According to the most recent salary survey conducted by the National Association of Colleges and Employers, the average starting salary this past recruiting season for accountants was $45,656. With starting salaries at these levels, and escalating salaries for experienced staff, firms should be reviewing their economic model. Too often, partners and owners are busy working in the business rather than working on the business. Is your firm still using billing formulas that were developed prior to the current investment levels in technology and the shortage of accountants?
I often hear firms say they are using the old mark-up formula of three to four times the hourly cost. Are your margins shrinking, and do your partners understand the economics of managing a profitable firm in today's global economy?
Now is the time to start managing your revenue stream by evaluating pricing alternatives, including value pricing. Public accounting is no longer in an effort-based economy.
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In an attempt to address some of these questions, let's make some assumptions about starting salaries and look at the economics as a whole. (Your firm's assumptions and assigned values may differ, but the premise regarding margins should be consistent.) People and firms generally don't change unless they are forced to, or they see their peers and competitors excelling under a different model. I believe that most of the changes we see today are driven by shrinking margins, improved management and increasing investments (i.e. technology, marketing, sales, office facilities, travel and communications).
The assumptions for this illustration are:
1. Base salary (average per NACE survey): $45,656 ($21.95 per hour).
2. Fringe benefits at 20 percent: $9,131.
3. Technology investment per person: $7,500.
4. Bonus or overtime: $5,000.
5. Total cost before training and overhead: $67,287 ($32.35 per hour).
The hourly amounts are based upon a standard of 2,080 hours. Many firms simply mark up the base rate by four times ($21.95 x 4 = $87.80) and round up to $90 per hour for a billing/pricing rate.
This may work in firms that are 80 percent chargeable, but is that realistic in today's environment? Are you aware that firms are only 50 percent chargeable?
This metric is based upon surveys that we conducted over the past five years of firms ranging from under $1 million to over $750 million in annual revenues (total hours worked for all employees compared to billed hours). This is partially because personnel who add value (i.e. technology, financial reporting and tax filing) often do not charge time to clients. Another quick calculation shows that the total cost at $32.35 per hour is 1.4738 times the base of $21.95 per hour.
In order to put this illustration into perspective, we must make some assumptions regarding charge hours. The table at the top of this page provides three scenarios.
The margins may at first appear adequate, but they don't tell the entire story or reflect the total economic model. Today's employees (male and female) are looking for work/life balance. Most do not want to work 2,500 hours per year (or even 2,300).
