2016 AICPA PCPS/CPA.COM NATIONAL MAP SURVEY€¦ · The 2016 AICPA PCPS/CPA.com National Management of an Accounting Practice (MAP) Survey reveals that firms across every revenue

2016 AICPA PCPS/CPA.COM

NATIONAL MAP SURVEY

EXECUTIVE SUMMARY

Copyright © 2016 American Institute of CPAs. All rights reserved.

DISCLAIMER: The contents of this publication do not necessarily reflect the position or opinion of the American Institute of CPAs, its divisions and its committees. This publication is designed to provide accurate and authoritative information on the subject covered. It is distributed with the understanding that the authors are not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

For more information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.

ACKNOWLEDGMENTS:

Many organizations and individuals provided their expertise to make this year’s AICPA PCPS/CPA.com National MAP Survey possible. The commitment of the PCPS Executive Committee and CPA.com provided us the support to build on past success and create the most dynamic survey platform and reporting options in the industry. We are proud of the continued firm participation in all 50 state CPA societies.

Additionally, we’re grateful for our partnership with the CPA Firm Management Association. Aon Insurance Services, the broker and administrator for the AICPA Member Insurance Programs, continues to be our valued, premier sponsor.

The Private Companies Practice Section (PCPS) is a voluntary add-on firm membership section of the AICPA that brings together CPAs managing their own practice.

PCPS partners with over 6,400 CPA firms of all sizes nationwide and provides targeted and customizable practice management tools in the areas of technical resources, business development, human resources, benchmarking and succession planning.

This section is overseen by the PCPS Executive Committee, made up of CPA volunteer practitioners, which steers programs to help improve the quality of services and operating success of PCPS member firms. The PCPS Executive Committee promotes the importance of firm practice management by endorsing this biennial survey.

DISCLAIMER: The AICPA offers this information as a service. Dynamic Benchmarking LLC, the survey administrator, has taken reasonable steps to compile the data survey respondents volunteered and to accurately calculate values based on the compiled data. AICPA makes no claims with regard to the accuracy of the data or the results produced in reports. The AICPA takes no responsibility for any use, interpretation or application of data or results derived from the information provided from the survey results reports.

TABLE OF CONTENTS

2016 AICPA PCPS/CPA.com National MAP Survey Executive Summary . . . . . . . . . 2

Survey Platform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Revenue, Profitability and Income Per Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Staffing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Health Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Service Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Key Policies to Ponder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Action Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

About the Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The 2016 AICPA PCPS/CPA.com National Management of an Accounting Practice (MAP)

Survey reveals that firms across every revenue band are showing solid gains in revenue

and profitability, diversifying services, incorporating a greater mix of billing protocols

and exploring diverse strategies for growth. Firms are building on the successes of the

last few years while proactively addressing many of the challenges they face today. At

the same time, firms are making investments to overcome obstacles in their way —

whether economic, cultural, regulatory, demographic, technological or entrepreneurial.

“One of the most telling conclusions revealed in the survey this year is that you don’t

have to be big to run a very profitable firm, and you don’t have to be small to be

innovative and nimble,” says Mark Koziel, CPA, CGMA, the AICPA’s Executive Vice

President of Firm Services and Global Alliances.

Regional improvements are seen much more uniformly around the country today.

Over the last few years, growth was interspersed between areas trying to gain forward

momentum. “Advances are being made from coast to coast and throughout all regions

in between,” notes Carl Peterson, the AICPA’s Vice President of Small Firm Interests.

The business of public accounting is strong. And while firm owners face challenges, they

also see expanding opportunities for staff, owners and clients.

The MAP Survey, the profession’s largest benchmarking poll on practice management

topics, is conducted every two years. The survey gathers information on the financial

results and practice management approaches of firms. The national results are reported

as medians and broken into seven size segments, from those with less than $200,000 in

annual revenue to those with $10 million or more as well as by geographic regions and

sub-regions. Responses were gathered from May through July 2016 and reflect firms’

2015 financial results.

2016 AICPA PCPS/CPA.COM NATIONAL MAP SURVEY EXECUTIVE SUMMARY

2 | 2016 AICPA PCPS/CPA.COM National MAP Survey Executive Summary

Firm owners and administrators are among the many interested readers who can use the survey

results to analyze how their firms compare with others throughout the country as well as in their

own size segments and geographic areas. They also can diagnose their firms’ areas of strength and

weakness and identify alternative approaches to the challenges they face. The survey is a great reality

check that spotlights where a firm stands in relation to other similar practices and which issues it

may want to address. Firm leaders should dig deep to understand variances from the median and to

line up their metrics with their desired results, identifying solutions as needed. This commentary will

spotlight some of the key aspects of the survey results and ways to put them to use.

Note: The statistics have been prepared using medians. The median value represents the middle value in a data range. While the average and median can be nearly the same, medians are considered a more accurate measure because they are not significantly influenced by a few extreme values (outliers).

