Five reasons that growth in profit is outpacing growth in revenue.
By CPA Trendlines Research
The Rosenberg 2023 Practice Management Survey exults in the growth and profitability of CPA firms last year, but warning bells are flashing. How long can this keep up?
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The good news: Firms with revenue greater than $2 million saw 2022 average income per partner soar 11.8 percent over the previous year, and revenue shot up 11.4 percent. This was the second year that profits grew faster than revenue.
Yay, right?
Yay, yes – but whoa, wait! The gush of income has come at a cost, and that cost shows no sign of easing off.
Hope is Not a Strategy
Accountants have risen to the opportunities for revenue and profit, but to rake in the dough, they’ve had to stretch themselves to their limits, the survey says. The severe staffing shortage has practitioners working harder than ever.
And the instability of the economy hasn’t helped.
Meanwhile, the efficiencies of new technology come with new demands for investment, training and imagination.
And CPA firms are now competing for not just clients but staff.
The situation is tolerable now but getting more serious fast.
“Doing nothing is not an option,” the survey foreword says, “and hope is not a strategy.”
Five Coping Strategies
Growth in profit is outpacing growth in revenue for several reasons other than burning the midnight elbow grease. Each reason widens the profit-revenue ratio by either lowering costs or increasing production.
- Outsourcing/Offshoring/Onshoring: More than half of firms with over $10 million in revenue are outsourcing work, and nearly 70 percent plan to do more next year. And half of those not outsourcing now plan to start next year.
- Client Culling: On the slightly bright side of the staffing shortage is the necessity of trimming off clients who are less than ideal. At the same time, many firms are more careful about which new clients they take on. Slightly over half of firms with more than $50 million in revenue are actively culling clients, and 45 percent of firms between $2 million and $10 million are also doing so. The culling, of course, is an opportunity for firms seeking more clients.
- Technology: Firms that can afford the latest in tech are reaping the benefits of efficiency. Traditional work gets done more quickly, and advisory services can expand. Firms on the cutting edge of technology are already taking advantage of artificial intelligence and exploring its potentials.
- Non-accounting Hires: With CPAs hard to find, hire and hold on to, firms are realizing that professionals in other fields can be put to work on non-accounting advisory services. HR costs may decline even as expanded services increase revenue.
- Advisory Services: Not only are firms investing in advisory services, but private equity is increasingly seeking to invest in firms in order to acquire those services. With 10 percent of the participants in this year’s Rosenberg National Survey of CPA Firm Statistics earning more than half their revenue in non-compliance services, the survey is considering a new title that encompasses more than CPA firms.
Though the stats in this year’s survey tell us a lot about what happened last year, they are harbingers of what’s to come. And what’s to come is going to be different from what’s already come and gone.
