How to Increase Profitability and Capacity in Your Accounting Firm

Gusto Editors

Is your accounting firm reaching its full potential?

Growth is a good thing, but it can be stressful for many. Expansion and growth cause anxiety because of unknown factors—moving into a larger market, expanding service options, and hiring new partners in your firm can all be points of friction if you are not prepared for the change. However, overcoming the fear of the unknown holds potential benefits that can make your firm flourish.

At Gusto, we love to see firms overcome the fear of the unknown to reach their full potential. That’s why we have partnered with CPA Academy to bring you our presentation, “How To Unlock Your Firm’s Capacity for Advisory Services.” This webinar, presented by Will Lopez and Yoseph West, looked into what it means to scale an accounting firm and the different strategies one can take to foster growth.

Our featured speakers in today’s article are Yoseph West,  co-founder and CEO of Relay Financial, a revolutionary online money management system for small businesses, and  Will Lopez, head of our accountant community at Gusto. Will takes pride in providing CPAs the tools they need to help their small business clients succeed.

In this article, we cover how to increase your firm’s efficiency, capacity, and profitability as you grow.

Three ways to expand profitability at your accounting firm

When it comes to increasing the profit margins at your firm, there are various approaches you can take. The first way is to increase the number of people at your firm. Secondly, you can charge more for your services. Finally, you can streamline the processes at your firm to minimize costs. Implementing multiple strategies will boost your firm’s numbers and increase profitability.

Confident young male team leader talking with colleagues at meeting.

Increase your headcount

One of the first strategies firms take when increasing profitability is to increase the number of people at your firm. If you are comfortable adding more people to your staff, adding more CPAs to your team is an effective strategy. After all, more people means more work, which means more profit. 

“When we’re talking about how to increase profitability and how to increase capacity, there are at least three ways to do it. On one hand, you can grow your headcount and just get more bodies in the room. I think for a lot of firms—that’s what they do. They just tack on people, hire, and grow, grow, grow to build a larger firm. Hiring folks is a great way to go.”

– Will Lopez

An increased number of people at your firm also increases the collective experience level. By hiring more people into your team, you effectively expand the knowledge base at your firm. As a result, you can provide more services to clients and charge a premium for your firm’s expertise.

Increase service costs

As your firm grows, you can charge more for your services. This increase in cost could be because you expand the services you provide. For example, instead of providing basic procedural tasks such as bookkeeping and payroll services, you begin to branch out to more complex offerings like HR packages and people advisory.

“The second way [to increase profitability] is to start charging higher rates. You’re hiring more folks that have higher skillsets, and you can aim to increase profitability in that direction.”

– Will Lopez

When you choose to charge a higher rate for your service, do not be afraid of how your clients may react. Remember that you are not offering the same level of service as before, which means you are adding value to the packages you provide to your customers. In many cases, your customers will be happy to pay a little extra for your firm’s expertise and expanded offerings.

Increase your efficiency

In this case, increasing your firm’s efficiency means spending most of your time focused on billable tasks rather than doing things that keep you from making money. The less time your team needs to focus on menial tasks, the more opportunity they have to use their time to do profitable work. 

“Conventionally, the profession has increased its revenue by throwing bodies through the door. But with the advent of the internet and cloud technology, a brand new conversation has started around scaling a practice by just streamlining efficiencies.”

– Will Lopez

Modern cloud-based software opens small to medium firms to the possibility of streamlining their processes more than ever before. These internet-based accounting tools automate many time-consuming tasks that prevent firms from focusing their time on projects that increase profitability. The result of implementing these tools is an opportunity for firms to expand their offerings without needing to increase the number of people in their business.

What strategy should you take to scale your firm?

Whether you choose to scale via a larger team, charging more, or streamlining your process, scaling your firm is challenging. This growth could cause you to rethink your marketing strategies, target new clients, or even require a company-wide rebrand. Before jumping into your changes head first, it can be helpful to have a framework for your growth.

One excellent example of a framework to align your efficiency improvements comes from a study performed by Michael Raynor, the managing director at Deloitte and Mumtaz. Even though Deloitte is one of the largest firms in the nation, they took an in-depth look at the efficiency and performance of 25,000 public accounting firms for nearly 50 years to learn how to improve. This study found that there was not one specific activity that separated top-performing firms from the rest of the group:

“The common element that the researchers found between the companies that succeeded and those that did not wasn’t a specific activity. … There isn’t a silver bullet or a smoking gun. Something that would make you say, ‘Aha. If I do that every single time, I’m always going to be successful.’”

– Will Lopez
A group of adult business-people are having a meeting in an office room.

Instead of finding specific activities or market approaches that made firms perform better, the study found the real difference was that top-performing accounting firms operated with a different mindset. In particular, there were three rules that successful firms followed over the last decade.

“If you look at the past decade, what has happened in the profession is that it has changed the way it thinks. In their decision-making [process], the most successful firms all follow the same rules. ‘Better before cheaper;’ they compete on differentiating themselves against others [services] rather than pricing. ‘Revenue before cost;’ they prioritize increasing revenue before reducing any cost. … And the third way is ‘no other rules.’ Change everything you need to follow the first two.”

– Will Lopez

Prioritizing your firm’s value and increasing revenue will give you the framework you need to structure everything else. Instead of worrying about cutting costs in your firm and making things cheaper for your clients, look for ways to add services that make your firm more valuable. This approach flips the script of “less is more” on its head and allows you to operate from an abundance mindset.

Work with an abundance mindset

Research shows that top-performing firms do not work from a place of scarcity—the mentality that cost needs to shrink to achieve success. Instead, they approach scaling their firm from a place of abundance. They understand the value of what they provide and know that their services will benefit clients.

“If we were to summarize the mindset shift in the past decade as abundance mindset and scarcity mindset, [it would be like this]. A scarcity mindset is like, I’ve got my costs. I have to bring them all down, and I’m worried about just what I have today.’ They don’t see the upside and how much things can grow. [An abundance mindset] is placing revenue before cost. It’s like, if we can grow revenue, there’s a huge opportunity to grow.”

– Yoseph West

A significant step to take when prioritizing revenue is finding where you can automate processes to augment your firm’s value. Automating processes increases your efficiency and opens the possibility to increase the capacity of your team. Think of it this way: If your team spends less time on easy tasks, they can increase the amount of time they spend performing functions that improve your firm’s revenue.

Learn more about increasing profitability and capacity at your firm

Following the framework discovered by Deloitte’s survey of successful firms will open the door to increasing profitability and capacity at your firm. Be sure to prioritize high-value services for your customers, focus on revenue rather than cost, and center the rest of your strategy on following those first two rules. An excellent place to start is by adding advisory services to your firm’s available options.

“When firms add on advisory services, they see an increase of 43% to revenue on average. … This just shows the fundamental difference between what buyers are paying on average depending on if their firm’s offerings include advisory services versus not. And depending on the actual service line [the firm provides], there’s even more opportunity to drive revenue.”

– Will Lopez

If you are interested in learning more about how you can increase your firm’s capacity and profitability, be sure to check out the entire webinar here. Also, if you enjoyed this article, be sure to look into Part One and Part Three of this webinar article series. There is plenty more information about scaling your firm and using Gusto + Relay to lay the groundwork for growth.

Our mission at Gusto is to give CPAs the tools they need to scale their firms successfully and grow into people-focused advisors. Be sure to look into our People Advisory Program to learn how you can add value to your firm by helping clients reach their potential. We also provide a partner blog full of resources for all your advising needs. Visit our Gusto for Accountants page for more information on utilizing people-based accounting within your firm.

Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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