2016 AICPA PCPS/CPA.COM NATIONAL MAP SURVEY EXECUTIVE SUMMARY

2016 AICPA PCPS/CPA.COM National MAP Survey Executive Summary | 3

SURVEY PLATFORM

The shift to a dynamic platform in 2014 makes it possible for users to get the added value of the comprehensive benchmarking data in this year’s National MAP Survey. Instead of accessing the survey through emailed reports, MAP Survey participants can return to the dedicated site (aicpapcpsmapsurvey.com), making it convenient to analyze and compare the data that are of greatest interest to them. Content categories include firm profile information, financial, compensation, staffing, benefits, technology, owner-partner and international services. Users can immediately access their own data (including data entered for the 2014 survey) on the platform and compare them against results for firm segments, including not only firm size by revenue and number of CPAs, but also region of the country, state, the top performers and others (see filter options below). Participating firms also can access their pre-filtered personalized reports. With the filtering options, it’s possible to micro slice the data many

ways, giving you a 360-degree vision of your firm and how it relates to other practices. The platform also makes it possible to compare your results against the 25th and 75th percentiles, which adds value to your benchmarking. In addition, with future surveys on the platform, firms will be able to compare their own and collective data relative to prior survey information.

FROM THE SURVEY PLATFORM: FILTERING OPTIONS

Insights Into Top Performers

One key category for benchmarking is the Top Performers, which includes the top 25% of firms nationally with regard to net income per owner. The Top Performers category is based only on earnings. Not every firm wants to be a Top Performer, but firms can use this result as a useful benchmark.


REVENUE, PROFITABILITY AND INCOME PER OWNER

How profitable can our firm be? How profitable should our firm be? These are two key strategic questions all firm leaders should ask themselves. But the even more fundamental question is, “What defines profitability in a public accounting firm?”

Revenue minus expenses is profit, right? Yes, but … to build a long-term sustainable enterprise, firms should look at additional factors, such as:

What investments in technology should we make this year to meet future demands?

What investment in people and processes do we need to make to plan for and create growth?

What new services or niches can we invest in to bring to our current and future client base?

How much should owners be taking out of the business (in terms of compensation of all kinds) versus reinvesting in the future?

All of these may negatively affect current-year profits (fees less expenses) but ultimately should lead to higher profitability for the future. Also, when looking at profitability, another key question arises: Is there a cost to owner labor, and, if so, how does that get factored into a profitability model?

Median Profit Margin (fees minus expenses before owner salaries as a percent of net client fees) in participating firms over the last four cycles of the survey is shown on the following graph. Growth in profit margin in the early years of this decade came from a lot of belt-tightening after the recession, and some pent-up desire to cash out when firms experienced better bottom lines. In the last few years, profit margins have decreased for most revenue bands (with the exception of <$200K and $500K–$750K firms). Some of the reasons for this decline are:

Firms are making strategic investments for the future after right-sizing for the last several years.

Significant competition in some major metropolitan markets still is depressing fee levels as firms continue to buy back market share lost after the recession.

Employee costs continue to rise as competition for talent gets stronger.

Firms at the higher level are more leveraged — adding more professional staff at a faster rate than they are making new owners. That means the pool of labor contributing to the top line has a smaller percentage of “free” owner labor, thereby increasing relative costs.

Continued on Page 6

MEDIAN NET REMAINING FOR OWNERS AS A PERCENTAGE OF NET CLIENT FEES

55.2%

43.3%

45.3%

42.5%

41.2%

39.3%

37.3%

32.2%30.5% 30.8%

31.7%

36.7%38.0%

55.3%

<$200K

$200K–$500K

$500K–$750K

$750K–$1.5M

$1.5M–$5M

$5M–$10M

$10M+

50.0%

40.0%

55.0%

60.0%

2010 2012 2014 2016

45.0%

35.0%

30.0%


Net Remaining for Owners and Compensation

For the largest firms, those over $10M in fees, net remaining per owner climbed to $481,731, up 4.2% from the median number in 2014. The largest increases came from firms between $500K and $1.5M, up about 12% from 2014.

Just how partners choose to compensate themselves has as many variations as there are partners. As firms get larger and the number of partners multiplies, it becomes ever more important for all partners to understand their responsibilities to grow the firm. For those that use partner-compensation formulas to determine pay levels, a number of factors are included at different-sized

firms. Below, we contrast the focus for partners of a $500K–$750K firm versus that of a $5M–$10M firm by illustrating the percentage of total responses each factor garners. (A more comprehensive look at the shifting areas of focus for partners at different levels will be shown in the AICPA’s 2016 Under $5 Million Report, available on AICPAStore.com)

