Hey 👋 - Brandon here.

Happy Saturday to 1,277 growth-minded accountants.

Today’s issue takes less than 10 minutes to read.

Today, I will tell you how I plan to eliminate busy season next year.

In recent years, I've seen the chatter on reducing hours during tax season dramatically increase. People are coming to the realization that it doesn't make sense to pull 70+ hour weeks for a $65k salary.

Employees are getting burned out and we are scaring people away from the profession.

But tax preparation is a tricky business to manage. Government-imposed deadlines condensing 12 months of work into ~9 months makes managing workflow, client expectations, and capacity exceptionally hard. On top of that, everyone wants to get paid more for working so much (a reasonable expectation).

And it seems like no one has figured out how to deliver a great client experience and cap staff hours at 40/week during tax season.

Which got me thinking...

If I could significantly reduce staff hours during busy season while delivering exceptional client service, our clients AND staff will stick around forever. Our firm would become a magnet for clients and talent.

So in Q4 2022 I went to work planning our 2023 tax season.

We developed a new intake and client delivery process. We improved our pricing methodology to ensure we got paid for the work we were doing. And we changed our workflow to eliminate bottlenecks and keep projects moving through all stages at all times.

And during all this planning, I realized that there was one thing that ultimately mattered most:

We are trying to make too much money on tax preparation services

Most firms target 50-60% gross margins on tax preparation work, which often results in 30-40% net margins. And those firms generally have the following characteristics:

• Employees work 70+ hrs a week

• Clients are unhappy, complain, don't follow process

• Managers don't manage much, they just 2nd level review

• Partners are heavily involved in review and delivery, something even preparing returns

  • Interestingly, partners love to tell you how profitable they are without talking about the replacement cost of their "in the trenches" work 🤡

We ran this model until we got smarter about managing our busy season.

Over the last couple of years, we focused on getting all of our partners our of tax prep, review, and delivery to determine the true cost of running a tax season.

I want my partners working "on" the business.

We implemented a better pricing model, improved our workflow, and integrated more software to help our team execute at a higher margin. We also got serious about theory and practical training by getting NASBA CPE approved and honing our on-the-job coaching.

For 2023's busy season, we reviewed all prior data and set a margin target that would make us some money and result in "overhiring" when compared to a traditional firm.

For 2023, we set a net margin target of 25%

And our labor cost (U.S. staff + offshore employees) is 65% of revenue.

You may be shocked by these numbers. You may also be thinking I have no idea what I'm doing. And I get the sentiment, but I'll explain my reasoning (and why I think 25% net is too high).

This setup resulted in a busy season where our:

• Experienced staff reported it being the best busy season they've ever worked

• Clients wrote us unsolicited emails gushing with positive feedback and an avg NPS of 9.8

• Associates and seniors all worked <40 hours the week before the deadline

• Client issue (and error) rate was <1%

The 25% target allowed us to staff up a bulkier team than we had in years past. And it allowed us to provide exceptional client service this year that far exceeded my expectations.

Unfortunately, our staff in new roles (through promotions or outside hires) worked 70+ hour weeks pretty consistently.

We missed the mark.

This led me to the conclusion that we were 1-2 seniors short this year. Had we hired two additional seniors, we believe our team would have worked a max 50 hours per week this year.

But reduced hours come at a cost.

Specifically, we would have needed to be okay with an 18% net margin.

On reflection, I'm okay with that. In fact, in 2024 we'll likely target 15% net on tax preparation work.

I think that's the magic number to eliminate busy season, deliver a great client experience, and retain staff for years to come.

And I'm not concerned about the profitability.

Here's why:

We added an "ongoing advisory" service that increases margins

This year we did a light push for "ongoing advisory" services which is $3,000 for unlimited email support, two calls, and access to our online tax forum.

This service increased margins for the Tax Compliance business as whole by 8%.

While we staffed our compliance team to deliver 25% net on tax preparation work, we are really getting 33% because that same team is running the ongoing advisory engagements for these clients.

Next year we'll push the ongoing advisory service harder and we think it will add 15% to our net margins for the Tax Compliance business. So the compliance team will ultimately deliver a 30% net margin for the business (15% from tax prep, 15% from advisory).

We are creating flywheel businesses and services

My unpopular opinion is that profit does not matter for tax preparation services nearly as much as revenue.

Tax preparation teams with higher revenue have more clients (generally speaking).

More clients mean more opportunities for flywheel businesses and services. Take CAS services for example: if you can run CAS at 40% net and can sell into a pool of 1,000 tax preparation clients who love the firm, do you really care how much tax preparation makes?

My goal is to accept a low net margin on tax preparation work but build a service that clients and my team absolutely love. They will all be stickier as a result and I will be able to offer clients other, highly profitable, services as we scale.

Why most firms will never eliminate busy season

Most firms can't eliminate busy season because there's absolutely zero chance partners will agree to take a 10-15% margin on the compliance work.

It would require cutting into their $500k partner draws and they simply won't go for it.

Many conversations online are about software, workflow optimization, upskilling people, extending clients, pricing... and all of that is important. But the most important thing impacting busy season is how much money partners want to make from tax prep services.

Smaller, more nimble, firms can force the industry to change.

It requires that you build a business where partners are not involved in prep, review, or delivery. Partners work ON the business at all times. They need to have real business skills to help you create flywheel services and businesses to sell to clients who are buying tax prep from you.

There's a famous quote by Dan Kennedy:

"Ultimately, the business who can spend the most to acquire a client wins."

Imagine trying to compete with a firm that is willing to accept a negative margin on tax preparation work because they know they can enroll those tax prep clients into a variety of other services and businesses they've developed.

That firm will have clients absolutely loving the tax preparation service.

And the staff will be happy as clams because they will feel supported, the team will be well-staffed, and everyone will see the investment you are making into making the business a great place to work.

Something to think about.

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 (one opening per week, 12:30pm EST on Friday)

See you again next week.

Cheers,

Brandon

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