As firms look for new opportunities to separate themselves from their competition and increase revenue, more and more they are looking at client accounting services, or CAS. In this CPA Conversations, we talk with Hitendra Patil, director of practice development for AccountantsWorld and one of Accounting Today’s Top 100 Most Influential People in Accounting, about what CAS entails, the benefits clients get from them, and the areas within a firm that need to be strengthened before providing CAS becomes an option. Check out AccountantsWorld’s guide to setting up a profitable client accounting services practice for more on this topic.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
Looking for new revenue streams and a leg up on their competitors, CPA firms are turning to offering client accounting services to separate themselves. But what are client accounting services, and how do they benefit CPA firms and their customers? To discuss these questions, today we're with Hitendra Patil, director of practice development for AccountantsWorld.
For people who are coming in without a lot of knowledge about this, can you explain to us what we mean when we talk about client accounting services? What does that entail?
Let me take you back a little bit in time to get the perspective right. If you look at the years prior to the internet, obviously everything was desktop software, including accounting software. There was no internet. The only way for a business to give the accounting database to the accountant was to port it manually in CDs and all that stuff. So what happened was accountants and clients did not work together collaboratively at the same time on the accounting database. Two, the businesses usually operated the accounting software as if it is their business software, meaning if they wanted to issue an invoice or pay a bill they would put that into their accounting software. There was no ERP or business software for many small businesses.
So accounting software became a business operations software. Which means the businesses wanted to keep that software with them. They ran their business off that software. Which means accountants always got to know about business transactions after the transactions were done. So in the process accountants predominantly worked in the past and on the past after the fact. And that's why you would have seen in the profession the rear-view mirror comes up quite often as a term that people relate to. But post-internet, the databases got ported onto the internet, meaning in the data centers, common places where accounting databases started getting stored. And in the process it also gave mobility to the transactions inside those databases. Which means softwares could now connect with each other, and we call that integration. Earlier it used to be export from a software and import into a software. Now it's online integration.
All that possibility came in because technology evolved. And in the process what has happened is you're not just working after the fact with a client, but also right now as the transactions are happening, and also in the future. Meaning even before the transactions can happen, accountants can collaborate with their clients on making those critical business decisions. So there are always choices that the business owners were making. Earlier in the desktop days business owners made those choices on their own and just informed the accountant, and then the accountant at the end of the month, end of the quarter, whenever they prepared the financial statements, will apply their minds and tell the business owner "Hey, look, you should have done this. You shouldn't have done that." And that was always post-facto, after the fact.
But now that collaboration, that insight, can be given now, right now. As the business transactions are happening. And that changes the whole perspective. The business owners can still perform their business functions like issuing a bill or paying a bill, showing an invoice and things like that. Which are required to be done on a day-to-day basis. That convenience of having the software with yourself is not taken away by internet and cloud. But at the same time now accounting is right there. Meaning even if it's 10 miles away, 100 miles away, you can still work together with the business owners.
So that changes the perspective. And if you look at it the other way around it is take you back again a few years, and if you ask the client "Who does your accounting?" The client would say "I do it." If I enter the transactions. That's not accounting. You're just entering something into the software. But clients thought, perceived they were doing the accounting. Accountants, of course, said they are doing accounting. So who is doing the client accounting?
So now with all this technology evolution, client accounting is to be done by professional accountants. While businesses are doing their own transactions. So that is where the understanding of CAS comes in. So while before clients were making the business decisions, that's when the accountant was available to them. Accountant was looking at things, whether those were getting entered correctly the first time. Those are the things that are now being done in client accounting services.
In other words, the impact is suddenly the business owners see that "Oh, I can still do what I want to do. I can still run my business with this software. But I am getting a professional oversight on everything that I'm doing right then and there. So why should I be doing the other things that I'm supposed to do?” Meaning key these all in, scan them, send it across to accountants or mail it across, inform the accountant, explain the transactions, all that overhead that was lying in the client's office now gets shifted to the accountants. And that's not an overhead that comes as is with inefficiencies. It clouded a lot of efficiencies that come in. Transactions can happen faster.
So which means the same world that clients would do and create mostly a mess out of it can now be performed by professional accountants with much more finesse at lower cost and much faster. So all that turns out into what is now known as client accounting services. So you're doing more as an accountant for your clients than ever before.
