Benchmarking against the Best

Using the best possible industry practices to establish targets or goals is a critical cal component in the success of every business. For CPA firms, one of the most difficult aspects of the process is obtaining information about other firms' results to see how one's own organization compares. To help practitioners, the Texas Society of CPAs sponsors the annual management of accounting practice survey, which is distributed to CPAs across the nation. Survey results are divided into two categories: the top 25% of the respondents (the top competitors), which were identified based on net income per owner (the sum of owner salaries plus the amount available for distribution to owners divided by the number of owners), and the entire group of respondents. As in previous surveys, national firms were excluded. The results have been broken down by firm size to allow benchmarking among peers. The 2,100 responses fall into four groups: individual practitioners (51%), small multiowner firms with revenues below $350,000 (9%), medium-sized multiowner firms with revenues between $350,000 and 900,000 (20%) and large multiowner firms with revenues above $900,000 (20%). The response rates for each group were large enough to ensure accurate representation of the population. FINANCIAL DATA In the firms' balance sheets and revenues, the spread between the results of the top competitors and of the entire group was consistently widest for individually owned firms. In net income per owner, for example, the top competitors among individual owners earned $143,662, which is nearly double the $74,914 average for the entire individual owner group. The other firm sizes had tighter spreads (see exhibit 1 on page 86). Owners' equity follows essentially the same pattern--top competitors among the sole practitioners had owners' equity of $95,41 1-approximately 208% of the overall average of $45,845. In the other three firm size categories, the spreads between these two averages were not as great. FIRM CHARACTERISTICS Firm characteristics are shown in exhibit 2 below. In almost every category, the top competitors reported higher averages than the group as a whole. Generally they had more personnel, charged more hours per person, had higher billing fees and better realization. All of these differences function together to produce firms that consistently reported larger profits. Exhibit 3 on page 87 breaks down the type of personnel employed. More important than the number employed is the number of professional personnel on staff, as these people generate the billings. As would be expected, the most profitable firms had the highest ratio of nonowner professionals/owners. The top competitors among medium-sized and large firms generally had fewer owners to participate in firm profits than the overall reported average, which meant more profitability per owner. The report shows that increasing the number of professional personnel generally produces a more profitable firm. Small firms are an exception, however, since their personnel levels are virtually identical when comparing the top 25% against all small firms as a whole. This may be due to the growing pains associated with the transition from a sole practice to a small multiowner firm. SOURCES OF INCOME Exhibit 4 on page 87 breaks down, by percentage and type of service, the sources of fees collected by the responding firms. Generally, the smaller the firm the larger the percentage of fees generated from tax services. As firms grew, tax became less important and audit services took on greater significance, but tax remained most firms' mainstay. There were only a few instances in which there were discernable differences in the sources of net fees between the top competitors and the group as a whole. The exceptions occurred in medium-sized and large firms. Review and compilation services were a larger source of fees for the top competitors in medium-sized firms than for the average medium-sized firm. …