reading

This book is dedicated to the ‘Father of Accounting’,
Luca Pacioli (c.1447 – 1517).

Luca was the first person to publish detailed material on the double-entry system of accounting. He was an Italian mathematician and Franciscan friar who also collaborated with his friend Leonardo da Vinci (who also took maths lessons from Pacioli).

It is said that Luca Pacioli published works for the double entry accounting system based on procedures in use by Venetian merchants during the Italian Renaissance. Most of the accounting principles and cycles described by Luca are still in use to this very day. His documentation includes journals, ledgers, year-end closing dates, trial balances, cost accounting, accounting ethics, Rule 72 (developed 100 years earlier than Napier and Briggs), and extensive work on the double entry accounting system.

If you are an accountant working in today’s modern world of ingenious inventions and technology, just remember that the majority of the accounting principles you are using actually date back to the late medieval period and even much earlier.

Pacioli credits Benedetto Cotrugli with originating the double entry method which Cotrugli described in a brief (but at the time unpublished) manuscript some 36 years earlier than Pacioli. History is blurred and some historians actually suggest that the double entry accounting system was in use for hundreds of years before this time in Italy. Pacioli however, is largely acknowledged as producing the first detailed and published material on the subject.

Luca Pacioli is famously quoted as saying that ‘a person should not go to sleep at night until the debits equal the credits’. How many sleepless nights would this equate to for some accountants!

Disclaimer

The content of this book is general information only. It is not and is not intended to be taxation, accounting, business, financial, legal or other professional advice and should not be acted or relied upon as such. Specific professional advice should be sought in respect of particular circumstances and requirements, as the information in this book may not be suitable or applicable to particular circumstances and should not be acted or relied upon. The authors have used reasonable endeavours to ensure that the content is correct and current but do not guarantee that it is correct or current and will not be liable or responsible if it is not. In no event will the publisher and authors or any related entity of those persons, or any of their directors, principals, agents, employees or representatives, be liable for any loss, damage, costs or expense (whether direct or consequential) incurred as a result of or arising out of or in connection with this book and the content included in it in whole or in part including but not limited to any error, omission or misrepresentation. The publisher and authors also disclaim all representations and warranties, including but not limited to, warranties as to the quality, accuracy or completeness of the information of whatsoever nature and warranties of fitness for a particular purpose.

CONTENTS

Introduction

1. Australian Accounting Industry

2. Compliance Services

3. Value Added Services

4. Financial Services

5. Overall Cost Leadership

6. Differentiation

7. Focus

8. Stuck-In-The-Middle Strategies

9. Sturgeon’s Law

10. Strategic Plan

11. Seven Deadly Sins

12. Practice Management Basics

13. Practice Profitability Tools

14. Advanced Profit Tools

15. Software Tools

16. The Power of the Office

17. Pathways to Your Own Accounting Practice

18. Organic Practice Growth

19. Purchasing Clients to Speed Up Growth

20. Funding an Accounting Practice

21. Client Value, Retention & Communication

22. Customer Segmentation & Service Bundling

23. Branding the Principal

24. Community Involvement

25. Branding, Website & Marketing

26. Social Media Marketing

27. Employer of Choice

28. Practice Culture

29. Positive Employee Performance

30. Practice Management Structure

31. Principal Development Programme

32. Personal Social Skills

33. Leadership Skills

34. Sharpen The Saw

35. Practice Entity Structure

36. Keep Everything Legal

37. Risk Management

38. Selling and Valuing a Practice

39. Survival of the Fittest

Tax Tips That Add Up

Stairway to Profits

Acknowledgements

About the Author

Introduction

Operating your own accounting practice can be extremely rewarding. You have the opportunity to be your own boss, positively help clients to be more successful, and make a lot of money. But unfortunately, like all small businesses, every day is not all peaches and cream. Operating an accounting practice is more difficult and challenging than it has ever been before. Compliance services, the backbone of the average practice to date, has started its inevitable decline. This is flowing through to falling or stagnating principal profits.

Although providing value added services promises interesting and challenging work with high fees, the reality is the average practice is still talking about it – not actually doing it. As a recent research report said on value added services – ‘accountants have a high awareness, but low action’.

I have been involved in the accounting public practice industry for over 25 years in a variety of roles. During that period I have been an employee, sole practitioner, partner in a three partner practice, bought practices, sold practices, started an accounting practice consolidator, dismantled the consolidator, and founded a National accounting practice franchisor.