NET REMAINING FOR OWNERS AND COMPENSATION

2016 Median Net Remaining Per

Owner

% Change in Median Net

Remaining Per Owner From 2014

2016 Median Owner

Compensation

2016 Median Owner

Compensation Per Compensated Hour

2016 Median Owner Billing Rate

<$200K $ 48,111 2.8% $ 50,000 $ 28.69 $ 150.00

$200K–$500K $ 128,630 -3.7% $ 101,422 $ 47.95 $ 165.00

$500K–$750K $ 182,294 11.2% $ 142,082 $ 66.87 $ 180.00

$750K–$1.5M $ 241,817 13.3% $ 216,667 $ 93.87 $ 200.00

$1.5M–$5M $ 290,086 -0.9% $ 254,833 $ 111.11 $ 244.00

$5M–$10M $ 368,916 -4.0% $ 323,079 $ 141.16 $ 281.00

>$10M $ 481,731 4.2% $ 443,320 $ 175.58 $ 336.00

PARTNER COMPENSATION FORMULA COMPONENTS: PERCENTAGE OF TOTAL MENTIONS

Billing realization and collections

Administrative duties

Client billing volume

Personal billable time

New clients

Years of service

New business from present clients

Interest on capital

Compliance with business plan

Training/mentoring

Post-retirement comp formula

Niche/new service developed

0% 5%

$5M–$10M $500K–$750K

10% 15% 20%


Digging deeper, we see more firms in positive territory, indicating that the revenue growth is much more universal. In the smallest firms, two-thirds experienced a positive

growth rate and one-third saw revenue decrease. As revenue bands get larger, the percentage of firms in positive territory steadily increases.

POSITIVE GROWTH ACROSS THE PROFESSION

MEDIAN GROWTH IN NET CLIENT FEES

Mw

dia

n G

row

th in

Net

Clie

nt F

rom

P

revi

ous

Yea

r Fo

r E

ach

Rev

enue

Ban

dRevenue

Across the profession, top-line revenue is showing a respectable median growth rate of 5.9% over the prior year. The smallest firms, those under $200K in revenues, experienced median growth of 10.5%. While that seems like a high percentage, a change of that magnitude can sometimes come from one or two new client engagements. Firms in every revenue category grew a median of 4.9% ($500K–$750K firms) to 7.1% ($10M+ firms).

Additionally, in all but the $5M–$10M firm band, the rate of growth was higher this year than in 2014. Often, firms in the $5M–$10M range face steeper challenges than other revenue bands to advance to the next level. Within this revenue band, frequently an additional investment in marketing resources is made, leverage increases and partners are transitioning responsibilities from the “doers” to the staff and business development drivers.

10.0%

6.0%

12.0%

100%

90%

50%

70%

30%

10%

80%

40%

60%

20%

0%

8.0%

4.0%

2.0%

0.0%

<$200,000

<$200,000

$200K–$500K

$200K–$500K

2016

% of firms that increased net client fees

2014

% of firms that decreased net client fees

$500K–$750K

$500K–$750K

$1.5M–$5M

$1.5M–$5M

$750K–$1.5M

$750K–$1.5M

$5M–$10M

$5M–$10M >$10M


BILLING

Billing Protocols

There are many ways to collect fees from clients, and much has been written and discussed over the years about various non-traditional billing methods (fixed fees, value billing, etc.). Survey respondents report that traditional hourly billing still accounts for the vast majority of all fees the profession collects — a median of 84% across all firms. Most firms use a combination of billing methodologies, with one in five reporting that hourly billing is the sole billing method.

The smallest of firms are taking the lead in implementing various billing protocols, with a median of 25% of all fees in firms under $500K coming from something other than hourly billing. Seeking efficiencies in the billing process,

managing cash flow and managing client expectations are driving the slow but steady growth of alternative methods of billing.

Of all firms that answered questions about billing protocols:

85% use hourly billing

56% use fixed fee

28% use value billing

19% use client retainer fees

10% use a per-tax form fee

Billing Rates

Pricing professional services the “right” way always has been one of the profession’s holy grails. Pricing strategy is both a science and an art, driven by often-conflicting beliefs: head versus heart, confidence versus fear, value-focused (external) versus cost-focused (internal); competitive anchors versus innovative uniqueness. As described above, pricing by the hour still is the

FIRM BILLING METHODS

BREAKDOWN OF NON-HOURLY BILLING METHODS

Percentage of Firms That Use Hourly Billing

as at Least One Form of Billing Methodology

Percent of Fees Based on Standard

Hourly Billing

Percent of Fees Based

on Non-hourly Billing

Fixed Fee Per Tax Form Fee Value Billing

Client Retainer

Fee (Percentage

of Total)*

<$200K 78% 71% 29% 43% 45% 40% 45%

$200K–$500K 88% 80% 20% 24% 49% 20% 25%

$500K–$750K 89% 80% 20% 25% 40% 10% 20%

$750K–$1.5M 95% 86% 14% 15% 34% 15% 15%

$1.5M–$5M 98% 85% 15% 16% 20% 10% 20%

$5M–$10M 99% 85% 15% 15% 4% 5% 20%

>$10M 98% 90% 10% 16% 1% 5% 10%

*Median percentage reported only among those who use this method.

profession’s dominant form of pricing, with some multiple of staffing and overhead costs primarily determining billing rates.

