Why Profitability Shouldn't Be Your Goal

Source: CPA Trendlines

The following includes excerpts, reproduced with permission, from an article by Marc Rosenberg.

It has been said that organizations should never have profitability as a goal. Why? Because profitability should be the result of an organization's efforts, not its goal. Profitability is a measure of success in accomplishing core business goals. The Disney Corporation probably says it best in its mission statement, which is short and sweet, but very powerful: “Our mission is to make millions happy.”

The same is true for CPA firm profitability. To be truly profitable, firms need to achieve business goals other than profitability. Then, and only then, will firms be profitable.

Let's clarify what we mean by “profitable.”

At a CPA firm, profits often are measured with an imperfect figure called income per partner. It represents revenues less expenses, excluding any payments to partners. Let's say a firm has five partners and the total income for the five is $2 million, which is distributed to the partners for an average income per partner of $400,000.

Now it becomes important to distinguish between the terms profits and compensation.

To properly measure profits, as opposed to “income,” a portion of the partners' compensation would have to be classified as compensation expense. Since there is no simple way to allocate the $2 million between compensation and profits, most firms don't bother doing so.

For the complete article, read “The Essence of CPA Firm Profitability – What Mickey Mouse can teach accountants about accounting.”

From CPA Trendlines, August 28, 2012, http://cpatrendlines.com.