Along the way I have made mistakes, taken some losses, had some significant wins, and learned an immense amount. This book is about sharing information, ideas and strategies so that you can transform your practice and make it more profitable, more valuable, and more enjoyable. These concepts and principles apply irrespective of the type of accounting practice you own, the size of the practice, or even your level of practice management experience.

Australian Accounting Industry

Industry overview

In 2015/16 the Australian accounting services industry grew 3.2% to generate a total of $18.7bn revenue (IBISWorld Industry Report M6932). The main activities of the accounting industry are accounting, auditing, bookkeeping, tax services, and advisory. The industry is comprised of 32,187 businesses employing over 114,000 people.

Six types of accounting practices

The Australian accounting industry is comprised of six main types of accounting practices: part-time home based operators, full-time home based operators, tax franchises, office based sole practitioners, partnerships of two to ten partners, and the Big 4.

1. Part-time home based operators

These practices generally have $20,000 – $50,000 of annual fees and operate with minimal expenses. These operators are happy with the extra income generated from their small loyal client base. The clients of these practices often expect below market fees due to lower overheads. Clients are normally salary and wage earners or micro businesses.

2. Full-time home based operators

These practices generally have $100,000 – $250,000 of annual fees. Principal profits range from $60,000 pa to $200,000 pa. The ability of the principal to complete all the work by themselves limits the size of these practices.

3. Tax franchises

The largest tax franchises in Australia are H & R Block with 440 offices (over 800,000 tax returns lodged pa) and ITP with 250 offices. Both franchise groups have been operating for over 45 years and predominantly service the salary and wage tax return market. There are also another 10 smaller accounting/tax franchises in Australia with office numbers varying from 1 to 70.

4. Office based sole practitioners

These practices generally have $100,000 – $300,000 of annual fees and employ staff to assist the sole practitioner. With the extra overheads these practices generate principal profits of around $100,000 pa.

5. Partnerships of two to ten partners

These practices generally have fees per partner between $150,000 and $1,000,000. Individual partner profits range from $100,000 to over $1,000,000 for the most profitable firms.

6. Big 4

The Big 4 accounting practices are PWC, Ernst & Young, KPMG, and Deloitte. PWC is the largest accounting firm in Australia and had 2015/16 annual revenue of $1.92bn. The Big 4 have a combined market share of 33.6% and generate partner profits averaging $1.5m pa each.

Accounting industry revenue

For 2015/16 the total accounting industry revenue only grew 3.2% or $580m. In contrast the Big 4 accounting practices grew their revenue between 13% and 15%, or $852m in total. Whilst the Big 4 are popping the champagne corks the rest of the industry is doing some soul searching as their revenue fell $270m or 2.25% on average. IBISWorld have forecast that the accounting industry revenue will climb by an annualised 1.7% over the next five years. If the Big 4 continue on their merry way with annual revenue growth of 13% to 15% pa over that period, the rest of the industry is in for a lot of pain (with average revenue to fall over 11% over that five year period).

There are two main drivers of the falling revenue for small and medium sized accounting practices. Firstly, smaller firms are losing revenue due to the growth of cloud based accounting software reducing client accounting fees. The Xero, MYOB and Sage One cloud based accounting software products are so easy to use that many business clients are bypassing their accountants and preparing their draft financials themselves. In addition, as these products reduce the time involved to prepare financials by up to 75%, clients still using accountants are naturally demanding their fees be reduced. Secondly, the ATO’s myTax system is reducing demand for individual tax return preparation. Over 3m taxpayers are expected to lodge their 2016 tax return for free online.

In contrast, the Big 4 are growing their revenue by diversifying into new value adding services that they can market to their client base. Over the last several years they have made big investments into legal, real estate advisory, and digital related businesses. These new services are driving their growth.

Compliance Services

Overview of compliance services

Accounting services can be divided into two main categories, compliance services and value added services.

Compliance services involve the preparation of forms and documents that are required to be lodged with the ATO and other Governmental authorities to comply with the law. Without this legal obligation it is safe to assume no clients would pay an accountant to prepare these documents as they have no intrinsic value.