A simple survey question this year — “What is the expected billing rate of a $50,000-per-year professional?” — yielded 96 separate and distinct answers from respondents, ranging from a low of $25 an hour to a high of $300. Viewed as a multiple of hourly salary ($24 based on 2,080 hours with


no additional payroll costs or benefits factored in), the low end represents a billing multiple of 1.04 and the high end of 12.5. So what is the “right” amount? The median number for all firms under $5M in revenue is $100, representing a billing multiple of 4.2. For firms above $5M, the number increases just a bit, to $105, representing a multiple of 4.4.

Billing rates for partners increased 8% in the largest firms (above $10M) to $336 per hour; 5% in the $5M–$10M group to $281; and 20% in the smallest firms (under $200K) to $150/hour. Firms in the middle (between $200K and $5M) struggle to gain traction, with very moderate (less than 2%) increases in rates over those reported in the 2014 survey.

FROM THE SURVEY PLATFORM: NUMERIC DATA

25thPercentile

$85

75thPercentile

$125

Your Answer (Percentile)

$96 (40th)

Median

$100

2016 Median Billing Rate — Equity Partners

2014 Median Billing Rate —

Equity Partners

2014–16 Equity Partner Billing Rate Increase

2016 Median Billing Rate —

New Professionals (Under one year

experience)

2014 Median Billing Rate

— New Professionals

(Under one year experience)

2014–16 New Professionals Billing Rate

Increase

<$200K $150 $125 20% n/a n/a n/a

$200K–$500K $165 $160 3% $79 $80 -1%

$500K–$750K $180 $180 0% $88 $85 3%

$750K–$1.5M $200 $197 2% $75 $70 7%

$1.5M–$5M $244 $240 2% $92 $85 8%

$5M–$10M $281 $268 5% $99 $90 10%

>$10M $336 $312 8% $101 $105 -4%

Continued on Page 10

PLATFORM

Using the Comparison Chart Legend, survey participants can compare the answer their firm provides with the 25th and 75th percentiles, as well as the median for that data point. The snapshot below demonstrates the sample firm’s billing rate compared with all responding firms.

Hourly billing rate for professional (base annual salary $50,000)

As a means for setting a baseline, enter the hourly billing rate for a professional with a base annual salary of $50,000.


Accounts Receivable Overview and WIP Management

Effective management of accounts receivable (A/R) and work in progress (WIP) is critical to any business, including public accounting firms. As firms get larger, and some services become more sophisticated (such as litigation support), A/R and WIP grow and become a key metric to manage for effective cash flow. In the smallest firms, median A/R is 6.2% of net client fees and WIP is 4.8%. In firms over $5M, these metrics grow to a median of 13.8% and 7.0%, respectively.

One useful tool in benchmarking cash flow management is to look at total days of production unavailable because it is locked up in A/R or WIP. As an example, in the $500K–$750K firms, median “lockup” is 45 days (calculated as A/R plus WIP as a percentage of net client fees earned multiplied by 365 days). For work completed

Jan. 1, the median date to have cash in hand is Feb. 15. Compare that to a $20M firm with 68 days of production locked up, and the calendar date moves to March 9 before cash is collected.

Receivables over 90 days are especially critical to manage in order to avoid write-offs and bad debt. On average, between a quarter and a third of all receivables are over 90 days. Interest charged on delinquent A/R is an effective policy in use by a growing number of firms, with annual interest rates averaging 18% across the profession. What the numbers do NOT show is how many firms actually implement their policy, begin charging interest at whatever trigger point is defined, and actually collect on the interest charges.

Median A/R as a Percentage of Net Client Fees Earned

Median WIP as a Percentage of Net Client Fees Earned

Median Total Days of Lockup

Median Percentage of A/R over 90 Days

Percentage of Firms Reporting

They Charge Interest on A/R

<$200K 6.2% 4.8% 33 27.5% 31%

$200K–$500K 8.0% 3.8% 42 34.5% 37%

$500K–$750K 9.4% 4.3% 45 34.0% 48%

$750K–$1.5M 10.4% 5.4% 60 29.8% 54%

$1.5M–$5M 12.6% 6.4% 72 30.6% 59%

$5M–$10M 13.8% 7.0% 76 32.0% 53%

>$10M 13.0% 4.8% 68 24.5% 45%


Overview

Finding, attracting, hiring, motivating and keeping qualified staff is the biggest discussion within the profession today. For decades, accounting firms of all sizes created successful business models based on the work style preferences of their baby boomer leaders, and dependent on the abundance of labor that came with the sheer size of that generation. With boomers now retiring at the rate of 10,000 per day in the United States*, and with younger generations seeking a distinctly different work-style preference, it is clear that demographics are working against the traditional business model.

According to an April 2016 report by Pew Research**, the following is worth noting:

In 2012, the number of Gen Xers in the U.S. labor force surpassed baby boomers — a generation that dominated as the largest group for decades.

Just four years later, in 2016, millennials have now surpassed Gen Xers as the largest generation in the U.S. labor force.

In 2016, millennials have overtaken baby boomers as America’s largest generation, numbering 75.4 million to baby boomers’ 74.9 million.

Estimates are that by 2020, millennials will make up over 50% of the U.S. workforce.

