3 Reasons Small Firms Stay Small

Woman in home office looking at paperwork in front of computerPlus 5 common situations. Do you see yourself?

By Hitendra Patil
Accountaneur

When firms want to grow but can’t, the problem is neither economy nor resources.

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  1. There are firms that do not want to grow. As long as it is by conscious, purposeful choice, it is a decision well respected.
  2. There are firms that believe that they cannot grow beyond what they have already achieved.
  3. Then there are firms that want to grow but struggle to break the shackles of being where they are now.

Over the last 12 years, I have been interacting day in, day out with accounting practice owners and helping those who want achieve growth develop their accounting practices. The first couple of discussions with them revolve around revisiting the core purpose why they had entered into public practice. In that state of introspection, many of them become sensitively honest with themselves. They recognize that their current practice situation, which is not what they had actually dreamed about, is because of the actions they have

In that state of introspection, many of them become sensitively honest with themselves. They recognize that their current practice situation, which is not what they had actually dreamed about, is because of the actions they have and haven’t taken repetitively.

And then comes the make-or-break point. The moment of truth.

To stay small yet happy. Or to stay small and unhappy. Or to grow. Some of them retreat, instead of stepping up and dreaming afresh. And that is perfectly OK when it is their choice. But, many times, there are those who want to grow, yet retreat.

There is no bigger and stronger reason why firms stay small, than this inaction at the moment of truth.

They make one of the two choices:

  • to accept the loss of possible gain and/or to accept the compromise of living with less… OR
  • to go through the gain of temporary pain of discomfort of learning and doing something new.

Invariably, the educated mind finds many justifications (excuses) for maintaining the status quo. The strongest of them all is the perception of causing risk to the existing comfort. And that is the fundamental trait of the human brain, rather, the uncommon trait that causes the inaction – the lack of or inadequacy of the entrepreneurial spirit. The size of a practice is usually a result of the owner’s wants, needs and belief system.

If you feel you are an accountant, you practice will most likely stay small. If, however, you feel are an Accountaneur ­– an entrepreneurial accountant – your practice will more likely be the one you dreamed of when you started.

This is not a philosophical post. Let me come to specifics, with real-life examples:

1. Small firms are woefully underprepared to grab growth opportunities.

Have you ever lost or declined to take on a profitable project because you did not have enough resources? Specifically, can you process and deliver four years’ books in one week?

Right in the peak of the tax season, the owner of a predominantly tax services practice that had one more staff member, emailed me. His new prospect had received an IRS notice. It was a small business owner who had no accounting data at all – and a few “shoeboxes” full of receipts, invoices and statements. The CPA firm had accounting software installed on a local computer at the firm’s office. It did not have a multiuser license. The Internet connection was not as fast as we would have wanted it to be. It was virtually impossible to work remotely. There was no high-speed scanner to quickly scan four years’ documents. There was no document management system or portal.

The business owner was willing to pay the entire fee for bookkeeping up front. The CPA quoted $8,000 for the books and separately for the tax returns. The time was short. A shared team could have processed it all in 2-3 days, if it had fast enough remote access with multiuser license, provided documents were scanned in on the same day and transmitted via online temporary portal.

The CPA gave up and declined to take the project, even when only on the accounting work alone he could have made a profit of at least $4,000 within a week. He never contacted me again for similar projects. I met him at one of the trade shows. He revealed that he doesn’t entertain such opportunities anymore!

2. Small firms are not adequately equipped to MANAGE growth.

Have you ever declined to take new clients because you and your team are already too overworked and overwhelmed?

When a restaurant chain signed up with this CPA, the firm did some great work for the first 2-3 stores. Impressed with the work, more stores started signing up with the firm. The process of producing the work was mostly manual, with plenty of analysis done in Excel sheets.

Restaurants are transaction-heavy. They have multiple pay types, shift hours and staff doing multiple types of jobs. The work done when the volume was small was easier to manage. But, the volume growth meant a cash flow problem – because the incremental revenue from more stores was not enough to provide for the costs of hiring another person to manage growth.

This is symptomatic of two major challenges small firms face when managing growth:

  1. The processes are not optimized with technology and controls.
  2. The marketing is not strong enough to provide a consistent pipeline.

Depending only on referrals means unpredictable work volume peaks and troughs. It almost always results in overwork and overwhelm at times, and more often than not underwork and underwhelm. It results in challenges of attracting and retaining talent. The quality of service and the consistency of delivery turnaround becomes inconsistent. And that leads to unhappy clients, damage to reputation, etc.

