By Ira S. Rosenbloom, CPA | Optimum Strategies LLC
Many accounting practices pay attention to performance benchmarks to understand how the firm is doing. These typically include realization, utilization, revenues, and client satisfaction.
Forward-thinking CPA leaders, however, look at not only the traditional metrics, but also at expanded benchmarks to find out where the firm is heading. By monitoring these predictors, the firm can better manage in the present while preparing for the future. In addition to the more traditional factors mentioned above, firms would be wise to consider the following five factors that predict a firm’s strength and future success.
- Days Receivable – If days receivable, or days sales outstanding (DSO), is growing, it means clients aren’t paying you as quickly as they used to. This could mean clients are having financial troubles, that they are unhappy with your firm or services, or that your internal team is not effective with collection efforts. Increasing days receivable is an indicator that cash flow is going to be extended, that people on your team may be overworked, and that morale internally and externally will become impaired. This metric is a potent one for grasping the ongoing health of your practice.
- Average Fee Levels – Take a look at average fees over a several year period. Have your fee levels been flat, increasing, or increasing by more than the rate of inflation? If you are pricing competitively, flat average fees are a sign that the addition of new services would be important to growth and client commitment. Ballooning average fees may be difficult to replicate for extended periods, or can be useful guides if you are aware of the factors that created the growth and can continue them. Diminishing average fees could reflect efficiencies, a downturn in service, or even a declining interest in that service – all of which foretell more decline and the need to make a change.
- Demographics – Take a look at the average age of your clients. Is there a trend of growth in the clients aged 35 to 45? This is a potential indicator of client sustainability. If a lot of clients are older than 65, it’s statistically predictable that the client base will soon shrink. It may also indicate your service offerings should change to better meet their needs. With a lot of younger clients below age 35, you may want to examine staffing. Make sure you have accountants on the team who can provide a comfort level to similar-aged peers. Take a look at your staff demographics to find out if the firm’s processes and services are properly matched to your team members.
- Client Referrals – Firms should study and track the number of client referrals, as well as the dollar volume those referrals bring. Look at both historical data and trends or patterns, which can be much more impactful. If your client referrals are growing, it suggests the future revenue stream will intensify. If referrals are flat or dropping, clients may be less than satisfied, which will put pressure on profits. Sure, you would be able to see client satisfaction trends if you use surveys or other forms of feedback, but tracking referrals is a real-time indicator of how clients feel about your team. It should not be ignored.
- Pipeline – An inventory of new business leads is important, but it is only valuable if you have parameters for mining and moving the opportunities to closure. Leads that are not closed out within 30 to 45 days are not likely to be realistic sources of new business absent some special circumstances. If the pipeline is too shallow – meaning, there aren’t enough good prospects – it’s a predictor that things are going to dry up fast. In contrast, if there is too much in the pipeline, it may mean your firm is not being as selective as it should be, or you’re not moving quickly enough on those leads. Too much in your pipeline may also mean your competition is weak. That’s a good problem to have. At the very least, you should look at staffing levels and hire more people to cover a potentially exploding client base.
Predicting the future for your practice is not flawless, and there is no easy way to capture the unknowns. Using the knowns and interpreting them diligently, however, will allow you to gain clarity on certain critical components of your firm that will improve your vision of the future.
Ira S. Rosenbloom, CPA, is chief executive officer of Optimum Strategies LLC in Spring House, Pa. He can be reached at email@example.com.