Even though there are no “new” millennials being born today (millennials are defined as being born between 1981 and 1997), the number of millennials in the U.S. workforce will continue to climb for another 20 years due to immigration.

The AICPA, consultants and accounting news media have identified that competition for staff continues to tighten — especially in major metropolitan areas — as accounting firms of all sizes attempt to compete with each other, with industry and with other professions by rolling out new programs, increasing compensation, offering a greater variety of benefits, providing different work opportunities and creating cultures that attract the staff they want.

All of this puts pressure on firms of all sizes. Some of the following metrics reinforce how these issues manifest themselves in the profession.

New Staff Hiring — More Education Preferred

Accounting graduates who achieve the 150-credit hour requirement clearly are more attractive to firms than those who don’t meet the requirement. Across all revenue bands, 150-hour graduates are hired at the rate of 1.8 for every one hired who does not meet the requirement. In firms above $1.5M in revenues, those who meet the 150-hour requirement are hired at a rate of 2-to-1 for every one who does not meet the requirement. On average, starting salaries for new graduates who meet the 150-hour requirement are from $2,000 to $5,000 higher than those who do not.

Social Media Use for Recruiting Staff

Using social media to recruit staff is becoming more commonplace, with 75% of firms over $5M, and 83% of firms over $10M using platforms such as YouTube, LinkedIn, Facebook and other social media sites to enhance recruiting efforts. Fewer than one in five firms under $1M use these tools, leading to a big opportunity for small-firm leaders who wish to have a digital presence and compete for staff with the larger firms.

STAFFING


The AICPA, consultants and accounting news media have identified that competition for staff

continues to tighten.

*pewresearch.org/daily-number/baby-boomers-retire/

**pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/


Staff Turnover — Up Slightly Over 2014

As the economy improves around the country, staff turnover rates continue to inch upward, with the largest firms (>$10M) seeing a median turnover rate of 13.4%, up from 12.9% in 2014. The $750K–$10M firms are seeing an average of 8–9% turnover, while the smallest firms — many with no staff or a small number — report almost no turnover.

Professional staff turnover rates are highest in the West, at a median of 7.0% turnover for all-sized firms, and lowest in the Midwest, with turnover rates averaging 2.4% for all-sized firms.

Among the least-experienced staff, for every person fired or let go (involuntary turnover), 2.1 people leave on their own (voluntary turnover). As professional staff gain more experience, opportunities become more prevalent, and decisions are being made as to whether to stay in public accounting altogether. For 2- to 5-year experienced staff, 5.2 people leave voluntarily for every one who is let go. For the 6- to 10-year group, the number climbs to 5.5 professionals leaving for every one that is terminated.

WHY ARE THEY LEAVING

Poor performance

Went to business and industry

Firm change

Family obligations

Career change (left accountingprofession)

Moved

Refirement

Staff conflict

Insubordination

Other

0%

1%

15%

3%

7%

8%

10%

11%

11%

16%

18%

5% 10% 15% 20%


FROM THE SURVEY PLATFORM: PROFESSIONAL SALARY EXPENSES (EXCLUDING OWNERS)

Firm Technology Changing to Meet ‘Digital Native’ Needs

While it is clear that firms invest more in technology to improve efficiencies, an equally important strategic objective is being met by doing so — ensuring that they appear more tech savvy for clients and staff. Younger staff, who often are much more comfortable with technology, are “digital natives.” They have a vastly different work style and communication preference than their older peers. They expect firms to embrace current technologies or risk losing relevance to them and their peer group, who are becoming the next generation of clients. Double-digit increases over 2014 are seen in the embrace of cloud-based software, cloud-based backups, and using Skype or similar services to communicate.

The chart above, created on the platform, displays the professional salary expense for all firms. Note the firm-specific data are highlighted in bold and distinguished by a blue dot on the chart. The icons in the upper-right-hand corner of the pop-up when accessed online can be selected in order to download the chart as an Adobe Acrobat or Microsoft PowerPoint file.

Personnel Expenses As a Percentage of Net Client Fees Earned

As expected, in the smallest firms — those with little or no staff — median salary expenses as a percentage of net client fees is 12.0% which, coupled with relatively few expenses to create a sustainable business, allows owners to enjoy an enviable profit margin above 55%. As firms get bigger, however, leverage is the key to a stronger top and bottom line, meaning the cost of employees continues to grow and becomes a larger piece of total expense of the firm. In the largest firms, employee salaries and other employee benefits account for 44.1% of total net client fees. That is up from 40.1% in 2014 and 38.9% in 2012.

A big part of the increase comes from the growth in leverage (total professional staff divided by number of owners). The largest firms have seen that leverage number steadily grow, from a median of 5.9 in 2012 to 7.0 in 2016.

$1,000,000

$99,075

$386,000

$750,000

$800,000

$600,000

$400,000

$200,000

25th Percentile Median

My Firm (60th)

75th Percentile

$0

$268,947


In a profession that still relies on over 85% of its revenues coming from charge hours of professional staff, this is a metric that needs to be tracked and monitored for peak performance. What should be the charge hour expectation for a senior manager in a $3 million firm? What about a partner in a $1 million firm? And how does that number change as the firm grows? Tracking these numbers is the first step toward improvement.