Types of compliance services

Compliance services provided by accountants include:

Preparation and lodgement of monthly, quarterly, or annual Business Activity Statements (BAS) and Instalment Activity Statements (IAS) with the Australian Taxation Office (ATO) as required.
Preparation and lodgement of payroll tax returns with the applicable State Government revenue department.
Preparation and lodgement of income tax returns for individuals, partnerships, trusts, companies and super funds with the ATO.
Preparation of annual financial statements for trusts (as required to comply with the trust deed and trust law obligations).
Preparation of annual financial statements for companies (as required under the Corporations Act 2001).
Auditing financial statements of large companies, public companies, charities and non-profit organisations.
Company secretarial obligations for companies including updating the ASIC records when company details change.
Preparation and lodgement of payroll and superannuation related documents for employees and contractors.

Compliance services have traditionally, and currently still account for between 90% to 100% of the fees revenue of the majority of the 32,000 accounting practices in Australia.

Historical rewards of compliance based practices

The almost exclusive focus by accounting practices on providing compliance services has historically made a lot of sense and been generally financially rewarding for three reasons:

The legal requirement for the various documents to be prepared and lodged with the relevant government bodies meant accountants had recurring customers that had to have the service prepared every month, quarter or year. There is no better customer for a business than one that is legally required to use your service at fixed regular intervals.
Taxation preparation, BAS preparation, and auditing services are all government regulated. They can only be provided by accountants who have the applicable licences and have met the strict educational, experience and obligation requirements. For example, only Registered Tax Agents who have complied with the Tax Practitioners Board (TPB) requirements can charge a fee for preparing a tax return for a client. Of the 200,000 accountants in Australia, only 60,000 are Registered Tax Agents and can charge a fee for tax services. The TPB licencing requirements reduce competition, restrict the number of accounting practices providing these services, and assist in producing above market incomes for these practices. (This is all economics 101 and the normal result when supply is restricted – above average profits).
As the services provided are repetitive with the accounting practices basically providing the exact same service to a client every quarter or year, efficiencies are inevitable. For example, once an accountant has prepared the financial statements and tax return for Mr A’s company this year, it is expected that the same job should be able to be done next year twenty or so percent quicker. This efficiency gain has generally been split with one third going to the accounting staff as higher annual wages, and the majority going to the practice principals as higher profits.

With the benefit of these three structural or industry advantages, accounting practice principals could be financially rewarded from operating 100% compliance based accounting practices. All they needed to do was manage the practice efficiently and gain new compliance clients (whether from competitors or new clients starting a business).

Structural pressures affecting compliance practices

Unfortunately for compliance based practices, the technology and digital disruption affecting many industries is starting to impact on the compliance accounting practice. Compliance fees in some practices are starting to fall year in year out, and for other practices basically stay stagnant. In either situation, both of these outcomes will reduce practice principals profits over time. The stagnating or falling compliance fees are the result of myTax, cloud based accounting software and computerised accounting software.

myTax

Over 36% of all individual tax returns are now lodged with the ATO through myTax for free. These numbers are expanding rapidly as the ATO focuses on making their online myTax platform easier, simpler and more capable. In April 2016 for example, myTax was expanded to allow sole traders the ability to lodge their tax returns with the ATO themselves for free.

Cloud based accounting software

Currently 25% of Australian businesses use cloud based accounting software and this is expected to increase to New Zealand’s 40% penetration rate over the next couple of years. With cloud accounting the time taken to prepare financial statements by the accountant can be reduced by up to 75%. The New Zealand experience has shown that these efficiency gains have not been kept by the accounting practice, but transferred to the clients in lower compliance fees. For example, in New Zealand in the last twelve years the average annual profit of an accounting practice principal has only gone up $12,000 i.e. $1,000 per year.

Computerised accounting programmes

As these are becoming easier and simpler to use more and more small-business clients are now preparing draft financial statements by themselves (so performing work that was traditionally done by the compliance based accounting practice).

Growth pathways for compliance based practices

Compliance based accounting practices that want to grow their practice revenue and be financially rewarded should:

Firstly, recognise that the world has changed and that compliance based services will not have the demand and profit margins that they have historically had.
As the compliance fees revenue is stagnating or falling the costs of providing the compliance services needs to be intensively managed. All the costs, especially the labour costs, need to be reduced. This can be achieved by working more efficiently by using technology (like cloud based accounting), outsourcing overseas to lower labour cost countries, or reducing fixed overheads (for example, reducing office rental space and costs by having some staff work from home).
Start offering value adding services to their existing compliance base clients. For example, all compliance business clients should be offered the Tax Planning Review service. This should be a high fee, high value added service.
Draw a line in the sand and commit to having 10% of the practice’s annual revenues coming from value added services within twelve months. This is the base to move to 20% in year two and rise through to 50% in year five. This makes the principal think about how they would achieve that, what services they would offer, what changes they will need to make, and what prices would they charge?
For every business client look at answering these four key questions.
Question one: Is their current business structure the optimum for operating their business?

