098 4 Billing Traps for Accounting Firms

We just got a once a year annual, like a big roundup of fees, how people set their fees here in the US Some interesting insights coming out of that around tax. We're going to look at some parallels around how you bill for an accounting practice and hopefully a constructive reminder that we all started somewhere. But it doesn't mean it's where you have to live forever. Come on in, let's share some good vibes. Big news. I'm back home right now. I didn't sleep in my own bed for 62 nights, which. Which is a lot. I don't care how you spin it, that's just a whole lot. But you know what's really wild is 12 months ago I was running an accounting practice, like in a physical office. I went into a physical office for like the first 15 years of my career every single day. Now I work in a stinky old cave off my garage with the pitter patter of tiny children's feet above me all day long. And 12 months ago I was in a big old building full of people. And like all of this would have been absolutely unthinkable. The notion that I could like go on a six week trip with the family and do all these things and go to a World cup final and like we are. I don't know, the way that we think about things is so limiting. I heard the quote recently that you're in internal reality lags two years. Wait, no, your. Your internal identity lags two years behind your external reality. Think about that. So our internal identity, how we feel and process things, is perpetually lagging behind reality. And it's why we struggle to know our worth, to see ourselves the way that people externally see ourselves. And my gosh, that is so true. So if you are feeling trapped, man, like it's so easy to lose perspective of just how quickly things can go in a direction that you could never expect, honestly, like in good ways and bad ways. But ultimately the best part of what we do is the fact that we have this agency that most people don't have control to kind of lay out that that lifestyle of your own design to have more control over positioning yourself to benefit from luck, from meeting cool new people, from new opportunities. Put yourself out there and good stuff happens. Okay, so this annual fee study that kind of kicked off my thoughts on this. It's something the natp, national association of Tax Practitioners maybe puts together every year. Lot of crossovers here to accounting practices too. So I've kind of got four interesting takeaways. Things that I think are traps that can be overcome. And I want to draw a parallel there with accounting practices on each of those four things as well. So I'll put a link in the show notes to how to get the full study you need to be an NATP member but four specific takeaways that I had from this kind of roundup of statistics. So in this study, firms reported that 65% of revenue was earned during tax season. Now if you aren't in the US tax season, you could basically say runs from maybe February 1st through April 15th. Maybe you could say it starts earlier. But reality is especially the last five years, you can't really start filing tax returns before February, many of them not even realistically until like mid to late February. But let's call it February 1st to April 15th. I've run the numbers. That's two and a half months. That is barely more than 20% of the year and 65% of revenue for the average firm is earned during that itty bitty window of time. Woo. And I so my practice there was a time when my practice was this way. And it's funny, I do think tax pros oftentimes the counter argument to change, maybe uncomfortable change that gets you away from this is well, I appreciate the flexibility that I then have in summer buddy. There's no version of a business that makes two thirds of its money in two and a half months of the year. That looks flexible to me. And the reality is last five years, I think where we had that flexibility maybe in the past in the summer, most of that stuff has gone away and it has just felt like you're constantly running on this treadmill. It's because at least in the tax base there's, I mean the amount of work that's had to go into doing the same return in my opinion ever since Tikja has gone up. So in our head we have this mental model of how long a thing should take. But for whatever reason, every year there's more stuff that goes into that, more work that goes into it because of new tax rules, because your virtual office is broken, because local and state tax has gotten really, really hairy. The same work takes longer than it ever did before, but we're still trying to maintain like we're still adding new clients, like something ultimately has to give there so some advice on. I mean I don't think that there's any version of a business that is going to be happy and healthy running 65% of their revenue in two and a half months of the year. So My best advice for firms in that position, man, stop taking projects during your busiest season. Consider if there's a way that you can push a lot of that work outside of that season. It's easy to get fixated on the problems that you have today with your current client base. But in my case, oftentimes what I would do is I wouldn't make a change because it was a really hard change to implement with the people that I had. But then when I let new people in, I would make that same mistake every time I brought new people in. You got to remember, for each new person that comes into the door, you are crafting a new should be better reality. It is okay to have a landing page that says, we'd love to learn more about you. Just know that we don't file any returns during tax season. If you're coming in the door, you're going to get extended. That's totally fine. You're making the rules like you're crafting that reality. Think of it as like the hours that you set at a retail store. Like you're the business owner. That's