5 Ways to Lose Money on Your Engagements
As CPAs we are experts in determining profitability and well aware of the components that go into it. We do a great job coaching clients in the manufacturing or construction business on the factors they need to manage in order to improve or maintain margin on a product or construction job. Yet despite our coaching, many great clients continue to experience eroding margins year to year. Their attention to what it takes to manage profitability seems to fade away. For us who are CPA firm business owners, we are no different. Owning a business, including a CPA firm, is full of distractions, time demands, fires to extinguish, dates and people to manage, new compliance demands and complexities, etc. Like our clients, we know what we should be doing, but the pressures of the busy season somehow cause us to take our eye off the ball.
Here is my list of the top five ways to erode the profitability of CPA firm engagements.
- “Unconscious” scope creep. This is the biggest area of engagement profitability erosion for CPAs. We do “whatever it takes” to give the client accurate, timely financial statements and tax returns that exceed their expectations. What a great service culture we’ve established, but it shouldn’t be to the detriment of the firm. If staff is unclear or never informed about the agreed-upon scope and degree of expected client readiness, then they will just do whatever additional work it takes to get to the end deliverable without making the busy partner or CPA firm owner aware. Nor will they realize that a fee discussion with the client – before the additional work is started – needs to take place. Staff should be empowered to share responsibility for the scope and profitability of the engagements they work on.
- Excessive stops and starts. Are your clients clear on what they need to do and complete before you can begin the engagement? Client readiness is key and will streamline the engagement greatly. It’s tough to resist starting the work when the client is partially ready. However, realize that there is a stop/start cost to doing so. Busy season is all about keeping many balls in the air, and typically a CPA or staff has more than a few engagements going on at one time.
Another costly practice for many firms is to only complete the work they need to while physically present at the client’s place of business. They defer finishing financial statements and tax returns to evenings or Saturday hours at the office so that they can immediately begin doing fieldwork for the next client in line. More stop and start costs are incurred as the file is picked up and put down over multiple evenings or weekends. Engagements are not like good wine. They do not get better with age. Consider mandating that staff continue working in the field at the client’s site until all the work is done right through to draft statements and the tax returns.
- Weak communications. “What’s taking so long? “Are you done yet?” These are among the most common busy season questions. Job efficiency is all about identifying and working through costly bottlenecks immediately. CPA firm owners, managers and staff all need to be proactive and timely in their communications with each other and clients throughout the entire engagement. Strengthening communications will help mitigate both unconscious scope creep and excessive stops and starts.
- Lack of or weak engagement planning. Typical client engagements repeat year to year, and the rigor for planning the engagement somehow diminishes the longer the client is with the firm. The engagement game plan basically defaults to SALY (same as last year). The detrimental result is that the prior year’s bottlenecks are long forgotten, the client’s state of readiness and business changes are not assessed, and the prior year’s engagement profitability is not reviewed. There's much to consider for new clients as well, such as better quoting and specs gathering at the onset.
- “Looking for love in all the wrong places.” Amazing how weak client acceptance and retention criteria appear as red flags in my top five lists. Take a look at your top five favorite clients. They are the clients who light you and your staff up, engagements that everyone is enthused to work on. They appreciate and value their relationship with your firm. I guarantee that these clients have the highest realization.
These five ways to lose money on engagements are not just tips to personally manage one’s own engagements. More importantly, they should be engrained in the firm’s culture and core service delivery process.
What advice do you have for firms to help them improve profitability on engagements?
James C. Metzler, CPA, Vice President – Small Firm Interests, American Institute of CPAs.