While the intent to deliver great quality service is highly respected, when firms go slow and decline new clients instead of planning and managing the growth, it becomes a default business action. It is unfortunate for the people who deserve help from competent and experienced accountants but can’t get it because firms are not equipped to manage growth.

3. Small firms defeat the true spirit of partnership.

Have you ever lost your big client to a larger firm?

A CPA firm from Chicago, who was my client for many years, lost a big account. It constituted nearly 30 percent of the firm’s annual revenue. The reason? Because the client’s business grew so big that they needed specialist services. This small firm did not have the expertise or experience to service the complexities. The client went to a larger firm. The smaller firm, which had

The smaller firm, which had an excellent relationship with the client for quite some time, could have “borrowed” expertise if it had developed a referral partnership with the local larger firms. It could have simply referred in the business to share the future revenue. Ironically, many small firms have “partners” who work “together” to run the firm. But the small firms hardly create mutually beneficial partnerships with peers or even competitors.

Collaborative servicing of the same client by multiple entities is a difficult concept for many small firms. There is no harm in “buying” a service for your client and making some money on it. Most likely, the other firm will give you great pricing because they save marketing money in any case. The client engagement letters must provide for this kind of “trading” arrangement.

4. Small firms themselves commoditize their own value.

Have you ever felt very uncomfortable and fearful that if you quote more, the prospect will run away?

“I saved this client over $120,000 in IRS demand settlement. I fought tooth and nail with the IRS because I believed that the client had integrity,” a Certified Tax Resolution Professional who runs a very small firm told me. The satisfaction of helping a client in trouble was priceless. But the “price” was commoditized by this tax pro. For many hours of work, all that this person got paid was not even 1 percent of the value that was created. The client was charged by the hour!

Giving away free advice on phone calls and emails does not earn return on value delivered. Many small firms simply do not have a consulting/advisory services “product” to be charged differently. Focusing on cost optimization and increasing utilization to increase profit has one physical limitation – the constraint of time. If someone else can do the same thing – transforming an input into an output – cheaper and faster than you – and someone else will – you are just commoditizing your practice.

5. Small firm owners are not as visible in the marketplace.

Do you get your new clients mostly by word of mouth?

Nothing wrong in that. Except when you feel that your practice should have grown bigger but it hasn’t.

“Nowadays, CPE is also available online. So I don’t get out of the office much,” a small practice owner from New Jersey told me at a trade show. He felt uncomfortable going to local networking events. He wasn’t investing in any formal marketing plan. “If somebody could manage my office, I would love to go out there and get new clients.” I felt this was a familiar sentiment expressed by many.

Growth by referrals is unpredictable, inconsistent and inadequate. Mostly, small firm owners are busy producing and delivering the work, rather than being visible in the marketplace. The discomfort of losing control over client work and its quality is representative of process weaknesses – delegation, and hence replication, is difficult.

Clients come to accounting firms not because of the technology or office location alone; they sign up because they trust the firm’s owner’s capabilities. If the firm’s owner is not visible and available to more prospects, growth is inevitably stunted.

Escape the gravitational force to launch your practice into higher orbit

When we work with clients on their practice development, it all starts with a deep, open-hearted conversation about the practice owner’s dreams, fears, aspirations, mindset and current level of conviction about their own talent. If we somehow feel that there is a self-depreciated viewpoint, it is mainly because of not considering leverage.

Time is a constraint and when one tries to limit oneself in that constraint, growth is very difficult to achieve beyond certain limits. Leveraging technology, leveraging other people’s time, leveraging resources of others – even of competitors – and leveraging your processes are the ways to escape the gravitational force of status quo.

Most importantly, if you genuinely believe that your expertise, your wisdom and your experience can positively impact the lives of many more people, you are doing them – and your practice – a disservice by not escaping into higher orbit.

3 Responses to “3 Reasons Small Firms Stay Small”

  1. Bigboy Billy Ndlovu

    There is no truth than this sometimes the personal background counts,after reading this article I felt my stomach turning.

  2. Katrina Geety CPA

    I agree and understand the concepts. I came out of an international accounting firm, big business, software specific consulting businesses, and outsourced CFO work. When I left that environment, I decided to dedicate my remaining career to privately owned businesses and the owners. I have chosen to downsize my accounting business, to utilize a few, very experienced professionals, yielding a respectable hourly billable rate. We are lean, highly credentialed, and very profitable. We are downsizing our office space and expenses to maximize profitability. This was my long term plan.

    • HITENDRA R PATIL

      Thanks, Katrina, for sharing your thoughts. You have consciously chosen to follow “making a deeper impact” as the way to growing your practice. “Small” should not necessarily mean just the “size” of the firm. Technology can help multiply revenue even with small headcount. Thanks again!

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