ADDED NICHE SERVICES PUSH WORK DOWN TO CREATE STAFF LEVERAGE • Leverage

34. Focus Your Marketing & Business Development Vertically SOME OF THE MOST PROFITABLE FIRMS IN THE COUNTRY HAVE GONE DEEP INTO INDUSTRY OR SERVICE NICHES REPETITION = EFFICIENCY…EFFICIENCY = PROFIT IT’S NOT JUST FOR LARGE FIRMS, YOU CAN CONCENTRATE IN CLIENT MIX, SERVICE MIX OR NON-TRADITIONAL SERVICES. • QUICK BOOKS, PAYROLL, NON-PROFITS, INDIVIDUAL RETURNS, MEDICAL SERVICES, CONSTRUCTION, CHURCHES, BUSINESS VALUATION, FRANCHISES, HOSPITALITY, MANUFACTURING, INTERNATIONAL, FARMING…….. ANY SPECIALTY MAKES YOU AN ATTRACTIVE FOR MERGER CONSIDER A PRACTICE ALLIANCE TO ENHANCE YOUR NICHE. • Leverage

35. ACCOUNTABLE(Required or expected to justify actions or decisions; responsible.) CREATE A CULTURE OF ACCOUNTABILITY ALIGN YOUR COMPENSATION SYSTEM EVERY TEAM MEMBER HAS A FIDUCIARY RESPONSIBILITY TO THE FIRM TO CREATE PROFIT GOALS SHOULD BE CUSTOMIZED, MEASURABLE AND ATTAINABLE A GOAL WITHOUT A PLAN IS……………. WHO HAS ENFORCEMENT POWER (MP, EC) ENFORCE THROUGH REWARDS OR PENALTIES? Accountability

36. MOST RESPONSIBLE FOR LOST PROFITS

37. The Profit Wheel #AICPAENGAGE #PSTech

38. THANK YOU! William Pirolli CPA/PFS/CFF/CGMA wpirolli@disantopriest.com #AICPAENGAGE #PSTech