It's funny because it's actually sort of the same principle. I remember the first thing that we talked about on a podcast was accounting automation, and it's the same principle where accounting automation people shouldn't be worried about it. Because this is something that can open them up to do some of the more valuable things that they're looked at to do. But I mentioned the article you had done for Accounting Today. In that article you talked about three main categories of client accounting services. Can you tell us what those are?
[Patil] Yes. I'm going by a focus in the middle part of the client account. So I'm not considering audits and tax for this discussion. I'm focusing only on the accounting part of it. So if you look at accounting, the same thing, the after-the-fact financial statements preparation. People used to call it, even now, write-up is a very famous term in the profession. The client has already written their checks. They issued their invoices and received cash for their sales and all of that. And somebody enters the data into a general ledger to produce a financial statement. So that somebody could be at the business owner's place, maybe a part-time bookkeeper, maybe an outsourced bookkeeper. And the accountant applies the finances of the accounting profession's knowledge to produce a compliant financial statement. It's all write-up, end of the period, after everything is over. That still is there.
The next is transaction processing. Now this is where the accounting firm takes some of the work that businesses would do and typically a little higher level of business volume that the client has. You issue a lot of bills, you take care of the terms of payments, some payments can be made 30 days later or 60 days later for what you buy, which means as an accountant you can plan the cash flow for the business. So those are the transactional processing, business transaction processing where an accountant can do, that includes processing of electronic payments, cutting checks, even processing payroll, paying employees, paying the payroll taxes and filing the payroll taxes online and things like that.
So that becomes transactional as when things are happening. Some of it can also be after the fact, so there's a second level of CAS. The third level is really the insights level, where it's commonly known as either outsourced CFO services or controller services. This is a higher-level kind of work where people with experience in accounting offices will look at the entire database of accounting in a holistic way, meet with client management on a periodic basis, review the financial performance, provide strategies to improve business based on what they see. For example, maybe an accountant who works as an outsourced CFO looks at inventory levels are going up, sales are not going up at the same rate, which means you're going to put your cash into inventory, which is going to put pressure on you in terms of cost of finance. So those kinds of things are higher-level, CFO-level kinds of services, where small business or medium size business which cannot afford a full-time CFO can get the same level of intelligence from an outsourced CFO which comes from an accounting firm.
Which supports the financial and business decision-making in real time. With after the fact, also. But that's the highest level of client accounting services that you can offer. So it's a complete picture. So each of your clients might fit into one of these three levels. Some of them might fit in the middle level better. Some of them might be level two, level three, that kind of stuff. But ultimately you're looking at professional accountants doing professional accounting.
The offering of these services, is it something that's on the rise in the accounting industry now? Sort of a second part to that question, are there certain size firms that are starting to take advantage more than others?
I think a lot of surveys that were done by a lot of people in the profession, and if you take Accounting Today for example, there are multiple surveys. There was a survey called Year-Ahead Survey that shows a growing interest in the percentage of firms offering or planning to offer client accounting services. They divided that survey result into different size firms. Small firms, mid-size firms, and larger firms. Now smaller firms compared to 2017, in 2018, 45% of the smaller firms said they either are doing CAS or trying to offer CAS. Again, 42% in 2017. The same percentage goes to mid-size firms, 48% in 2018 versus 41% in 2017. Whereas for larger firms it actually dropped a little from 43% in 2017, came to 42%. If you look at it carefully, it means the larger firms raced ahead with jumping into client accounting services and actually implementing them. So that's why the percentage went down a bit in 2018.
Whereas mid-size firms there was a larger gap between those offering our client offer in 2017 versus 2018. Which means mid-size firms are more aware that there are opportunities there and we need to do something. Smaller firms are kind of similar percentages, but there is a growing interest in it because what has happened really is technology is a great equalizer. What is available to a larger firm on cloud is also available to a smaller firm on cloud. Of course, there are different levels of software, but technology wise it's a very similar concept. 70% of top 100 firms were already offering CAS. Small firms are increasingly wanting to offer CAS.
Firms with what I call the CAS-optimized technology stack in processes irrespective of their size are starting to make headway into client accounting services. So this is an exciting field. One doesn't have to feel "Oh, I'm too small for it, I don't know, I don't have the processes, I don't have the resources.” And it's something that you apply your mind, you will find out that, yes, this is something that you can do.
You know, Hitendra, the editor in me feels it necessary to say that when you're shortening it to CAS, you mean client accounting services. So I just want to make sure people who are jumping in and don't have the exposure know what we're talking about here. I'm sure most of our audience does. A person like me jumps in and they're sort of like, okay, let's make sure that we make it clear for people.
