Accountants Make A Lot Of Money

Only a small fraction of CPAs make $500k a year, but it is possible. And it is faster to achieve in your own firm than by working for a large public accounting firm or getting a corporate job in the industry.

To make big money in a solo practice or a small firm, your strategy will differ greatly from the big firms. This strategy is not taught at school and cannot be learned from experience at large firms.

Obviously, increasing revenue and reducing expenses will increase income. The strategic question is: How do you do that, in a very practical and realistic way? The one key to maximize income is efficiency. This is really what separates the highly successful, from the moderately successful and the not so successful. This article gives you three tricks to increase your efficiency as an accountant. Take your pick, or use all three.

Example: To understand the efficiency tricks, let's begin with a realistic, though ambitious, example. Suppose an accountant serves 50 payroll clients at $500 per month. That's $300,000 in revenue. If she or he can also do their business taxes at $2000 per business, that adds another $100,000. The remaining $100,000 can come from retail tax clients, business incorporations or filings, financial services for individuals (retirement or estate planning), or CFO services for businesses (e.g. business loan applications, financial reports). For example 40 business incorporations at $1000 each and 100 individual retirement advisees at $600 will yield the required revenue.

Indeed, that revenue may not be reached in one year and will require building up your firm's business over some years. And even then, to capture the above revenue, you will have costs. Assuming your net income compensates you for your own time, your major expenses include payroll costs for any staff hired, vendor payments (e.g. bookkeepers), and marketing.

You can play around with the mix of services your firm can provide and your estimate of costs to serve that volume, to arrive at your income potential with various scenarios. Whether you decide to pursue $500k, $400k or $300k depends on your priorities, the number of hours you want to work, the number of staff members you wish to hire, train and oversee, and your market reach. The strategies below will help you reach your goal faster.

3 Practical Strategies to be Efficient

An efficient firm is one that can perform the revenue generating services at the lowest cost. Knowing the efficiency strategies that work for you will let you reduce the number of hours you work and payroll costs, bringing down expenses and raising income.

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Strategy #3: Play to Your Strengths

Everyone is good at something. Even if you are good at everything accounting, you might be better at certain things. Those are the things that take you the least amount of time to do. So while the big firms focus on corporate processes and industry standards that do not take advantage of individual strengths, you can increase your efficiency by playing to your individual strengths.

Less time spent on a revenue generating activity means you can do more of it in the time available to you, directly raising revenue. On the same note, activities that you find boring will likely also be the ones you tend to be slow at or at times even procrastinate on. Outsourcing these to vendors or staff will yield the biggest bang for your buck. Outsourcing your slow tasks will help you free up more time than outsourcing everything equally, or according to industry standard recommendations.

The following steps help implement this efficiency strategy in your day to day work.

Understand your strengths: The first step in implementing this strategy is to understand your strengths. For some, their strengths may be obvious. For others, especially those who are good at multiple things, they may have to use a stopwatch and measure the time they take for different activities.
Redesign workflows: You may need to redesign your workflow to allow you to work on activities that play to your strengths. Rather than dividing work among staff members by client account, you may have to divide it by stage or activity in each client account. Ideally, for each new client that you take on, your workflow should make it clear which tasks you will do yourself and what you will have others do. (If it so happens that you are slow at work for certain clients than others, see Strategy 1 further below.)
Optimize vendors/staff: Ideally, you want vendors or staff who complement your strengths. So they should be good at things that are not your strengths. This does not mean their biggest strength should be that activity. It may so happen that even their strongest skill may be in the same activity as you, because certain tasks tend to be more appealing to all. However, they should be good enough at the task you have selected for them. So more work is completed in the hours paid. Over time, you wish to select (and change) your team to maximize the work done per unit cost incurred. That is what increases your firm's efficiency. Some team members may not be changed (e.g. family members working together) and in this case you should divide your tasks to maximize the time spent playing to each of your strengths.

Strategy #2: Do Not Let Clients Slow You Down

Clients do not know your workflow. They may either have their own guess about how the service will be performed or may be basing their expectation on the previous firm they worked with. The client may proceed according to their preconceived process in an honest effort to avoid asking "unnecessary" questions that will waste your time. Having worked with just one accountant before you, they may genuinely not have imagined that your process might differ.

If you change your workflow for each client, it slows you down, creates chaos with how different tasks are performed, and increases the overhead for adding each new client.

Have a common well-defined process that you follow for every client of a given service type. For instance, all payroll clients follow the same process. Give an outline of this process in writing to your client immediately after they have engaged your service. For instance, after the initial engagement meeting, you may prefer to first get their paperwork and meet only after you have reviewed it. The client might think they need to meet you with the paperwork to explain what they have going on. Having a written process saves time for both you and your client. It is much better than wasting time on a meeting that you did not need. And less awkward than having to call the client in again because the earlier meeting was too soon for you to have asked the right questions (and might leave the client thinking 'what, you have not even started on my work yet!').

The written process also shows that your firm is mature and sophisticated. Having a written process suggests that you serve many clients, deliver a consistent quality of service, and are less likely to make errors or omissions. It also demonstrates to them that they are not being treated any different because they think they are a smaller business than your other clients.

The written process also lets you and your staff proceed with greater speed and fewer errors. One thing you will note when managing your staff and vendors is that they will not tend to negotiate short-cuts on the work when it is specified in writing. When stated verbally, many occasions arise where they think this task or that is not applicable for a particular client or seemed appropriate to skip for another client. Such deviations increase your management overhead and reduce efficiency.

As you continue to streamline your workflow and optimize your process, your and your team's efficiency will increase. In the consulting industry, such efficient processes are referred to as runbooks, and having the right runbooks is what differentiates the highly profitable firms from the rest.