Question two: How can you help them to legally reduce the amount of tax they pay?

Question three: How can you help them to increase the profitability of their business?

Question four: What advice can you give them to make the operation and management of their business easier?

The changing dynamics of the compliance accounting practice will continue on, and cannot be stopped. Practice principals therefore need to change to fit into their new world environment and realise the great opportunities.

Value Added Services

Definition of value added services

Value added services are a large category of services which meet one test – they actually add value in some way or form to the client. The common value added services include tax planning, profit improvement, business development, and succession planning.

To pass the value-added test the service or product must generate value for the client that is at least three times (3X) the cost charged by the accountant. For example, a tax planning service provided to a business client at a cost of $1,000 must generate legal tax savings for the client of at least $3,000.

Types of value added services

Value added services that an accounting practice can provide include:

Tax planning.
Succession planning.
Cash flow management.
Marketing.
Strategic planning.
Business planning.
Asset protection.
Annual budget preparation.
Preparation of real time up to date financial statements (using cloud based accounting) and quarterly review of actual performance versus budget.
Customer segmentation and pricing analysis.
Business valuation and saleability improvement.
Key performance indicators.
Benchmarking.
Business process reengineering.
Franchising.
Break-even point calculations.
Customer segmentation.
Organisational structure.
Unique selling proposition.
Internal control.
Competitor analysis.
Reducing overheads.
Advisory board
Pricing analysis.
Business scalability.
Export market development grants.
Research and development tax offsets.
Working capital management.
Sensitivity analysis.
Job costing.

Attractions of providing value added services

Valued added services are attractive to accounting practice principals because:

The work is stimulating, interesting and challenging. Much of the work is like an intellectual puzzle where the accountant has the question or problem, and then needs to find the answer or solution. For example, how does a retail store increase sales and profitability by 50%? The possible answer is implementing the Flight Centre employee store ownership model whereby the store manager can buy up to 35% of the store. When this is done these stores produce 50% more profit than ‘standard’ stores.
Can be highly profitable. The fee for the service is based on a percentage of the value added to the client or a fixed fee, not the time taken on the job. This can mean effective hourly rates of $500, $1,000, or $5,000.
Low competition at this stage as very few practices are actually offering value added services. In the accounting profession there is a lot of talk about the service, a lot of accounting signs saying business advisory services available, but limited actual provision of the service for a fee.
Opportunity to build a business only servicing a niche value added service. This specialisation allows the building up of exceptional skills in this niche area, with the corresponding exceptional income opportunities. Just think of the income of a general GP versus a specialist heart surgeon.

Constraints on providing value added services

Accounting practice principals are very aware that they need to diversify into value added services, but progress so far is very slow (or totally non-existent in many cases). This is due to two factors firstly, that accountants have not invested the time and dollars into retraining themselves and developing their business advisory skills. Secondly, accountants generally have poor selling skills and are not proactive enough in selling their services/products that their clients could benefit from. Instead too often they wait for the client to request a service.

Strategies for providing value added services

Accounting practices that want to grow their value added practice revenue should:

Firstly, procrastinate no-longer. Just get started with one easy to implement value added service first. Once that service has been rolled out and existing clients are starting to use it, the practice can then look at adding a second service. An ideal first service is a Tax Planning Review service. This is an ‘easy sell’ to clients as clients are often asking their accountant how they can save tax.
Commit the time and dollars to retraining. Fifty percent of an accountants training should be on value added business services, strategies, and ideas. To date, many accountants have focused one hundred percent of their training time on accounting and tax compliance.
Draw a line in the sand and commit to having a minimum of 10% of the practice’s annual revenues coming from value added services within twelve months. This objective should be committed to in writing as written goals are much more powerful goals (and have a higher achievement rate). This is probably due to the fact it makes you work harder and focus, so as not to embarrass yourself.
Develop their selling skills. The value added services are of great value to clients but they will not sell themselves. Clients don’t know why they need these services or how they add value to their business. It is the accountant’s role to communicate the benefits.

Value adding services are an opportunity for accountants to make their work more meaningful, interesting, challenging, and profitable.