How to increase profit for your accounting firm (with these 9 KPIs)

Hey, this is Isaac from Absolute Co. In this video, I'll share the most useful 9 accounting firm KPIs to track to assess your performance. And you might say, wait, Isaac, we are the numbers people. What are you talking about? What do you know? So just for context, we've been helping firms for several years now, and we noticed they're very good at measuring, you guessed it, their financials. Very often they even know what they want to measure, but don't always know or have the capabilities of pulling data from different sources, different tools, and a lot of the things that frankly are still an engineer's job. So we introduced kind of like a KPI tracking service 18 months ago, and we're working alongside firms to determine what to measure, what to track, and what to do about it. So over the last 18 months, I've learned a lot about metrics within an accounting firm context, and I want to share with you what we've learned. Okay. In terms of what specific KPIs to look at. Now, before I tell you what metrics we've chosen, we believe are most important to track. Let me tell you which ones I'm not going to be talking about in this particular video and why. I'm not going to be talking about net profit or margin because to be real, those are part of your financial statements and hopefully it's something that you should be looking at on a regular basis. Shame on you if you're not, but you have the ability and you do it for all your clients. You probably know how to. I'm not going to be talking about Costs. Accountants rarely have a problem keeping costs low. If anything, they overdo it and sometimes, you know, cut costs that they shouldn't cut or don't make some investments that probably would benefit them. So I'm not going to be focusing on those metrics either because it's not something accounting firms struggle with. I'm also not going to be talking about kind of like satisfaction or like happiness because it's a little bit more subjective and although it could definitely be measured through surveys, We do believe that some of these metrics that I'm going to be talking about capture that in some way or another. So what are the metrics? Let's actually explain it with an analogy so you can better, more easily understand where we're coming from. All right, so here's the analogy for you. Let's assume that your business is a bucket, right? And you want to keep that bucket effectively with as much water possible to a reasonable level, right? Now, in order to quote unquote grow your business, you would need To increase the size of the bucket and to increase as well, right? We have a little hose here that's adding water to the bucket, but we also have, unfortunately, a little leak that's dropping water in the bucket as well. Okay? So effectively, we have 3 main functions, 3 main things happening. One, it's the size of the bucket and our ability to fill it with water, because there might be other, you know, rocks here that prevent it from actually being filled with just clean, as clean of a water as possible. We have a flow of water going in and we have a flow of water going out. Okay? So this is what we're calling the delivery, which is the bucket, the retention, which is the leak, and the generation, which is the water coming in. And for each one, we're going to be talking about 3 metrics we believe tracking for each one of those effectively business functions. So let's talk about delivery first, because we've found it's often the one that's hardest to track. And it has a lot more components to it to some degree. All right, so let's talk about the first function, the deliver function. This is the size of the bucket because at some point there's only so much revenue you can handle. And this is a function of measuring how much can you handle and how efficiently can you get at delivering such that hopefully you can increase the size of the bucket. And not necessarily increase your, for example, your headcount. So 3 metrics for you. And before I get into it, I was just gonna say there's alternative path to get here. I wanna explain both the path that requires time tracking data for the firms that have that available, and I'm gonna explain the other path of like the no timesheet kind of like group, right? There's a path for both. For the people that track time, what we believe in measuring is first the capacity hours of the entire firm. Mm-hmm. Including every role, sales, marketing, leadership, administrative roles, product, the production team, the delivery team, whatever you wanna call it. Like, what's that entire pie composed of? How many hours do you have available in your team? Usually this is a function of like, okay, we have 10 people, they work 40 hours a week, we have 400 hours a week to work with. And you can kind of multiply that by 52 to get to a kind of yearly number. We don't wanna get into the granularities of like trying to take out time off or whatever, just like the entire pie. The second metric It's really about knowing, okay, of that percentage of that big pie, what percentage is being invested into clients specifically? And usual benchmarks like 40 to 60%, it's usually a good starting point. Somewhere in that range, most people, most firms will land. And the third piece is, okay, of those hours that we invested in clients, how much revenue did those hours earn us on average? If you Think about it. We're effectively going from hours and connecting that to revenue. Ultimately, the multiplication of capacity hours times the percentage we invest in clients times how much each hour earns us gets us to revenue. Now, if you don't track time and you don't care about getting granular, one of the benefits that if you break this down, then you can kind of look at the percentage of utilization or realization, whatever you want to call it, the percentage you invest in clients, You can break it down by team member, for example. You can look at effective hourly rates by different services, by different clients, and so on. But if you don't have time tracking data and don't care to measure time, there's an alternative path, which is effectively making that connection more direct, connecting their team members, the FTEs, with revenue directly, right? Which is, let's say, each team member have a specific target of managed revenue for the role based on what effectively what you're paying them. More often than not, we want to see a ratio of like 3 to 1 or 4 to 1. So for example, if you have a senior manager or controller, a tax manager that you're paying $150 grand, you probably want 3 to 4 times their salary in the revenue they manage for you to be able to have enough margin to handle everything else, right? And usually we see for other roles will depend on how junior those other roles are, but if it's like bookkeepers or staff accountants that manage revenue target, that revenue quota, if you like, it's closer to $100,000 to $300,000 for those, I guess, more junior or less senior roles. So that's on the delivery function, right? Through increases, people you hire, you can increase your bucket, but also you can increase your bucket by ensuring