If your firm eliminates timesheets, is it still possible to calculate profits-per-partner and to determine how to price your services? Can you still effectively tackle cost accounting?
Gusto partnered with CPA Academy to bring you wisdom from two accounting pros with visionary ideas about the industry.
Greg Kyte is a comedian and CPA who made Accounting Today’s list of the Top 100 Most Influential People in the industry. With 12 years of standup experience, he brings a fresh, funny take to accounting education. Caleb Newquist is the Editor-at-Large at Gusto and combines his editorial eye, content expertise, and accounting background to his unique perspective on the accounting profession.
Why cost accounting can be simple
While doing cost accounting without timesheets may seem complex, Greg and Caleb made the case that it can actually be pretty simple. Greg suggested looking at how you do your personal budget. The reason this is possible is because as an accounting firm, all of your costs are fixed costs. They’re predictable and steady, just like your rent, car payments, or other expenses might be.
Once you’ve identified your fixed costs, you can simply deduct them from your revenue. This makes determining profitability very clear. If you are under budget, you are profitable. If you go over budget, you’re not profitable. In this second case, you’ll need to either get more revenue or reduce costs in order to be profitable.
While this is a simple process, it has limits, one of which is how to determine the profitability of individual clients.
“We want to know, ‘Hey, was that last job that I just did? Is this client a profitable client? Was that job a profitable job?’ And the problem with having only fixed costs is that … if you wanted to create a profit and loss job by job, you can’t do it because here’s what’s happening: If all of your costs are fixed costs, then none of your jobs are profitable until you have enough revenue to exceed your costs. … [Alternatively,] all of your jobs are 100% profitable because you’ve already taken care of all of your fixed costs.”– Greg Kyte
This limitation can come with a blessing, however. While it’s a challenge to go without this ability to gauge individual client profitability, it also forces you to consider how much that matters relative to your work-life balance.
“I think the real question people have here is, ‘How do I know if a job is profitable?’ What they’re really asking is, ‘I need a little more motivation to get rid of the clients that I don’t like.’ Because we all have those clients where we go, ‘Oh my gosh, that guy just raked me over the coals. That was a hard client. That was a hard engagement. I would prefer if [I only had] easy clients.’ And you go, ‘Well, was it profitable?’ And it’s like, even if it was profitable, why are you working with people that steal your soul?”– Greg Kyte
According to Greg, whether a client is particularly profitable or not is irrelevant. Not everyone will be on board with his bold assertion—it takes a radical shift in mindset and value systems to embrace it. At the same time, burnout, depression, and other mental health issues are important issues in the accounting profession. This raises the question of how much you’re willing to give up to turn a profit. Could it be time to prioritize your well-being over a lucrative but soul-crushing opportunity? It’s something to think about.
“When the phone rings and … your head hits the back of your chair because you’re just like, ‘I don’t want to deal with him,’ get rid of that client. Life’s too short. … That’s the thing that should be reflected on your timesheet—that life is too short.”– Greg Kyte
Do you have clients who chip away at your well-being? Do you feel that it’s worth it? These are good questions to ask yourself—whether you’re considering eliminating timesheets or not.
How to assign profits per partner
Another underlying question you might have is how to allocate profits per partner. How do you see how much work each person is doing relative to the revenue they bring in? This is key to determining how much value a partner brings versus how much they cost the firm.
“This is the heart of this question: … How do [you] split staff salaries if they don’t use timesheets? Because timesheets are embedded [so that there is a] way of allocating these sorts of costs to the different partners. … A lot of people go ‘We can’t do it. It’d be too hard. We don’t want to get rid of our timesheets.’ … The main thing [to] do is [to] come up with a formula to assign profits and you make sure [that] the operating agreement for your partnership is really the best place for that to be very clearly spelled out.”– Greg Kyte
Take the example of a two-partner firm with $300,000 annual costs, $200,000 of which are staff salaries. Partner A barely uses any staff, provides most services directly to clients, and brings in $350,000 in revenue. Partner B uses staff heavily, barely provides any direct services to clients, and also brings in $350,000 of revenue. The partners are behaving very differently, yet their revenue is the same.
So how would you approach this without timesheets? In this case, Greg gave the example of basing it only on revenue. So, each partner would have the same profit percentage as each other. While their behaviors differ drastically, their revenue is the same.
This can be challenging to accept, and could potentially create conflict at the firm. Greg advised accountants to make this process clear to both existing and new partners.
“This whole thing is to try to prevent partner conflict where somebody is going, ‘Hey, you’re using staff way more than me, why am I getting charged so much? I should be making more money because I’m here for 20 hours a day during the busy season and you’re out playing golf and making all our people do all your work for you. You’re lazy, and I work hard, and I need money.’ That’s what we’re trying to avoid.”– Greg Kyte
Approaching cost accounting this way will inevitably lead to changes in the way you operate. You may need to rethink how and why you partner with certain people. You may need to ask yourself why you are partners to begin with. For example, you may have a partner because of economies of scale. Perhaps you joined forces with another so you could have lower rent and utility costs. If this is the case, you can simply share only those costs instead of also sharing staff costs. Each partner can then have their own staff. In this case, partner A might have minimal staff and partner B might have a large staff. Let’s say partner A needs some extra support, he or she can go to partner B and ask to hire some of his or her staff for a job.
On the other hand, you might rethink the partnership altogether, considering how different each partner is. If partners A and B are only working together to reduce costs, maybe it’s not an alliance worth keeping.
Finally, you could keep these types of partnerships and use the situation to incentivize you to make much-needed changes.
“If you’re going, ‘Hey, we’re splitting up the staff salaries,’ maybe you’re just saying, ‘If we’ve got five partners, every single one of us … has to take 20% of the staff salaries every year.’ You do that, and then all of a sudden, that encourages you to not do all the work. So that helps you have a better work-life balance because … you’re working smarter, you’re not working harder. … And then the other thing is that if you’re being incentivized to use staff more through how you’re allocating your costs, that’s also going to incentivize you to mentor your staff better. … If you’re not working your butt off and you want to make sure that your people are doing the job right, you’re going to be investing that time into those people to make sure that you have a whole team of rock stars.”– Greg Kyte
At the end of the day, you have to make the right decision for your firm, your partners, and your clients. While Greg and Caleb don’t have all the answers for every firm, they have ideas worth sitting with, and they bring up a critical point: How much value should you place on pure profit versus the rewards of a well-balanced professional and personal life?
Learn more about how to apply cost accounting without timesheets
Allocating resources without timesheets may seem like a daunting task, but you can simplify it. Considering that costs in accounting firms are fixed, you can look at those similarly to your personal fixed costs, such as rent and utilities. Much like your personal budgeting, you’ll want to deduct expenses from revenue and ideally have something left over.
The real challenge in doing away with timesheets is determining the value of individual clients and individual partners. Greg argued that determining the value of individual clients is generally an excuse for accountants to get rid of clients they don’t like working with. He asserts that if you’re that bothered by a client, there’s no real reason to be working with them. Life’s too short.
When it comes to calculating the profitability of specific partners, you’ll need to come up with a system to assign profits and make that very clear in all communications. You may decide to simply base profits on revenue alone, which doesn’t account for details such as how much a partner uses or does not use staff. If there are big differences in how partners behave and use resources, consider hiring separate staff. You may even choose to stop working with that partner altogether.
Gusto’s mission is to create a world that empowers a better life. We’re here to bring you the entire spectrum of wisdom about the accounting profession. Don’t forget to check out our other articles based on the same webinar: “How to Price Your Accounting Services Without Timesheets” and “How Do You Manage Your Accounting Staff Without Timesheets?”
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