Is Your Profit Metric Hurting You?

Hey 👋 - Brandon here.

Happy Saturday to 1,481 growth-minded accountants.

Here’s one growth tip for you and your firm.

Today’s issue takes less than 7 minutes to read.

Today, I’m going to challenge your views on profitability.

How much profit should an accounting firm make?

30%? 35%? 45%?

We’ve all pondered this and likely researched online and purchased surveys that tell us what the average firm profit is.

When we find a number that feels good to us, we anchor ourselves to it.

But what if that number is hurting you? What if you are benchmarking profitability against firms who look and feel nothing like you? What if you have different goals than the owners of the firms that created the average profitability % you are tracking against?

Anchoring to a high profitability number can result in:

1. You personally making a lot of money but still feeling like you are running a bad business (due to low profitability)

2. You personally making a lot of money but working like a dog to avoid hiring necessary people (to keep payroll low and profit high)

Growth requires investment

One way or the other, you will pay for growth.

You can pay in time, or in money. When I was in my 20s and figuring things out, I paid in time. Today, I realize how much leverage capital grants me and I choose to pay in money.

That means hiring people in advance of the need. Investing in better talent and leadership roles to help run the firm. And paying people to spin up new services and business units rather than doing it myself.

It also means lower profitability, and sometimes that is hard to reconcile.

But when I talk about profitability levels with different firms, inevitably the most profitable firms require significant owner hours on both business building and client deliverables.

10% or 35% doesn’t matter

When it comes to profitability, here’s what matters:

You and everyone in your firm are getting paid well, and what you want to be paid, and you have a bit extra to invest in growth.

If your firm grossed $3M and netted only 20% (before owner pay) but you are a single firm owner… you can comfortably take home $400k while leaving the extra $200k in the business.

If you are happy netting $400k, why are you sad your net profit was only 20%?

What if you netted 20% because you have fully staffed out teams and you didn’t do any client work and played golf 4x per week?

Happy with your $400k now?

Focus less on profitability as a metric and more on what you want to earn and what you envision your day-to-day life looking like.

Does higher profitability command a higher sales price?

This is when profitability matters.

To get the best price for your firm, you need to run at higher net margins. The caveat being that if running at higher net margins requires significant owner hours, that will work against you when determining the purchase price.

What is more valuable:

A firm running at a net 25% with zero owner hours or a firm running at 45% with 1500 owner hours?

While profitability certainly matters when you sell, when are you actually going to sell?

5 years away? 10?

Don’t worry about boosting profitability today for a sale a decade from now. Invest profits back into the business by hiring more staff which will boost client retention and enable you to grow even faster.

Enterprise value > cash flow

If you think about it, once your financial needs are taken care of, do you really need the extra cash flow?

What if you invested the extra cash flow in the business and were able to bring on clients faster and more successfully?

This growth will boost the enterprise value of the firm.

Most of you reading this are tax nerds (said with love) so I don’t think I need to explain the tax benefits of cashing out equity later versus receiving higher cash flow today.

This doesn’t excuse crappy businesses

Lower profitability can be an indicator of the business investing in growth.

Or the business could stink.

In accounting firms, low profitability and low growth is typically an indicator of a pricing problem or capability problem.

Capability usually starts with the leadership team which cascades down and throughout the firm.

The point of this newsletter is not to excuse bad businesses but to instead challenge your thinking when anchoring yourself to a high profitability metric that may hinder growth (or your quality of life).

That's all for this Saturday. See you next week.

Whenever you're ready, here's how I can help you.

→ Work with me 1:1 to grow your firm (now accepting waitlist coaching applications)

See you again next week.

Cheers,

Brandon

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