[Patil] It sounds like cash, right?
Yes, absolutely. Which is something that all accountants want to be familiar with.
[Patil] In fact, one of the CPAs told me “CAS is cash.”
There you go. That's the headline. I may steal it for the title. But in the areas where there's been growth, what would you say the reason that offering these types of services is gaining in popularity?
[Patil] I think if you look at the entire technological spectrum from the desktop days, there comes a time once in a time period, sometimes in decades, when the demographics, the status of the economy, the technology all come together at such a flux that it creates new possibilities that did not exist before. Now I think the accounting profession is sitting right on that cusp right now. And this means there is a totally new way of how accountants work for their clients. If you look at accountants' process transactions in real time, in collaboration with business owners, what happens is you're interacting more with the business owners, much more than before. You help them make timely and better business decisions, which means client accounting services is a sticky service. And then as you interact more and more with your clients, your top-of-the-mind recall goes up. So whenever they have those dilemmas, entrepreneurs are always making choices from their business-decision dilemmas. And suddenly they now feel "Oh, there's an accountant who understands my business who actually knows the position of my business in terms of finances and everything, let me call him up or let me email."
So it is not easy for a business owner to replace or recreate that value that an accountant who offers client accounting services can deliver. It's more sticky, it's more valuable. Also as more and more advice is given, accountants become even more trusted advisers. They become really the trusted advisers. Because you're giving advice based on the facts in their accounting database. You're not taking time to clean up the mess that happened, fix everything and then look at generating insight. That would take too much time. It's like after the fact if you've given advice, everything has already gone ahead. So it's only hindsight. But here you're giving real time. I give examples of doctors and patients. If you're hospitalized for any reason your health is monitored around the clock. You're given the medicine on time. So that's how it becomes. Accountants can give really timely input for business decision-making.
Then if you look at the cost of doing accounting, after the fact essentially the business owners thought of it as an expense. Basically something that needs to be done to be compliant with the law of the land to be tax-ready. Which means the business owners wanted to reduce the cost. Any expense you need to consider, you want to reduce the expense. That's human nature. But as client accounting services deliver more decision-support intelligence, the value that business owners receive, they perceive that accounting information makes it a win-win, meaning the business owner thinks "If I make right decisions, ultimately it's going to add to my bottom line at the end of the year." So this is not an expense. This is an investment. So suddenly the whole perspective changes from business owners looking at accounting cost as an expense. They start thinking that this is actually an investment. They may not say so, but they start recognizing that internally.
And their thinking changes, the way they look at accounting and the way they consider accountants as whether it's a necessary evil because you need to be compliant, or is it a necessity for me to make my business better.
So what would you say are some of the new benefits, new opportunities, new outcomes that client accounting services allow CPAs to provide to their clients? What sort of benefit are the clients getting extra from the ones you've already stated, which would be the costs and things like that? What do you think the extra benefits are?
[Patil] Interestingly, I was just looking at some social media posts that accountants keep posting. One of them posed a question. If somebody tells you "I cannot afford you," what does it really mean? And if you look at that sentence really meaningfully, what it means is it's not about the absolute value or the money terms, the dollar terms, what is being paid for the accounting work. It's about the value of accounting itself. How does the business owner look at what is accounting giving me? Is it only cost, or what is happening? Most of the owners, small businesses especially, they just want everything to be tax-ready correctly. That's how it is. So when CAS comes in, client accounting services come in, that perspective starts changing. Because suddenly what happens is because of all the collaborative technologies and automation, the time that is required to produce an accounting outcome has decreased. Which means the effort has decreased. Which means accountants have a little more time to apply their minds into the accounting information to find insights. Which means you're able to deliver more professional expertise to the business owners, and suddenly the business owners start thinking that the cost of that expertise has gone down actually.
It's not gone up. Which means "Look, I can afford the professional expertise of an accountant, professional accountant." So when they start thinking like that, they're giving you the work in terms of "Do everything for me, whatever is known as client accounting, but make sure that you give me not just information but tell me what I should do with that information. What decisions am I supposed to take? Are these good decisions, bad decisions? What should I do? If you were in my position running my business, what would you do?" So those are the things that are suddenly now available to the business owners. And that's why if you look at the designation or the title “outsourced CFO,” if you search that on LinkedIn three years ago, you would find possibly a couple of thousand outsourced CFO in their titles. If you find now, there will be thousands and thousands. Why?