that you're efficient at anything but Your delivery function. If you're more efficiently at marketing and selling and at some of the administrative work that needs to be done, then you will increase the size of your bucket without adding headcount. And also, how can you be also more efficient at delivering the revenue itself or effectively at the client work piece of it? That could be through pricing, that could be through training, that could be through automation, that could be through process. So the next set of metrics is really about measuring your retention and how long do clients stay, how many clients you're able to keep, and how much they're worth. So 3 metrics here: your number of clients, how long they stay, and their average value. Usually you want to make sure that those 2 are measured in the same period. For example, you might say how many years they stay and how much they're worth per year on average, or you might actually do it by month, right? How much they're worth per month. And how much they stay on average. For very like MRR-based and recurring-based firms, which is a good percentage of them, you could do it like that just based on monthly churn. You could also do it by absolute revenue amounts, right? We have churned this amount of money in the last year, for example. And I should mention that it's a very important measure to track to get a perspective of how much you can afford to pay to get a client, how much you're worth to you over time can be kind of like a combination effectively of multiplying your average lifespan by the average client value that gets you a lifetime value in that way. I prefer this way personally as opposed to by MRR, a month in churn, because this can be measured regardless of whether the nature of the revenue is recurring or non-recurring. The challenge is it takes a history to measure 'cause you need to measure how long They are with you, which for a firm that's just getting started or for a firm that's been in business for 3, 4, 5 years, you might not have that dataset fully built just yet. And this can truly become the bottleneck of firms at certain periods of time. Actually, I was talking to a firm owner. I think they did about $2 million and they have stayed flat at that level for a while. And even though they were selling $500,000, $700,000 of new clients coming in per year, The revenue didn't quite grow. You see a problem there? So effectively, they were either having a retention issue, right? Because either, either it is we have too much leak, which can't outpace the flow of water we have coming in. So either, right, let's try to make that leak less powerful, or let's bring more water in. And that's actually one of the things I would have done in her shoes, right? I would be probably looking at retention rates, average lifespans, average clients value, splitting that up maybe by industry if we serve different industry to make sure we picked what are, or we understand what are our clients with the highest lifetime value and potentially inform that, take that information into our business development, into our marketing, into our sales to niche down certain marketing campaigns. Of course, there's probably work to be done as well on the retention piece of it itself of like improving onboarding, Understanding the reasons why some of these clients are churning and see if there's anything that can be done in that regard. Because maybe you might realize, actually, you know what, we serve startups and they only stay for 2 to 3 years on average because either they go bust and go out of business or they exit and don't need us anymore or they get acquired, whatever. And then you realize, actually, if we serve these smaller businesses or these traditional medical or restaurants or whatever, Might be less client value on a year-to-year or a month-to-month basis, but maybe they'll stay for much longer. And that can help you start to assess how you can better retain clients or see which clients you're actually better retaining already if you have that dataset in your systems. The last piece I want to talk about is the flow to the bucket, right? That's usually the first problem that needs to be solved if you're starting a firm. Like there's just no water in. In the bucket to begin with. And for the purposes of, I guess, measurements, it is, of course, you've probably seen the pattern here. We have usually a volume metric, how many, a percentage or efficiency metric, how much of those follow through the process, and a quality metric of how much revenue or how much money we made from each one of them. So here we have number of opportunities, how many new opportunities, sales qualified opportunities come to your pipeline. How many of those you converting to clients, looking at each individual step, usually like from inquiry to discovery call, from discovery call to proposal, from proposal to onboarding and registration, and how much are those deals worth on average. These, like the other ones, are 3 metrics that from our perspective are foundational because you can potentially create other metrics from them. For example, if I take the number of opportunities and I multiply them by our conversion rate, I'll effectively add in any given period our number of new clients. If I multiply the number of opportunities for the conversion rate and the deal size, I'll get what? The net new revenue. If I take the number of opportunities and multiply them by the average deal size, I'll have the pipeline value. What's the value of the potential revenue of all of those deals in our pipeline at the moment? And if you want to do weighted, Pipeline value. It gets a little bit more complex, and it's usually done like through the probability of each of the stages in the pipeline. But for the purposes of this video, you could say, okay, if we on average close 20 and we have 10, assuming we worked, we sell 2. How much? What's the likelihood? What is the likely revenue that will actually close from our current pipeline? There's other ways to measure it, but that gets you to revenue from a business development. Or a sales standpoint. You might have noticed that actually all of these metrics have, as I mentioned, a volume metric, which is a number, like an absolute value. Like in this case, it's the number of hours. In this case, the number of clients. And let me move this. And in this case, the number of opportunities. You might then have an efficiency. Okay. Of those hours, how many do we invest? Of those clients, how long they stay? Of those opportunities, how much How many we close, and then a quarterly metric of how much money do we make for each client, how much money do we make for each hour, and how much money do we make for each opportunity. You show me these 9 metrics in a little dashboard that we're actually working, working on at the moment. So I'm excited about that. And I can tell you what the firm owner should be working for the most part. If you enjoyed this video, click on that subscribe button in the bottom and check out this other video where I talk about how to onboard clients the right way and efficient. I'll see you on the next one. And until then, stay efficient.