How’s Your Overhead?

https://cpatrendlines.com/2020/09/14/how-to-determine-overhead/Plus a tip for increasing revenue if needed.

By Ed Mendlowitz

QUESTION: Are there any rules of thumb for a CPA firm’s overhead and salary costs?

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ANSWER: The Rosenberg Survey has excellent metrics and is highly recommended. On a less scientific basis you can use as a general rule of thumb 1/3 for salaries, 1/3 overhead, 1/3 partners salary.

At the end of the day you should look at what you and your partners are making, including pension funding and cash to grow the practice. If your income is not sufficient, then your fees are too low. If sufficient, then you are on right track.

If you feel you need to or want to increase revenues, a technique I recommend is to start with firmwide average realization. Then segment it into service or client categories (or whatever categories are right for you) such as

  • business clients,
  • not-for-profits and
  • individual tax clients

and look at the realization for the firm as a whole and each group separately. My experience and discussions with other accountants indicates that the individual tax return realization will be about 10 percent less than the business clients. Some firms segment the categories where they have a large industry specialization such as physicians, contractors or real estate, but you should start with the two or three major categories.

Now look at every client (sorted from highest realization to lowest) and see what the realization is for the lowest 5 percent to 10 percent of business clients. Might you be better off without them? If so, try to raise the fees to what they should be (not a penny less) and if you cannot get it, then drop or sell them. You can package five or so clients and sell them to a smaller practitioner who maybe can do better with their time and client management or who have lower rates. As to the 1040 clients, do the same also working off the lowest 5 to 10 percent.

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