Profitable Communication

hat a difference a decade makes: Just 10 years ago, most managing partners didn’t consider marketing key to their business plans. Now firms not only employ marketing professionals but also expect them to deliver value beyond traditional functions. Yet many firms need to realize that one area still requires their attention—showing marketing teams how CPA firms make their money so that marketers can help make their firms even more profitable.

Marketing directors have become an integral part of their firms and manage marketing services, determine client satisfaction, track results and participate in strategic planning—yet few of them help drive the firm’s profitability by tying together marketing and bottom line results. Just as partners do, marketing directors need to think and act like owners, which means they need to know what makes their firms profitable. It is up to the managing partners to effectively communicate with marketing directors to help them become steady profit enhancers.

WHERE TO BEGIN

Invite your marketer to monthly partner meetings; sharing the firm’s financial condition and strategy not only will help him or her develop a better plan but also just may reveal how marketing expertise can help drive your firm’s bottom line.

You, as a CPA, know all the specialized technical language of finance, so make sure your marketing staff does, too. Start with the basics and cover all the terms your marketers need to understand the financial part of the business. Well before the first partner meeting, clue your marketing staff in on the meanings of the terms they’ll hear in the meeting. Among the essential ones to cover are:

Gross fees. Explain how gross fees are calculated and what they mean. (Some firms refer to gross fees as production.) A simple definition is that gross fees equal total chargeable hours multiplied by standard billing rates. Go into the details of what gross fees do and don’t show. Explain just how the firm calculates gross fees and what the partners find most important about these figures.

Net fees. Many firms show only net fees on their income statements. Point out that net fees matter because they include write-downs, write-ups and reserves. However, if your firm shows net fees as only the first line on the financial statement, it is likely your marketing director will not know how much is being written down from standard unless you tell her or him.

Profit margin. Discuss the importance of your firm’s profit margin, but also explain why it can be very misleading and why it alone is not enough to reveal the firm’s profitability. Describe what happens to your firm’s profit margin when the firm adds new partners, for example. To get your marketing professionals’ input in making better sense of the firm’s numbers, explain the limitations of the profit margin. For example, it

• Doesn’t reveal which divisions of your firm have problems. Involve your marketer in evaluating the numbers and helping you determine the firm’s profitability by service type or industry.

• Doesn’t indicate what additional services the firm should add to enhance client service. A marketing professional can shed light on this area because he or she is in charge of determining client satisfaction.

• Doesn’t show how efficiently the partners manage engagements. Ask your marketing staff to study each partner’s profitability by engagement.

• Isn’t an accurate measure of productivity. Make sure your marketer understands how efficient the firm is. Discuss with him or her the value of increasing engagements during the off season or charging higher fees during the busy season.

• Is rarely linked to pricing. In most industries pricing is a marketing function. If you talk to your marketing professional about profit margin, you may learn how to price your services better.

Write-downs. One of the biggest revenue drains for any CPA firm occurs when a partner reduces, or “writes down,” a standard fee. You may be able to solve your write-down problems if you share them with your marketing staff. A frank conversation about your firm’s billing philosophy—or lack of one—is the first step in the process.

Generally, write-downs occur when clients don’t know your fee structure and are surprised by a bill. Always tell your marketer when you or your partners decide to write down a fee. Your marketing professional can show you and your partners how to better communicate with clients about fees and avoid such unpleasant surprises. Other reasons for write-downs include inaccurate fee quotes, improper staffing of an engagement and poor engagement management.

Make it clear there also are good business reasons for taking a write-down: entering a new niche, to attract or keep an important client or for on-the-job training for new staff.

Realized rate per hour (net fees per chargeable hour). This is an indicator your marketer needs to thoroughly understand. The September 1999 Bowman’s Accounting Report said the most profitable firms averaged almost $104 in net fees per chargeable hour. Discuss with your marketer how your firm scores on this measurement and ask her or him to help you analyze the three areas that can improve this rate: pricing, cost management and client management. Improving any one of these areas will improve your net fee per chargeable hour.

Days outstanding. Most firms need help in this area, and the two major components—work in progress (WIP) and accounts receivable (A/R)—are easy concepts to explain. The sooner the work is billed and collected the less working capital the firm needs, hence a lower need for financing.

The longer it takes to collect money from a client, the harder it gets to collect it. Slow-paying clients are not happy clients. Here are some points to discuss with your marketer:

• What is the firm’s billing policy? When do we bill? How often?

• What is the days outstanding record for each partner?

• Why do days outstanding vary at certain times of the year?

• How do the days outstanding relate to the different types of services offered?

By looking at the numbers you can tell if the problems are in billing (WIP) or in collection (A/R). Have your marketer talk with clients to find out why they take so long to pay. You may be surprised at the answer. Your marketer may be able to add some fresh information to the equation by inquiring whether slow-paying clients are dissatisfied clients.

Average chargeable hours. Finally, your marketing staff needs to know one more indicator: the firm’s average chargeable hours per partner. Bowman’s Accounting Report found that partners in the top 10 firms charged 1,348 hours per year; the average for all the rest was 1,218. Of all the things that partners do, the two most important are their chargeable hours and bringing in new business. Discuss with your marketing professional the firm’s performance management philosophy, also called paying for performance. Obviously the most profitable firms are the ones in which the partners bill more.

THE STRATEGIC MARKETER

These are not the only areas where marketing professionals should be involved in order to be valued contributors. Other financial and nonfinancial areas that need to be discussed include billing rates, business gained and business lost, client satisfaction, employee satisfaction, recruiting and employee retention. In fact, it’s good to include marketing staff in as many meetings on finance and profitability as possible.

The more your marketer is in tune with the financial operation of your practice, the more her or his marketing activities will improve your bottom line.

August J. Aquila, vice-president, mergers and acquisitions of American Express Tax and Business Services, Inc., in Minneapolis, is a consultant to the accounting profession. His e-mail address is aaquila@worldnet.att.net .