Editor's note: This article is the second in a series about starting or buying a firm. The first article is about the entrepreneurial skills CPAs need to be successful firm owners.
Three years ago Michael Fahmy, CPA, collected his savings and launched his own public accounting firm, Fahmia Inc., in Torrance, Calif. He was 22, with a strong entrepreneurial spirit. "To be honest, the first six months were the slowest months of my entire life," he said. "I was spending hours and hours trying to drum up business." When his money started dwindling, he became an Uber driver to help cover expenses.
After months of hard work the clients came calling the following January, just in time for tax season. Now, Fahmy has grown his practice from a handful of customers to over 1,200 tax and small business accounting clients. He accomplished this by creating a budget, finding a reasonably priced office to rent, working long hours, and investing $500 a month in marketing.
Fahmy is just one of many young CPAs who have opted to step out of their comfort zone and fly solo. But doing so can be a challenge: You must possess entrepreneurial skills, and you need financial resources and the discipline to ensure your expenses don't exceed your revenue. This means creating a budget, projecting cash flow, and reeling in the right clients in a competitive arena.
"A lot of people underestimate how long it takes to build a client base," said Brannon Poe, CPA, author of On Your Own! How to Start Your Own CPA Firm (2nd Edition). "If you are trying to build a general practice the old-fashioned way, it takes two to three years." Poe should know: At the age of 29 he founded his own public accounting firm, but, he admits, it wasn't a success because he misjudged the amount of time needed to ramp up. In 2003, he switched gears to launch Poe Group Advisors, a Charleston, S.C.-based firm that helps CPAs sell their practices.
CPAs offer the following tips for launching a financially successful firm:
Figure out your niche. You may want to focus on a certain industry, or a certain aspect of accounting, or you may want to do it all. But first, you must figure out what kind of firm you want to operate. Seek advice from experienced mentors who have launched their own firms, and gravitate toward your strengths and interests or where there's a void in the market, Poe said.
"You have to find your niche and stand out from the competition, so you can charge your fees appropriately to the client," said Ami Shah, CPA, who launched her San Jose, Calif., firm in 2006 by renting a cubicle. Today, she manages eight employees.
Create a business plan and budget. CPAs may think of business plan creation as a "daunting" experience, but that's not so, Poe said. "It can be simple. You don't need to write a novel," he noted. A business plan should include startup capital, cash flow projections, and how much income you will need to survive. It will also include what kind of hours you are willing to work. (See the AICPA PCPS "Starting Your CPA Practice" planning checklist to learn more.)
Build your budget, using benchmarking surveys such as the AICPA PCPS MAP survey as a guide. And expect to spend more than you intended. "Most people are generally going to undershoot," Fahmy said.
Know your basic expenses. New CPA entrepreneurs should be prepared to spend money on items such as rent (if applicable), software, liability insurance, supplies, marketing and advertising, entity creation, and business licenses, the latter of which varies depending on locale. However, your initial expenses should not be that high. "The startup costs should not be anything that is so straining that it would cause you to need small business funding," said Shannon Hay, vice president of accounting and tax at Live Oak Bank in Wilmington, N.C. Hay provides acquisition and capital loans to accounting and tax professionals.
The amount you will spend depends upon how you structure your business. Working out of your home, for instance, will obviously be cheaper than renting an office. "You can really build a book of business without a physical location, and without hanging a shingle in today's day and age," Hay said. "Technology has changed the way startups start."
Renee Prince, founder of Renee Prince, CPA, PC, in Granbury, Texas, operates a home-based business with her husband to help cut costs. "We made sure that all of the capital investment was purchased beforehand so it wasn't in our operating budget," she said.
Don't overspend. Don't splurge on things you cannot initially afford. "Once you have the $10,000-a-year client, you may want to spend $3,000 on a particular software that might apply to that client's needs," Hay said. "But I would encourage everyone not to make high-level, expensive decisions in the beginning."
Research the competition. To grow financially, spend time researching the market and what other CPAs offer clients. "Know what makes you special," advised Prince. Fahmy spent time researching competitors' websites. He also read Yelp reviews to assess customer complaints. When he met with potential new clients, he asked them why they were unhappy with their current CPA and why they were looking to switch so he could know how to better meet their needs. "Responsiveness and personal relationships were important to people," he said.
Embrace technology. Use technology to help grow your practice. Budget money for online ads. Study search engine optimization. And start a website — even one that is inexpensive — to reinforce your brand. "If you make a simple website that is attractive, you could really have quick market share," Fahmy noted.
Engage the right clients. Take on clients that figure into your niche and think long-term. "You need to be careful about taking on clients that have cash-flow problems," Poe advised. (AICPA members who are also PCPS members can log in to access the Good Fit Client Tool.)
Be prepared for bumps. Hiccups are inevitable when you own your own practice. The economy could tank, you could lose a key client, or important employees could leave. So be prepared for things to go wrong, "and add a cushion for good measure because there will always be surprises," Poe said.
Cheryl Meyer is a California-based freelance writer. To comment on this article or to suggest an idea for another article, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com.