As accounting firms start a new year with hopes of putting 2020’s unprecedented disruption in the rearview mirror, it may seem counterintuitive to look back to 2019 for guidance.
After all, last year changed everything — where accounting firm staffers work, how they work, the technology they use, how they interact with clients, what clients need, and even how business development is conducted. Given all that, 2019 seems light years away and hardly a compelling guide to the future.
However, there are important insights in the new edition of The Rosenberg Survey, an annual survey of the CPA industry. The most recent survey — produced in September by the consulting firm The Growth Partnership — aggregates and analyzes the pre-pandemic 2019 financial performance of more than 330 U.S. accounting firms. Here are a few takeaways:
Revenue growth was slowing before the pandemic
Revenue grew 6.4% in 2019, but that was down from the prior year when firms reported 7.7% growth — and it has declined in three of the past four years.
Accounting firms participating in the survey expected the downward trend to continue in 2020, and that was their assessment before the COVID-19 pandemic arrived and decimated the economy. “The alarming observation is that the estimated revenue growth in 2020 (for firms earning more than $2 million annually) is only 3.4%,” the report states.
Profitability, however, rose in 2019. Income per partner (IPP) for the 270 firms that participated in the past two annual surveys increased 5.6% in 2018 and 6.9% in 2019. The study uses the label “elite” for firms with IPP of more than $500,000. The percentage of firms achieving that milestone increased from 29% in 2018 to 34% in 2019. “This is a great sign that, while growth may be down, firms are doing a good job in the areas of leverage and are still finding ways to make more money,” the study concludes.
Succession planning continues to challenge smaller firms
Among firms with more than $2 million in annual revenue, the percentage of partners over the age of 50 increased from 56.3% in 2009 to 61% in 2019. This trend is more pronounced among smaller firms — among those firms with less than $2 million in annual revenue, the percentage of partners over the age of 50 increased from 58.5% in 2009 to 72.3% in 2019.
“This trend makes sense,” the study reports. “We see relatively larger firms dealing with succession better than the smaller firms, where the partners just keep working.” As the survey authors interviewed more firms and consultants, they report seeing “many smaller firms with partners who either don’t want to retire or need to hang on because they can’t find a replacement.”
Planning pays dividends
Firms with a formal written marketing plan grew faster and their net IPP was $22,000 higher than at firms without a plan, the survey found. Performance also was better at firms that engaged in a formal strategic planning process at least once every two years. “This is our second year measuring this statistic and we are seeing a noticeable difference in IPP for those firms who invest time in strategic planning,” the study notes. “Additionally, the pandemic is shining a light on how important strategic planning is for firms who want to not only survive but thrive amidst the chaos.”
Shifting from compliance to advisory services drives profitability
Firms that perform less audit work (as a percentage of fees) generate higher IPP than firms that do more audit work. “The firms in the lowest quartile increased their IPP from $526K to $576K over the past two surveys, which is a 9.5% increase,” the report states. “This comes as no surprise as the market continues to drive down compliance-related fees.”
The same phenomenon occurs when a smaller share of firms’ annual billable hours are tied to tax season. IPP for firms in the lowest quartile for this metric was nearly $120,000 more than it was for firms in the highest quartile. This illustrates the financial benefit of providing advisory services, which are not tied to the tax calendar and can be spread throughout the year.
As accounting firm leaders look ahead to 2021, The Rosenberg Survey recommends they:
- be diligent in pursuing accounts receivable — The report notes that the economic impact of the pandemic may continue to adversely affect some firm clients.
- focus on growth — “Make sure partners are staying on top of getting new clients, continuing to train staff in business development skills, keeping lead generation campaigns going, and driving growth in niche areas,” the report suggests.
- expand client advisory service offerings.
- aggressively recruit and develop personnel — “Unfortunately, the labor shortage the accounting profession has been grappling with for the past several years is not going away,” the report notes. “As such, firms should continue to aggressively recruit new talent. Additionally, firms need to develop their people, so they have a team that not only has technical talent, but is also poised to develop into the managers, rainmakers, and leaders of the future.”
- plan for the need to work remotely for the long term — Assess how much office space is needed, what the office should look like, how HR policies need to change, how to maintain the company’s culture, and how technology requirements and spending may need to change.
- bolster the strategic plan — “Make sure the firm has a strong mission statement, value statements, vision, and ultimately a realistic one-year action plan.”