Recognize that there are many different kinds of practices. Some rely more heavily on partner expertise with

staff supporting their efforts, while others are more highly leveraged and push work down to the less senior staff with partners serving in a different capacity.

The following table outlines the median chargeable hours by staff position for each revenue band. When analyzing your firm against the median, consider your service mix, whether work can be pushed down, the expertise level required to adequately service clients and the kind of culture you wish to develop.

UTILIZATION

<200K 200K<500K 500K<750K 750K<1.5M 1.5M<5M 5M<10M 10M+

Partners/owners (including PT) 1,080 1,300 1,307 1,256 1,178 1,100 1,015

Directors (11+ years’ experience) - 1,280 1,497 1,380 1,233 1,181 1,086

Senior managers (8-10 years’ experience) - 1,516 1,576 1,500 1,398 1,359 1,278

Managers (6–10 years’ exp) - 1,450 1,480 1,502 1,462 1,400 1,364

Senior associates (4–5 years’ experience) - 1,476 1,508 1,507 1,530 1,570 1,500

Associates (1–3 years’ experience) - 1,497 1,404 1,500 1,510 1,545 1,458

New professionals - - 1,200 1,441 1,496 1,443 1,349

Paraprofessionals 811 998 1,167 1,290 1,395 1,464 1,438

Interns - 952 1,048 843 1,200 1,411 1,281

Subcontractors (any experience level) - 900 1,300 1,291 1,463 1,943 -


More firms are shifting away from paying for the bulk of employee health care premiums. In 2010, 68% of all firms paid 80–100% of the premiums for employees. That number dropped to 62% in 2012 and to 51% in 2014. In 2016, for the first time, it dropped below the halfway mark, with 48% of firms picking up the bulk of the cost of employee premiums.

More firms that are not currently providing health insurance are considering it for next year. In every revenue band, a greater number of firms expect to offer health insurance coverage next year than currently are offering it. The largest jump is expected in the $200K–$500K firms, where it is expected that the percentage offering health insurance will go up from 42% to 51% of the firms.

It goes the other way, too. Of those firms that currently are providing health coverage to employees, 3.4% indicate they are unsure or have decided not to offer health coverage at all next year. Those firms that may drop coverage are all under $5M in revenue.

Seventy-five percent of firms say they are not changing their policies due to the Affordable Care Act (ACA). They recognize the financial challenges and also recognize the staffing competition, and most are staying the course.

Some are looking to make changes. When asked about the impact of ACA on the firm, 25% of respondents indicate they are looking to change strategy and/or policies in some manner to offset increased costs. Sixty-two percent of this smaller group are opting to shift more of the responsibility of health insurance premiums onto employees. Shifting staff to health care exchanges is the priority for 20% of the firms, while the remainder look to reduce staff or curtail future hiring (14%) or reduce staff hours (4%).

PPOs and HSAs dominate health insurance options. The most popular options in the profession today are PPOs (in place in 39% of all firms and 79% of firms above $10M) and HSAs (in place in 31% of all firms and 73% of $10M+ firms).

HEALTH INSURANCE COVERAGE

FROM THE SURVEY PLATFORM: FLEXIBLE WORK ARRANGEMENTS (ALL FIRMS)

From the benefits section of the survey, the snapshot above shows selections by all firms for the related question. A participating firm’s chosen answers would be reflected in blue. The information can also be viewed via a pop-up chart by selecting the red, blue and green icon in the upper-right-hand corner. The chart can then be downloaded into Adobe or as a Microsoft PowerPoint slide.


SERVICE AREAS

While it is difficult to point to a snapshot of a selected sample of firms at any point in time and definitively declare the next “big thing,” two quick observations can be made regarding trends in growth in service areas of the population surveyed this year.

Larger firms are seeing a shift to more client accounting and outsourced CFO services. While this service area traditionally has made up a higher percentage of the total for smaller (under $1.5M) firms — usually accounting for 10–15% of their fees — larger firms are seeing an increase in this service area. Firms of $10M or more are making the strongest jump, from a median of 3.9% of total fees in 2014 to 9.0% of total

fees in 2016. A shift of that size in a $10M firm represents a growth of $500,000 in fees for one firm. Many firms are seeing the payoff of their investment in this practice area.

Individual tax planning and processing continues to be a growth area — specifically for firms $200K–$1.5M. Despite the growth of tax processing offices across the country, and the plethora of do-it- yourself tax software on the market today, firms — specifically those in the $200K–$1.5M range — continue to experience growth in individual tax planning and processing services, which currently generates a median 31.2% of all fees in these firms.

