Accounting Office Management & Administration Report

CPA firms are starting to reap the results of growth strategies: More than half (52.3%) of CPA firms are expecting their firms’ gross revenues to rise 1% to 10% this year, and 30.5% believe their firms will grow 11% to 20%. Strategies to achieve this growth run the gamut from higher fees to marketing to existing clients and M&A. Given the current tight staffing situation, uncertainties about the future of the lucrative Sarbanes-Oxley niche, and ever-present questions about the economy, this is good news—but are firms overreaching?

Only time will tell the answer to that question, but the increased emphasis on growth and strategic planning means that firms are far more likely to have a grasp on what they can realistically expect from their firms’ financial performance this year.

Changing expectations. IOMA’s just-completed CPA Firm Strategic Outlook Survey finds that in addition to the above, 7.8% of respondents believe they will see more than a 20% improvement in gross revenues for this year (see Table 1). Information about the survey is in the accompanying sidebar.

Especially compelling in considering the optimism of CPA firms about this year’s revenues is the fact that smaller firms are as likely as large ones to be expecting big leaps in revenues in 2007. For example, among the firms with gross fees of $2 million or less, 55.3% expect to see an improvement in revenues of 1% to 10%; nearly a quarter, or 21.3%, expect to see 11% to 20% growth, and 8.5% anticipate growth greater than 20%. Compare this to the firms with more than $20 million in revenues: Half of them expect a 1% to 10% increase and 25% anticipate 11% to 20% growth—percentages similar to those of the smallest firms. However, a larger proportion—25%—of firms with more than $20 million in earnings does anticipate a leap in revenues exceeding 20% this year.

The smallest firms in terms of number of personnel are also very optimistic about the year ahead: 42.9% of the firms with one to five people expect to see revenue growth in the 11%-to-20% range. They are topped only by firms with 51 to 75 people (44.4%); those with 76 to 100 people (43.8%); and those with more than 100 people (50.0%).

Reasons for growth. Marketing to existing clients is far and away the leading reason for expected improvements in revenues: 77.3% of all respondents gave this reason for projected growth (see Table 2). Other key causes cited were higher fees (62.5%) and expanding the firm’s marketing strategy (58.6%). Mergers are not a major factor for any group—the overall percentage using M&A to grow was just 14.8%—with the exceptions of firms with personnel numbering 51 to 75 (44.4%) and firms with $12 million to $20 million in gross fees (33.3%).

To provide revenue growth in 2007, new practice areas are receiving the greatest emphasis among firms with gross fees of $4 million to $6 million (50%) and in firms with one to five people (35.7%).

From comments about the firms’ financial performance in the most recent fiscal year, the emphasis on planning is clear, as well as are some other reasons for firms’ success—or what is holding them back.

"Strategic planning session annually, focusing on our top three goals, and aligning staff goals with firm goals" are responsible for the success of a local firm with 86 full–time-equivalent workers (FTEs) and fees of $12 million to $20 million, wrote the firm’s chief operating officer.

Marketing plays an important role in growth, commented a partner at a firm with 29 FTEs and fees of $2 million to $4 million. "We are trying to take advantage of the opportunities presented—increased marketing and aggressively pursuing growth."

A number of respondents cited the opportunity to expand into new areas as responsible for their firms’ growth tracks.

For instance, the managing partner of a firm with 68 FTEs in the range of firms grossing $8 million to $12 million wrote: "More work in the SEC arena. Obtaining work from larger companies (both tax and A&A) who have more diverse needs which allows us to sell our expertise."

Tighter financial management was indicated by a number of respondents. A typical comment: "Keeping a close watch on ‘quoted fee’ clients and staying within budget while performing at our high standards," wrote an owner from a regional firm with 43 FTEs and garnering fees of $6 million to $8 million.

A number of respondents mentioned technology’s important role in productivity and profitability enhancements. "Increase in efficiency due to a paperless environment and technological advancements like VPN [virtual private network]" are helping a six-person local firm earning fees of $6 million to $8 million to succeed, according to a partner.

New or expanded services have also helped set the stage for another profitable year, reported several respondents. One reason for new or expanded business has been shifts in the clients being served by firms of various sizes. One firm obtained "new business as result of national firms’ not being competitively priced for closely held businesses," explained the managing partner of a local firm with 91 FTEs and annual gross fees in the range of $8 million to $12 million.

"Strong market dynamics combined with migration upstream," reported a firm administrator for a local firm with 79 FTEs and fees in the range of $12 million to $20 million. "Firms larger than us have abandoned clients in our area of strength from a size and business entity perspective," said a firm leader.

The largest barrier to enhanced growth: lack of staff or of quality staff. As noted by an owner of a regional firm with 84 FTEs and $8 million to $12 million in fees, there is "strong demand for our services. We are limited by not enough or staff trained in specific areas."

Funding new initiatives. Continued growth will be fueled in part by rising revenues, but firms said they do expect to put some profits into further changes.

When asked what percentage of profits the firm will invest in new initiatives this year, 35.4% of respondents said they will invest 2% to 5% of profits (see Table 3). Another 26.8% plan to invest 0% to 2%.

For more information. More highlights from the CPA Firm Strategic Outlook Survey will be published in upcoming issues of AOMAR and in Partner’s Report for CPA Firm Owners. Complete results will be available for purchase in book form this spring.

