Could Your Accounting Firm Survive a 35% Drop in Revenue as a Result of the Pandemic?
I’ve been talking with partners in dozens of CPA firms about how they are weathering the pandemic and how this compares to past recessions. As a recovering “serial entrepreneur” I’ve owned businesses during Black Monday 1987, the dot-com crash of 2000, the telco crash in 2001, and the 2008 financial crash. What those events have in common with today is that they all caused substantial drop in company’s revenue. Where they differ is in their magnitude.
What we’re experiencing now is an economic crisis – not a financial one. It’s not limited to one industry but the entire economy. The Federal Reserve estimates that we can lose 47 million jobs and pass 32% unemployment rate. Social distancing and other preventive measures will have a severe impact on everyone’s existing business processes. And no one can be certain of how long the impact will last, or what “normal” will look like when we finally get back there.
This is an unprecedented situation, but over the years I’ve learned to look at crises as a “glass half full”.
Most business owners I talk with are going through the same emotional stages. First, they become jittery looking at the unemployment numbers. Then they focus on short term steps – like government subsidies – that will let them save as many of their employees as possible. Then, as things get settled, they start taking a hard look at what structural changes they’ll need to make to keep their business going in the face of a significant loss of revenue.
There will be companies that succeed, but it’s going to mean making some difficult choices. Fortunately, the changes you make now will directly translate into greater competitiveness when things get better. To do so you’ll need a plan that:
- Protects your profit margin by increasing efficiency and lowering costs
- Increases the value you bring to customers to ensure you stay off of their list of things to cut
- Establishes a comprehensive set of measures and a measurement plan to ensure you’re staying on track.
How Efficient Are You?
Start by determining a few key business questions – How much of the compensation you give your employees is connected to revenues? What are your most valuable services? What tasks are you spending the most time on?
Then define the metrics you’ll need to answer them and assess how well you’re currently doing. Key measures I look at are:
- Realization Rate. A critical metric for evaluating performance, this measures the difference between what you record as time and what percentage of that time is paid by the client.
- Cycle Time. The total time it takes the service to be completed from the starting point to finishing the service. You can also look at cycle time by process step. Tracking cycle time will help you identify capacity and where you may have constraints and bottlenecks.
- Revenue per FTE. Your firm’s total revenue divided by your current number of employees (or “Full Time Equivalents”). This is an important ratio that roughly measures how much money each employee generates for the firm. Looked at across the company indicates how efficiently you are using your employees. Broken down by individual service lines let you identify your most profitable services.
In future articles, I will address how to increase your competitiveness by implementing and monitoring a CVI (competitive value index).
Once you define your measures, make sure they are widely available. Your goal is to empower partners and staff to increase revenues by optimizing their processes and focusing on higher touch services.
Shifting to Higher Value Work
The easiest way to immediately lower your operating expense is to outsource or automate your back-office accounting services. This frees your team to spend more facetime with clients and provide more advisory services (at a higher billing rate).
Until recently, outsourcing and automation have been the exclusive domain of large corporations, but advances in technology have now made these viable options to mid-sized firms. They do still represent a commitment in time and resources. You’ll want to proceed in a way that minimizes the disruption to your clients and keeps you in control of the process every step of the way.
Go Slow to Grow
At Accsurant we’ve developed a framework for process improvement that emphasizes a “go slow” approach. We start by placing a dedicated team lead, a chartered accountant with 4-5 year’s experience, who can start working on your backoffice accounting tasks while taking the time to learn your overall business. Work is managed through a task-management portal that gives you total visibility on what’s being done, and utilization dashboards give you insights on how you’re tracking against your goals. We’ve found a number of benefits to this approach:
- Patience. It takes time to learn to work with someone. Farming out basic tasks is easy, farming out complex tasks requires preparation and a good understanding of the existing environment. Especially if your firm has not done outsourcing before
- Minimize risk by ramping up slowly. Starting each engagement with one team lead and not ramping up unless everyone is satisfied with the work and team utilization rates helps keep your initial investment to a minimum.
- Transparency: In the past 50 years, the price of technology has kept going down and now small/medium firms have access to the resources as much larger firm. And with the migration to the cloud, security has been dramatically improved.
- White gloves approach: Solely relying on a virtual team is like throwing a baby in the water and expecting him/her to swim. The secret ingredient is to have an experienced US team to assist the virtual team during and after the transition period.
As we understand your process, we can add additional data sources to your dashboards, pulling data directly from your accounting systems, resulting in a comprehensive Business Intelligence platform that will provide productivity reports for your internal and external teams.
In my experience, there will be companies that do very well in the months to come. But there are no quick remedies to getting there. My advice is to take the time now to make the investments that will position your firm for success in the future. Establish your KPI’s, identify your opportunities for improvement, and start shifting your best people to the tasks your client’s value the most.
Yann is Accsurant’s president. With 20 years experience and six different technology startups behind him, Yann has a proven track record in developing innovative solutions based on his technology and financial acumen.