Average Percentage of Fees in Firms Under

$200,000

Average Percentage of Fees in Firms

$1,500,000–$5,000,000


$750,000–$1,500,000


$200,000–$500,000


$5M–$10M


$500,000–$750,000


Over $10M

8.8%

16%11.6%

13.1%

10.8%

24.2%

12.5%

33%

13.8%

6%

7.2%

9.4%

9.6%

10%

6.6%

59.8%

54.9%

60.4%

6.1%

55.4%

4.3%

51.4% 44.6% 40.6%

13.2%

15%

14.7%

15.3% 12.7%

15.5%

2.6% 4.3%

11.9%

15.5%

9.5%All assurance services combined

Total comp and review

Client accounting and CFO service fees

All tax-related fees

Other service fees


Look at any accounting publication, and you’ll see firm after firm announcing an acquisition of another firm. Many factors are contributing to this phenomenon of consolidation, but these five are the most influential:

1. Aging baby boomer owners are looking for ways to ensure retirement payouts from the business they spent decades creating, and many turn to larger firms for upstream mergers. Sellers are recognizing that they may not have the cash flow or the in-house bench strength to execute an internal succession.

2. Some firms looking to grow their niche practice areas are seeking qualified, viable acquisition targets.

3. Firms are looking to add qualified staff, and often that can come quickly with an acquisition of a practice.

4. Location can play a factor for firms trying to gain presence or nexus in a certain region or simply to expand their geographical footprint.

5. As opposed to expanding through niche practice areas, some firms are just looking to expand general services offered to their clients, for example, an audit rich firm may be looking to offer tax services.

Overall, one in eight of all firms indicated that they had acquired another firm in the past year.

MERGERS AND ACQUISITIONS

PERCENTAGE OF FIRMS THAT INDICATE THEY ACQUIRED ANOTHER FIRM IN 2015

<$200K

4%7% 7%

12%

16%

31%

24%

$200K–$500K $500K–$750K $1.5M–$5M$750K–$1.5M $5M–$10M $10M+


KEY POLICIES TO PONDER

Is Unlimited PTO Catching On?

In a competitive environment where finding and keeping qualified staff continues to be top-of-mind for firm leaders, some are exploring what many thought was a finite benefit — paid time off. The idea of unlimited PTO isn’t new, but it is gaining renewed attention in an era in which work-from-anywhere technologies allow staff to keep up with the demands of the job during untraditional hours, blurring the lines between personal time and working hours.

Unlimited PTO does come with some fine print — don’t assume that employees can simply be hired and immediately take off whenever they like. Some firms tie it to a minimum number of chargeable hours achieved. Others stipulate that PTO can be taken as

long as it is practical — that is, it does not interfere with commitments made to clients or other employees. It’s still too early to tell whether unlimited PTO is providing both employees and employers with what they want and need.

So what do the numbers show?

The numbers are still pretty low. At the highest acceptance rate of this benefit, one in 10 firms in the $200K–$500K band offer unlimited PTO. That number drops to one in 40 for firms above $5 million.

As is often the case, smaller firms are quicker to change the paradigm of how they think about paid time off. As the lines between being at work and being on personal time continue to blur, we will continue to watch this trend to see how it plays out in the years to come.

PERCENTAGE OF FIRMS REPORTING THEY OFFER UNLIMITED PTO

<$200K

8.1%

9.7%

6.0%

7.6%

4.8%

2.7% 2.1%

$200K–$500K $500K–$750K $1.5M-$5M$750K–$1.5M $5M-$10M >$10M+


Accepting Credit Cards As a Form of Payment

Clients find it easy to pay with credit cards, and it allows them to accumulate miles or points on reward cards. Firms recognize that accepting credit cards reduces profitability of a job by several percentage points, depending on the card used. Firms have tried to find the balance for the cost of doing business, yet some firms that are not accepting credit cards now are wondering if they should.


In 2010, the survey reported that 45% of all participating firms were accepting credit cards. The numbers grew bigger as the firms grew bigger, with 74% of $10M firms accepting credit cards at that time.

In the six years since, 68% of all participating firms indicate they are accepting credit cards.

But just as the smaller firms began adopting this form of payment in greater numbers, larger firms may be retreating. At a peak of 79% in 2014, credit card acceptance is down in 2016 to 72%. Some of that change may be based on the very public security breaches by major retailers, cyber-hacking of government and private institutions, and new credit card rules being implemented this year that require heightened levels of security of customer information.

PERCENTAGE OF FIRMS ACCEPTING CREDIT CARDS AS A FORM OF CLIENT PAYMENT

90%

50%

70%

30%

10%

80%

40%

60%

20%

0%<200K $200K–$500K

2010 20142012 2016

$500K–$750K $1.5M–$5M$750K–$1.5M $5M–$10M >$10M



Charging Interest on Accounts Receivable

In a continuous effort to manage accounts receivable, many firms maintain a policy of charging interest on unpaid balances after a certain period of time. Other firms feel it is impractical to try to collect any interest on A/R, and that it works against efforts to establish strong relationships with clients.

Issues that need to be resolved when addressing whether to charge interest on past due accounts include:

Is there a firm policy on charging interest?

Is the policy detailed in client engagement letters?

