Business model transformation: ‘Single best decision I’ve made’

The onslaught of client requests related to COVID-19 overwhelmed many small firms, creating a new norm that didn’t ease at the same pace as the pandemic.

“Helping our clients prepare those PPP applications, pursue ERC, family leave, all those various things –all of these things together led me to a crisis point.”

Sandy Johns, CPA, shared those words and shared her story during a recent episode of the Small Firm Philosophy podcast. The name of her Atlanta-area firm, Revolution Financial, is fitting because that crisis point led Johns to revolutionize her firm with a business model transformation that changed everything.

“Being on the other side of this now, a year later, I can say it is the single best decision I’ve made in my professional life,” Johns said. “I get chills thinking about it because it has transformed my life.”

Johns’ journey to that transformation – a combination of culling clients and further committing to a subscription model of billing – can serve as a model for other small firms.

‘I was at the edge of the cliff’

Lisa Simpson, CPA, CGMA, AICPA & CIMA’s vice president of firm services, recently welcomed Carrie Steffen to the AICPA Town Hall series to discuss a Private Companies Practice Section (PCPS) toolkit focused on right-sizing your client base.

“I think we have to get past the idea that every single firm can do everything for every single client,” said Steffen, a founding shareholder and president of The Whetstone Group. “Because that’s not a sustainable model.”

More than 60% of firms that participated in the 2023 National Management of an Accounting Practice Survey, conducted by PCPS and CPA.com every two years, reported that they culled their client list in 2022. But the smaller the firm, the more personally taxing the culling process can be.

“It was difficult emotionally because I started my firm in 2008 and I had worked for years to build this book of business and with that, relationships with these clients that I cared about,” Johns explained. “I did not make the change until I got to the point where I was at the edge of the cliff. So if I could do things differently, I would start the process earlier.”

For several tax seasons, Johns vowed that next year would be different, that the busyness of busy season for three employees and her simply couldn’t continue. Yet it always continued the next year, even after she hired a tax manager to help tackle the crush created by a rush of orphan Form 1040s.

“And then my health began to break down,” Johns said. “I was absolutely stretching my schedule to the limit in terms of work. There was limited time for family, which when I was with family, I had a lot of angst because I felt like I needed to be working.”

Finally, in 2022, Johns ripped the Band-Aid off.

The result?

“Profitability has increased, which just absolutely blows my mind. I never would have dreamed that would happen,” Johns said. “Our net profit margin, it’s increased from 32 percent to 37 percent. Completely unexpected. That was not the goal. The goal was time margin. Now I’ve got more financial margin.”

Renewed zest for the profession

“It’s an exciting time for our profession,” said Erin Hartman, CPA, a PCPS manager at AICPA & CIMA, together as the Association of International Certified Professional Accountants, and one of the leaders of the Transform Your Business Model initiative. “It’s not just time to transform our firm business models but to transform the profession.”

Hartman, who is dedicating significant time these days to helping firms transform for the better, interviewed Johns for the Small Firm Philosophy episode. They went through what Johns meant by “ripping the Band-Aid off” and about the surprising position that Revolution Financial finds itself in, a little more than a year later.

Even with the hiring of a tax manager to help with one-off tax returns, Johns was struggling, professionally and personally, prior to the changes. Last year she took action, deciding to focus on her subscription-based clients while culling from the other 50%, primarily 1040-only clients. She intially planned to keep some 1040-only clients, but when she ran the numbers, the plan would require letting her tax manager go, leaving her – as the lone CPA on staff – in the same spot.

“The bulk of the workload to service that remaining 50 percent would fall back to me,” Johns said, “and that defeats the purpose.”

So, Johns ran the numbers again based on eliminating the entirety of her tax-only client base, finding that the firm technically could afford to make the bold move – a move that would result in a reduction to her paycheck but a manageable reduction given how it would free up time for her family and for herself.

Next, she took a close look at the pricing and structure of the firm’s subscription model, moving from creating a plan personalized for each client to a three-tiered model. In the process, she increased rates.

The pushback she received?

“Zero,” Johns said. “I love the subscription model. I think it’s the way to go.

“If we’re selling time, I am rewarded for inefficiency and the client is punished for inefficiency, my inefficiency. But if my team does an amazing job and the quality of work is at the level that we need to maintain it at, but they can do it in 50-percent less time, we win. And if we can price for a client and they know what to expect on a month-to-month basis, they can plan for cash flow. I think it’s a total win-win, and I think we’ve got to do this as a profession.”

The business model transformation freed up Johns to take on some fudiciary tax work that also increased profitability.

But for Johns, the win-win has extended well beyond the bottom line.

“I am happier, I’m healthier, emotionally, physically, spiritually, relationally. My zest for life has returned, and my passion for the profession has been renewed, which is so cool,” she said. “Raise prices. Establish a high floor for taking on new work. Be selective. Phase out those pain-in-the-butt clients and your lower-margin clients over time.

“But don’t be afraid if ultimately your analysis leads you to ripping the Band-Aid off because the intangible benefits that I’ve described are amazing on the other side.”

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.