How Do You Measure Profitability?
Source: CPA Trendlines
The following includes excerpts, reproduced with permission, from an article by Marc Rosenberg.
CPA firm profitability. How do we measure it? You would think that the uncontested champions of measuring financial data would have this down to a science. But such is not the case.
The two most common measures are income per partner (IPP) and partner income as a percentage of fees. Income as a percentage of fees tends to range from 30 percent to 35 percent, with the most profitable firms earning more than 40 percent of fees. Since the computation of these two measures depends on the number of partners, and partnership standards vary widely from firm to firm, it can be difficult to compare IPP or income as a percentage of fees from firm to firm.
The best definition of profitability is a blend of the following:
1. The firm's budgeted profits. Some firms actually do for themselves what they do for their clients: They estimate expenses and revenues and the difference between the two is the budgeted profit. Very simple. If the budget calls for the partners to earn $300,000 each and the firm actually earns $400,000 per partner, then it is “profitable.”
2. What the partners want to earn. Everyone has different standards. I know some partners who earn $150,000 a year and don't know what to do with their money. I know others who earn more than $300,000 a year and seem to live paycheck-to-paycheck. To some, quality of life is paramount, and they aren't willing to sacrifice their personal lives to make a few more bucks. To others, making more money is the driving force in their lives. They can never make enough.
This definition may not be as satisfying as some of the more traditional measures. And I certainly am not suggesting that firms ignore the traditional measures used in MAP surveys. But a blend of your budget and how much you want to earn is probably the best measure of firm profitability.
For the complete article, read “Don't Ask a CPA What Profitability Means.”
From CPA Trendlines, September 3, 2012, http://cpatrendlines.com.