At what point in the collection cycle do interest charges begin?

At what percentage rate?

Is it automatically added to the bill or at the discretion of the partner in charge?

If a client pays an overdue bill without interest charges included, will an attempt be made collect the rest?


The profession is truly split over this practice. It appears that the percentage of firms charging interest on A/R may have peaked in 2014, as a smaller percentage of participating firms in 2016 in every revenue band and in every region indicate they use this collection practice. This may be a one-time anomaly, or the beginning of a trend showing more reluctance to charge interest on client debts. This will surely be an area to watch in the future.

For those that do charge interest, the prevailing rate has inched up from a median of 1.3% monthly in 2010 to a median of 1.5% monthly, or 18% annually, in 2016.

PERCENTAGE OF FIRMS CHARGING INTEREST ON ACCOUNTS RECEIVABLE

50%

70%

30%

10%

40%

60%

20%

0%<200K $200K–$500K

2010 20142012 2016

$500K–$750K $1.5M–$5M$750K–$1.5M $5M–$10M >$10M


Use this checklist to detail and chart your progress in putting the survey’s findings to work through the priorities set for by your firm.

ACTION Project Champions Deadline Date Date

Completed

Review the results of the 2016 AICPA PCPS/CPA.com National MAP Survey.

Identify the key performance indicators and/or practice management issues that your practice will choose to focus on.

Use the survey platform if your firm participated in the survey or the National Report(s) to compare your firm with others in your size segment and location. In addition, consider reviewing results for firms larger than your own, as appropriate, to get a sense of how they differ.

Look for trends in the data or significant variances from your own results. Consider what they mean for your firm now and in the near and long term.

If changes are needed, rank them in order of importance.

Appoint an internal firm champion for each ranked item to follow through. Revisit progress at regular intervals to see how well your initiatives are progressing.

Participate in the 2018 National MAP Survey. Information on future surveys will be available at aicpa.org/mapsurvey.

ACTION AGENDA


The AICPA PCPS/CPA.com National Management of an Accounting Practice Survey is conducted every two years by the AICPA’s Private Companies Practice Section in partnership with CPA.com. For 2016, representatives

*A group of respondents did not disclose their firm revenue; 72% of this group have two or fewer partners. In addition, 6% have more than five owners, and 9% didn’t disclose the number of owners.

from almost 1,600 CPA firms were asked details about their latest fiscal year financial results. Responses were gathered from May through July 2016. The poll’s premier sponsor is Aon.

ABOUT THE SURVEY

Number of Participating

Firms

Total Number of Owners

Represented

Percentage of Female

Owners Among Representative

Firms

Percentage of Minority Owners Reported Among Representative

Firms

Total CPAs in Firms

Total Client Fees Earned

From All Survey Respondents

<$200K 163 181 39.8% 8.3% 178 $17,548,615

$200K–$500K 240 282 34.4% 7.9% 364 $80,283,995

$500K–$750K 163 240 25.8% 5.7% 396 $101,092,384

$750K–$1.5M 222 414 23.4% 5.1% 858 $236,727,701

$1.5M–$5M 299 1,028 23.0% 7.1% 2,868 $843,469,547

$5M–$10M 77 460 20.2% 2.8% 1,630 $539,814,711

>$10M 48 914 20.1% 4.4% 4,146 $1,747,556,986

Not disclosed*

325 674 26.4% 10.3% 1,742 n/a

TOTALS 1,537 4,193 24.3% 6.5% 12,182 $3,566,490,938


It pays to be a member! PCPS provides member firms with up-to-date information, advocacy and solutions to challenges facing their firms and the profession. The price of membership ($35 per CPA) is more than matched by the thousands of dollars in member benefits and discounts. If you have any questions about PCPS membership, please call 800.CPA.FIRM or email [email protected].

The Platt Group publishes both the award-winning INSIDE Public Accounting newsletter and the award-winning IPA National Benchmarking Report. The Platt Group also consults with firms to help them become more successful. The Platt Group works with managing partners, CFOs and thought leaders across the nation to provide practical ideas, benchmarking data and information to take firms to the next level of improvement. Contact the Platt Group at [email protected] or visit insidepublicaccounting.com.

ABOUT THE AUTHORS

ABOUT PCPS — PRIVATE COMPANIES PRACTICE SECTION

CPA.com offers a growing list of digital products and services that help CPA firms and businesses succeed in practice management, client advisory services and professional development. More than half of the 45,000 CPA firms in the United States use some service from CPA.com and its partners. CPA.com is a majority-owned subsidiary of the American Institute of CPAs, the world’s largest member organization representing the accounting profession. The company has its headquarters in New York City, and officesin Silicon Valley, CA; Dexter, MI; and Durham, NC. For more information, visit CPA.com.


http://www.cpa.com/

http://www.cpa.com/

NOTES


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Documents

2016 AICPA PCPS/CPA.COM NATIONAL MAP SURVEY€¦ · The 2016 AICPA PCPS/CPA.com National Management of an Accounting Practice (MAP) Survey reveals that firms across every revenue