Because there is a market demand for that. People think that expertise has been affordable for them. Expertise has become available to them, which they never had before. Which means the clients are now able to make their business decisions far more confidently than ever before.
If a firm is thinking about entering the idea of offering client accounting services, what areas of their firm do you think they have to strengthen first to make sure they're able to do it right?
[Patil] Good question, Bill. In fact, at AccountantsWorld, we're just about to launch a new how-to practical guide for client accounting services for accountants. That explains a lot in detail, but let me touch upon it a little quicker. What we identified after talking to several accountants in the profession, and at AccountantsWorld we sell only to accountants. We don't sell to the end clients, which means our clients are only accountants. So we talk to them day in and day out. Right from solo practitioners to top 10 firms, we have clients on our board. Which means we get perspectives from everywhere.
I have personally read every damn white paper, content piece on CAS out there. For the past 18 months.
That's a lot of reading.
[Patil] A lot of reading, a lot of reading. And I ran a little sprinkle survey amongst my own connections in accounting, and I asked them what are the top questions that you have in your minds about client accounting services? So I collected a list of 18 unique questions, and from that top six questions were the ones that I focused on before I came for this podcast. And in our white paper – not white paper, guide – the guide that we developed – I call it a guide because it actually tells you how to go about launching your CAS, not just what it is and not just a philosophical thing. So we found that there were just five things that you need to do right. The topmost, of course, most important but that comes at the end, is the right clients. So you need right clients. You need right communication. That means within your firm, your partner, your staff has to be on board while we are doing what we are going to do in terms of moving entire accounting spectrum from the clients to us.
The right technology solutions. This is one of the core things. Basically it's like a manufacturing company whose core technology plant that actually manufactures, of course, is the biggest investment. The right solutions will give you the right platform for launching your CAS. And that could be a technology stack. But if you look at accounting, if you don't control your accounting technology you will have more inefficiencies in your processes. And that means you must have the right processes, processes that work for you for mostly right of work will not work for client accounting services.
Basically CAS means you are going to have deliverables practically every day, maybe payables every day, maybe receivables every week. So you're looking at daily, weekly, monthly kinds of deliverables that you must collaborate with for with the clients. Which means your processes are going to be different. You might be emailing more. You might be using client portals more to exchange information on a timely basis. You might be calling up your clients a little more, which means your resources have to be rescaled on those kinds of scales, communication, presentation, writing skills, and things like that. And then, of course, the right pricing. This is obviously one of the topmost questions that comes up on CAS is how should I price my client accounting services? And what we found that it is not like a standard package or a fixed-fee thing that comes in that you apply, like let me make three different slabs, small, medium, large, and try to fit everybody into that. It depends on your service mix and what the client is comfortable with.
Which means you're doing a little bit of customization of your service experience for every client. It is a little different than what would you do in terms of standardization. There is a simpler, common fundamental there in right pricing for CAS, that is, if you look at the total money that the client has spent on his or her accounting and you average that out, you will know that many times the clients cannot really do the total costing. Sometimes they forget the overhead. Sometimes they say office overhead, electricity, so many things. So all that put together and then the cost of management of that information when it was done by the client. So you're overseeing the accounting processing. You're trying to say "This was done wrong, bring it back to me."
All these things take away the time of the owner. That's an opportunity cost. Most people don't count that. So if you look at the total costing of what the client paid for doing the accounting and you offer a pricing that is not more than that, maybe less than that, maybe equal to what he is already spending, the client still gets an advantage that the professional accountant is going to do his or her accounting in almost the same price. That becomes more palatable. If you say "I'm going to charge you 10% of your revenue or I'm going to charge you $1,000 a month because that's my package," that's going to be difficult for the client to digest. And, as an accountant, if you do the write-up also, you should be able to find out what was the cost of accounting. Not just your fees, but what else happened before you found the database and you worked on it. Which means the cost of doing the processing before it ever reached you, even that comes into the picture. So you can easily guess or measure what that was and promote that pricing. And, of course, as you go along you enroll three, four, five clients. You go through the experience. Then you will see "Oh, this is where the pricing ballpark is, this is what gets accepted very quickly, or this requires too much explanation, which means people are not finding it valuable," which means you might have to do communications. What's the new value of the client accounting services that you're now offering?
So, accordingly, right clients, right communication, right solutions, right processes, right pricing. These are the things that you need to get done right.