Why Accounting Firms Struggle with Falling Profit Margins & Revenue

When it comes to profit, it seems like accounting firms should be writing the book on that. After all, they’re analyzing other companies’ financials; it stands to reason that they should have a good grasp on their own.

However, for many reasons, accounting firms continue to struggle with falling profit margins.

Staying status quo or bringing in a few new clients isn’t enough to combat lagging profit growth. What other tactics can firms consider to bring their profits up to par?

Why Accounting Firms Struggle with Margins & Profitability

When it comes to profit margins, CPA firms may be struggling because the cost of business continues to go up. Technology, staff expenses and a competitive marketplace can all have an impact on eating away profits.

Technology: Too much or too little?

“Disrupt or die” is a popular catchphrase in the startup world. Does it impact accounting firms and their profit margins as well?

The answer is yes and no. Accounting firms need to find ways to use technology, not to be impacted by it.

According to the Inside Public Accounting 2018 Benchmark Study, most accounting firms are seeing an overall impact to their profit margins from the cost of implementing new technology. However, the portion of their revenue going toward technology is small, only around 4 percent across firms of all sizes.

Efforts by industry leaders like EY seem to show that’s not enough. The firm recently announced an aggressive technology-focused plan that includes allocating $1 billion over the next two years to invest in “new technology solutions, client services, innovation and the EY ecosystem.”

EY leaders specifically referenced getting ahead of disruption, adding new services, helping businesses achieve growth potential and bringing on knowledgeable team members with expertise in leading-edge technology.

While the average firm has only a fraction of EY’s investment capital at its disposal, this significant investment signals the direction accounting firms should be looking in the future in order to continue to maintain clients, increase revenue and keep on top of ever-growing regulatory compliance burdens.

Acquisitions and mergers: Real cost savers?

Sometimes merging can impact profitability if economies of scale are not properly calibrated. Both firms have valuable resources and staff members, and figuring out how to combine them efficiently and reduce redundancy can be a drain.

With 53 percent of firms reporting at least one merger last year, some resources are negatively impacted through the change, although there are many obvious benefits to combining forces.

On the positive side, a merger can provide additional resources to invest in needed technology, reduce some overhead costs, and offer access to new markets and service areas.

While completing the process, however, the merger needs to make sense as far as meshing cultures and business styles. Otherwise, firms run the risk of further impacting profit margins through staff attrition and client loss.

High cost of staff: Worth it?

Staff costs as a percentage of overall firm costs continue to increase. On average, staff costs comprise about half of a firm’s overall revenue.

With the current highly competitive employment market, as well as increasing price tags associated with benefits and healthcare, it’s unlikely this percentage will decrease at any point in the near future.

The unemployment rate in the accounting field is extremely low, even more so than the overall national unemployment rate. According to the law of supply and demand, the need for additional professionals in the field makes the ones currently practicing even more valuable.

Some firms report generous raises (in the 6 or 7 percent range) being used as a retention tool. While that may seem prohibitively costly, on the flip side, there are also substantial expenses associated with acquiring and training new talent, which also impacts the firm’s bottom line.

How to Stay Safe when Profit Margins Look Perilous

With so many factors impacting large and small accounting firms and their ability to be profitable, how can you make sure to protect your firm’s interests? When looking for ways to improve profit margin at accounting firms, success comes down to building on the past, working in the present and keeping focused on the future.

Build on the past

No matter how many new bells and whistles you add, you won’t be able to grow your business or maintain your profit margins if you don’t invest in the resources you have now.

When it comes to employees, make sure you’re looking for ways to enhance those relationships.

Hiring new employees can be prohibitively expensive in competitive fields like accounting, where the pool of new candidates continues to dwindle. And, losing high-profile, valuable staff members can affect the confidence your clients have in your firm as well.

Speaking of clients, maintaining a strong relationship with your current business partners is not only the right thing to do, it’s an excellent gateway to adding new services.

Strengthening established relationships with clients can be beneficial because they will be more likely to turn to you in the future for additional services beyond traditional auditing and accounting work. They trust you and you’ve proven that you have their best interest at hearts.

Therefore, if you offer expanded services, it stands to reason they’ll be willing to use your expertise in service of their business. According to IPA, many accounting firms are shoring up profit margins by offering non-traditional services, including strategic planning, technology and marketing consulting and financial advising.

