David W. Cottle
Three reasons accountants don't earn enough

Accounting firms often work too cheap and don't manage their practices like businesses.

August 5, 2013
by David W. Cottle, CPA

Editor’s note: This column is an edited excerpt from the book Bill What You’re Worth, by David W. Cottle, CPA.

Some years ago, a group of accounting firms invited me to speak again at their annual meeting. They held the meeting in a resort location some two hours’ drive from the airport, so one of the members picked me up. As we got on the freeway and she did not have to concentrate quite so hard on the traffic, she asked me, "What do you consider the No.1 problem facing accounting firms today?"

Wow! Tough question. Accounting firms face lots of problems. Some of today's problems are not the problems you faced a generation ago; some are. As the economy and the market change, so do your challenges. Technology changes, competition changes, laws change, accounting principles change, taxes change. All these problems change with the times. So I had to think for a long time to answer that question.

Then I realized that the people problems seem to remain the same year after year—partner compensation, recruiting, client relations, marketing, and so forth—because people don't change. That's why we can get valuable advice for living from some very old books like the Bible or other ancient texts. Technology may change, but people don't!

So the answer that I gave her years ago still is true today. And I think it will be true for many, many years to come.

The No. 1 problem facing accounting firms
The No.1 problem facing accounting firms yesterday, today, and tomorrow is attitude. Too many accountants have inherited or adopted the wrong attitudes about a number of things:

  • They act as if they need their clients more than their clients need them.
  • They feel like they don't deserve to make a lot of money.
  • They believe they have to justify everything they do. I call this "playing defense instead of offense."
  • They have the attitude that something has to come hard to be worth anything.
  • They think they have to work 60 or more hours a week during the busy season to be successful.
  • They feel there is something immoral about charging more than their standard chargeout rates.

Here's the bad news—as long as you have those unrealistic attitudes, you will not be as financially successful as you deserve.

Here's the good news—you can change your attitude. It's as simple—and as hard—as changing your mind. But changing your mind requires you to form new habits. Someone once said, "Bad habits are easy to form and hard to live with. Good habits are hard to form and easy to live with."

I sometimes think the most important thing I do for some clients is to get them to rethink the way they see themselves and their relationships with their clients.…

Why some accountants earn more than others
When it comes to economic opportunity, the accounting profession is the proverbial level playing field. All the players have about the same education; they possess well above average intelligence; it only takes a few thousand dollars of capital to start a practice; and most accountants practice in similar marketplaces with similar economic conditions. In other words, the profession truly has equal opportunity.

Then why do some accountants make so much more money than others?

  • Is the accountant who makes $500,000 a year twice as smart as one who makes $250,000? Not likely.

  • Does the $500,000 accountant work twice as hard? No way!

  • Has the $500,000 accountant simply been in practice longer and, thus, have a head start? Sometimes, but not always.

Then what does account for the wide differences in financial performance between accountants?

A few firms thrive in today's volatile environment: firms that grow in depressed markets, firms that far outstrip their competition, firms that enhance both the quality and the quantity of their services to clients, while they earn appropriate—even amazing—profits.

You can do this, too. But you have to know what to do differently from what you have done in the past.

Whenever I do a billing seminar or consult with a firm to improve profits, I invariably ask this question: Disregarding what any of your fellow owners’ chargeout rates may be, could you personally invoice and collect $20 per hour more for your own time?

Over 50% of the time the answer is yes. Often, 80% of the attendees at a seminar answer yes.

What's your answer? Could you charge $20 per hour more?

This question and its answer indicate the No.1 cause of lack of profitability at accounting firms—we work too cheap. And the really sad thing is that we know it.

Then I ask this question: If I were to ask all the professionals in your firm, "What percent of the work you do could be done by someone with a lower chargeout rate, if you were better organized and if you had trained assistants available?" What would the average answer be?

The typical answers average between 35% and 70%.

What's your answer?

This question and its answer indicate the No. 2 cause of lack of profitability at accounting firms—we use expensive people to do low–value work. Another term for this is systemic underdelegation.

These two conditions are symptoms of the third major cause of lack of profitability in our profession—we don't manage our practices like the businesses they are.

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David Cottle, CPA, consults with professional firms on profitability improvement, partner compensation, marketing, client service improvement, and strategic planning and management. He also provides advice at retreats, speeches, and seminars.