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Strategy #1: Serve the Most Efficient Clients

It is common for a solo accountant or a small firm to accept every client that happens to request your service. After all, each new client brings in additional revenue and may even bring in word of mouth referrals. But serving too many different types of clients is not efficient.

Specialization: The most efficient client mix depends on your skills, your team, and the market situation. The trick is in determining the correct level of specialization. If you specialize too narrowly, there may not be a sufficient market for you to serve. Too broad, and you cannot be efficient.

The optimum level of specialization is often impractical to determine. A more realistic strategy is to continue to shift your client mix towards services that you can deliver most efficiently. Your client mix should allow you to follow a very small number of common processes.

In the short term every client refused will seem like a revenue loss and hence it is important to specialize at the pace you feel comfortable. First recognize the specialized space internally and review your client mix to verify these are the clients you are able to serve most efficiently. That is, your time and money costs are the lowest per unit revenue for this category. Then change your external messaging, on your website, office displays, and any advertisements to reflect that change. For instance, one may specialize gradually from "accounting and tax services" to "business accounting services" to "small business accounting" to "construction business accounting services." You may use fewer or more steps depending on where you start and your market.

Client Demands: Some clients are just more demanding. They seem to act as if by retaining your service they own you. In other cases, they may just be so incompetent or disorganized that they fail to provide you the information you need from them in a timely manner. But they will blame you for missing any deadline or incurring penalties. In rare cases, their business needs may be so complex that you simply cannot serve them efficiently.

Serving such clients will not allow you to be efficient in terms of time and money. Instead, it will likely drain your overall energy, resulting in stress and dissatisfaction. It is best to stop serving such clients. Politely but firmly, you have to sever the relationship.

Value Added Services: Value added services, sometimes called specialized services, are usually high-margin services that capture more revenue per unit time spent than the highly commoditized bread and butter services. As electronic accounting and tax filing tools improve and as the newer generations are increasingly more inclined to use apps and computers for everything they do, the revenues and margins for the commodity services are not likely to improve. That's why adding value added services becomes important. The more services a client is purchasing from you, the more satisfied they are likely to be, increasing both your client retention and word of mouth referral rate.

Which value added services you offer depends not only on your client mix and your market but also your willingness to take on new risks. The trick is to selectively offer the services that are efficient for you - that is, services you can provide at a competitive price while spending less time and money than your competitors.

For Businesses: Business loans are much more complex than residential mortgages and most business owners can benefit from an accounting professional's service in preparing a comprehensive loan application. Developing some familiarity with the requirements of your local banks or the Small Business Administration (SBA) backed loans can allow you to craft a loan preparation service for your client mix. Other value added services that you may promote include business valuations, cash flow management, detailed financial reporting for strategic optimizations, new business planning and incorporation, or part-time CFO services.

For Individuals (including business owners): Financial services such as retirement planning are gaining increased interest among accountants because tax filing data can allow you to offer immediate insights into how your client can reduce taxes and save for retirement at the same time. Many financial institutions offer commission sharing to independent accounting professionals who bring in their client's retirement savings to the respective financial institution. Since they charge a commission based on the value of assets held, the opportunity can be very lucrative. Alternatively, financial services can also be offered independently of such affiliations allowing you to provide unbiased advice for a fixed fee. You may also be able to offer personal finance, budgeting, and debt planning advice, though revenue margins can vary widely depending on your market.

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Next Step

Making $500,000 in income as a solo accountant is an achievable goal if you can optimize your firm's operations to be extremely efficient. The reason why senior partners at the large accounting firms are able to make that much in income is because the large firms do have that much margin to pay out as income after their expenses. However, working your way up the corporate ladder to become senior partner at a large public accounting firm takes multiple decades. Making your firm efficient in the manner that appeals most to you can let you reach your income goal much faster.

Homework questions

Question 1. John makes $500k in income and regularly contributes to his self-employed 401(k).

Question: What is the maximum pre-tax amount he can contribute for himself?
Assumption: Assume that the elective deferral limit for this year is 18,000. You need to determine the maximum profit sharing contribution.
Hint: See this link from Intuit and check the first answer to read how TurboTax calculates the maximum allowed contribution for Solo 401(k).

Question 2: Next, John wants to retire in 25 years, with a passive income of $100,000 in addition to any social security benefits available at that time. However, John has decided that he will work hard and save a lot for the next 5 years. After that, for 20 years he will live it up spending his entire income. So, he wishes to save enough for his retirement in the next 5 years, such that after the next 20 years, the amount will be sufficient to yield a passive income of $100,000 a year, before taxes.

Question: How much does John need to save in the next 5 years, so that he need not save anything for the subsequent 20 years?
Assumptions: Assume that he will invest in growth-focused investments before retirement, expecting an 8% annual return (compounded once a year). After retirement he will switch to lower risk income-focused investments expecting an annual return of 4% on the amount accumulated by the time of his retirement. Also assume that his entire savings are in a tax-deferred retirement account and no taxes are due until he begins withdrawals. Ignore inflation.
Hint: At 4%, to make $100k, he needs $2.5 million to be accumulated in his retirement account when he retires.

Bonus question 2a: If John wishes to spread his savings over 25 years (savings each year earning 8% until retirement), how much does he need to save every year to still meet his goal of $100k/year in passive income?

Bonus question 2b: Assume inflation is 1.5%. John wishes to retire at $100k/year in today's money (adjust to higher amount after 25 years). Adjusting for inflation, calculate how much he needs to accumulate over the next 25 years and how much should he save each year to meet that goal?

Post your answers in the comments below.