Smart firms are leveraging their current client relationships by making it easier to commit to the additional services. Offering conveniences like fee financing, a payment plan that provides funds to the firm immediately, while giving the client time to pay in installments, can be an excellent way to build up business with a client.

Using fee financing to cover the costs of new services can give the client some runway to observe the benefits of new services, while positively impacting the firm’s bottom line. The overall cost doesn’t hit as hard when it’s spread over the course of several months.

Work in the present

In addition to building on the past, take a look at the way your business is currently running, and see what you can do to make things better.

Practice performing while transforming

You don’t have to do everything at once, and you don’t have to spend a couple of years ramping up technology before doing a huge launch. Performing while transforming means maximizing efforts within your current business model, but at the same time, looking for options and implementing opportunities to improve.

Because technology can move so quickly, an agile approach to improving the business can work well. Make small improvements toward a larger goal, instead of completing all the improvements at once.

With this methodology in mind, it can be easier to pivot if an approach doesn’t work for the business or clients, or to personalize a project to fit your client and business needs.

Figure out which services are profitable

While your bread and butter services of audit and accounting will still be an important part of your business, you should also take a look at other avenues that can give your business an opportunity to grow. Compliance services are necessary, but they’re not necessarily something clients get excited about or want to allocate additional budget for.

Business advisory services can be perceived by clients as providing additional value. Because you already employ highly-knowledgeable staff members trained to look critically at financial data, your firm is well-positioned to build and monetize existing partnerships based on insightful review and analysis.

Firms are branching out into a variety of areas, including financial management, technology consulting, strategic planning, and wealth advisory services. The bigger question is how to encourage clients to make that additional investment when their first thought is how to cover the costs of starting up new services.

You can make it worthwhile for clients to invest in new offerings by letting them pay in installments. In that way, they won’t see a huge financial hit all at once and can begin to reap some of the benefits of the investment before eating the entire cost.

Keep Your Eyes on the Future

When it comes to profit margin, you can’t be reactive. You need to make proactive decisions and try to stay a step ahead by keeping abreast of trends and being willing to experiment.

Watch for disruptors, and invest in tech that keeps you current

When it comes to technology, you don’t have to jump on every latest and greatest thing.

Instead, look at the options available to you and determine what can help you be optimally efficient. Consider which options might give you more opportunity to generate profit and provide the greatest return on investment, versus those that may look technically sharp but not be a great fit for your business.

Don’t allow yourself to fall into a “paralysis by analysis” trap and talk yourself out of technology. Instead, commit to action, take small steps and continue to refine your technology based on employee, client and market feedback.

Technology that reduces repetitive work, leaving more time for creativity and problem-solving, can be a great benefit to clients. And, at the same time, it can improve efficiency for the firm’s staff. 

For example, using a payment portal to reduce the inconvenience of processing paper invoices and mailing checks can make payments easier for both clients and for your staff members who have to process them. Just the processing of a payment alone can be cumbersome when accounting for staff time; and, when payments are late, managing the relationship and ensuring the funds are received can eat up even more time and energy.

Let client experience be your guide-stone

When you’re implementing new options to serve clients in the future, measure them against the impact on client experience. Ideally, any additions or changes you make should be efficient for the firm without sacrificing the quality of client interactions.

It can be important to consider processes like on-boarding, document signing and payment management, and to look at the friction created in these processes. How would you feel if you were doing business with a firm the way you ask your clients to do business with you?

Would you feel frustrated over dealing with manual processes or with trying to communicate with firm staff? If you see a gap where the experience creates friction, find a resource to fill that gap.

As an example, signing can reduce time spent meeting to review documents, and, as they say, time is money. Sitting down to a stack of big invoices, including yours, can be daunting for a client, but using a fee financing option to break payments down to manageable portions, can reduce the cognitive dissonance that comes with saying “yes” to a big expense.

Giving clients easier ways to say yes to you and the services you provide is one of the biggest ways to improve profit margins and create a better experience on both sides of the table.

One of the biggest things you can do to improve your profit margin is to give everyone involved a sense of destiny and purpose when it comes to your business. For your leadership team, that may mean looking together at strategic growth options, including mergers, enhanced technology and value-added services.

Give your employees a sense of purpose and destiny, and show them the value of investing themselves in the field and in the firm. And, when it comes to clients, strengthen those relationships and show them the ways you can add value and expand to a robust partnership that serves their needs beyond the traditional accounting field.