Table 1. Gross Revenue Projections, for 2007 Fiscal Year
Q: Compared to fiscal 2005 or 2006, you anticipate that your firm’s gross revenues in fiscal 2007 will:
By gross fees
		$2M or	$2M to	$4 to	$6M to	$8M to	$12M to
	Overall	less	$4M	$6M	$8M	$12M	$20M	>$20M
Improve by 1% to10%	52.3%	55.3%	51.5%	50.0%	42.9%	50.0%	55.6%	50.0%
Improve by 11% to 20%	30.5	21.3	30.3	25.0	57.1	50.0	33.3	25.0
Improve by more than 20%	7.8	8.5	6.1	16.7	—	—	11.1	25.0
Remain the same	7.0	10.6	9.1	8.3	—	—	—	—
Decrease by 1% to 10%	2.3	4.3	3.0	—	—	—	—	—
	100.0	—	—	—	—	—	—	—
By number of personnel
	1 to 5	6 to 10	11 to 15	16 to 20	21 to 35	36 to 50	51 to 75	76 to 100	>100
Improve by 1% to10%	35.70%	70.60%	50.00%	58.80%	54.50%	46.20%	44.40%	56.30%	33.30%
Improve by 11% to 20%	42.9	5.9	28.6	17.6	31.8	30.8	44.4	43.8	50.0
Improve by more than 20%	7.1	5.9	7.1	11.8	9.1	7.7	11.1	—	16.7
Remain the same	14.3	11.8	7.1	11.8	4.5	7.7	—	—	—
Decrease by 1% to 10%	—	5.9	7.1	—	—	7.7	—	—	—
(Source of all tables: IOMA)

Table 2. Reasons Cited for Projected Changes in Growth, in 2007
Q: Indicate the three primary factors that will contribute to your projected changes next year*
By gross fees
		$2M or	$2M to	$4 to	$6M to	$8M to	$12M to
	Overall	less	$4M	$6M	$8M	$12M	$20M	>$20M
Merger or acquisition	14.8%	10.6%	18.2%	16.7%	14.3%	12.5%	33.3%	0.0%
New practice areas	18.8	17.0	18.2	50.0	—	6.3	22.2	25.0
Marketing to existing clients	77.3	74.5	78.8	75.0	100.0	87.5	66.7	50.0
Expanded marketing strategy	58.6	40.4	72.7	58.3	85.7	56.3	66.7	100.0
Hiring new practice leaders	13.3	21.3	12.1	—	—	6.3	22.2	—
Raising fees	62.5	68.1	60.6	41.7	85.7	62.5	66.7	25.0
Other**	21.9	27.7	6.1	8.3	14.3	50.0	11.1	50.0
By number of personnel
	1 to 5	6 to 10	11 to 15	16 to 20	21 to 35	36 to 50	51 to 75	76 to 100	>100
Merger or acquisition	7.1%	11.8%	21.4%	11.8%	9.1%	15.4%	44.4%	18.8%	0.0%
New practice areas	35.7	11.8	14.3	5.9	27.3	30.8	11.1	18.8	—
Marketing to existing clients	85.7	70.6	64.3	88.2	77.3	76.9	77.8	81.3	66.7
Expanded marketing strategy	57.1	29.4	42.9	70.6	72.7	69.2	55.6	56.3	83.3
Hiring new practice leaders	—	29.4	21.4	11.8	13.6	7.7	11.1	6.3	16.7
Raising fees	57.1	64.7	71.4	70.6	54.5	53.8	55.6	75.0	50.0
Other**	28.6	35.3	28.6	5.9	—	15.4	11.1	43.8	50.0
*Note: Multiple reasons given by respondents.
*+Other reasons cited: Adding staff or staff resources; attracting new clients; being more focused on core business;
concentrating in niche areas; continued referrals and client growth; developing engagement & other  efficiencies, including technical (paperless software); hiring audit personnel; hiring the right people; networking more aggressively; specializing in litigation and valuation.

Table 3. Percentage of Profits to Be Invested in New Initiatives, in 2007
By gross fees
		$2M or	$2M to	$4 to	$6M to	$8M to	$12M to
	Overall	less	$4M	$6M	$8M	$12M	$20M	>$20M
0% to 2%	26.8%	0.0%	30.3%	29.8%	25.0%	14.3%	40.0%	0.0%
2% to 5%	35.4	66.7	30.3	27.7	50.0	57.1	33.3	25.0
5% to 10%	16.5	22.2	21.2	12.8	16.7	14.3	—	75.0
More than 10%	3.1	—	—	4.3	—	14.3	6.7	—
No new initiatives planned	18.1	11.1	18.2	25.5	8.3	—	20.0	—
By number of personnel
	1 to 5	6 to 10	11 to 15	16 to 20	21 to 35	36 to 50	51 to 75	76 to 100	>100
2% to 5%	35.7	23.5	42.9	23.5	40.9	30.8	50.0	56.3	—
5% to 10%	14.3	17.6	7.1	11.8	18.2	30.8	—	6.3	66.7
More than 10%	—	5.9	7.1	—	—	—	12.5	—	16.7
No new initiatives planned	14.3	29.4	21.4	35.3	4.5	15.4	—	25.0	—