completely up to you. And maybe some people will go away because of it. But if you get to the point, like we've talked about, where you are, the best solution for a very specific type of person ultimately doesn't matter when you file the return like you are the pro there and trusting that work to you. It's up to you at the end of the day. So if you're super stuck on the status quo and the paradigm that you're living in with your current clients, ensure that you're not letting anybody else in through the door into that paradigm. Cause you don't like it, you don't wanna do more of it. That's just making the problem worse. Now, some people online pushed back on this when I've said this before, saying, no, you're just creating this mess of this overcomplication of different expectations and different ways of doing things for different people. I used to think this. I used to think the only way to roll out a change was absolutely blast it across your entire client base. Honestly, I don't think that anymore for a lot of reasons. One, because that is really, really high stakes. Like, that's a really high stakes way to make a change. And if that's a bad change, good luck reeling that back in across the entire client base. Two, as we got more explicit about productization and the service levels and the service offerings that we provided, we got really explicit about here's all the things that we could do. And when we did something different for somebody, it was just a different service level. So we still had very explicitly defined exactly what the expectation for that individual was. And it wasn't the same as what we did for everybody else. But that was still much better to me than like pouring gasoline on, on some of our biggest fires. And to me is the only way to build towards that like hypothetical better practice that you don't yet have. I don't know a way to do that besides a client at a time. And so that's just like, that's how I build firms is incrementally. The reality is when you're running a firm, you can't just totally pull the rug out from under that entire client base without hosing a lot of people. And so the way I prefer to work is today I can see this slightly better version of my firm that charges 40% more for a more specific type of person. And we work this way. I'm gonna start that a client at a time, invest in that. Every one of those clients is gon gonna be 2x as profitable as the clients that I have. So I can start phasing out those other clients. And before long, when I'm up here, I see this other opportunity that is okay, here's another way we can increase pricing 40%. Can it get really hairy if you're doing this too much and you have all this wildly different stuff? Yes. But what's the alternative? Because each new iteration of that practice is a better, more practical, more profitable firm. So I don't wanna sit back and then have these huge decisions I have to roll out across the entire client base. I think that ultimately slows you down and is riskier. We like to talk about operations and workflow, but at the end of the day, the thing that's gonna drive a firm to be profitable and give you control over your time is how you price your work. That is 80% of what matters. So if you're stuck within this kind of cyclical restriction, man, stop like pouring gasoline on the fire by adding more work there. Specifically in the domain of tax prep, I think there's a lot of people that responded to this study probably who are more the retail style tax prep shops where you sit down, you prepare a tax return with somebody, maybe live, and that goes out the door during tax season. And for those types of tax returns, it is harder to build the case that people should be extending that they should be doing tax planning at year end and all that. And so in some ways, as long as you're in sort of that retail environment doing simple tax returns, it is hard to get out of that trap of just doing all the returns during tax season. But, but this is a great reason to move up market into the people who will benefit more from tax planning. Just because this is the way that you have always done tax returns in the past does not mean that it's the way that you need to keep doing it. I acquired an 80 year old tax practice. We didn't do any sit down, retail style tax stuff. But that's sure how it started. Like the first half of the time that firm was in existence. That's how it was. That's how most tax pros I know got their start at like a Jackson Hewitt or an H and R Block. Sitting across from somebody preparing tax returns, that's totally fine. Everybody starts somewhere. You just don't want to be beholden to that forever. It's much easier to build a profitable, sustainable practice around work that you can do year round. And once tax work gets beyond a certain threshold of complexity, it's absolutely justifiable to say you need year round tax planning. And all of that takes all the pressure off of when the tax is filed, the tax return is filed, and instead changes the conversation to how much needs to be paid and when. And the filing of the tax return is really just an administrative afterthought. When it's filed, that is. This episode is sponsored in part by the fine folks at Cloud Accountant Staffing. Do you hire accountants? Bless your little heart. 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I had staff in the Philippines like totally red pilled me to like oh geez. Like we need to globalize the way that we get our work done. Check these folks out. Link in the show description cloudaccountstaffing.com this episode is sponsored in part by Copilot Gang. I like tech as much as the next guy. I like finding new apps, plugging new stuff into my stack. But you know what I won't stand for is a scattered client experience. Imagine this dream world where a client can log into one thing and get access to all the things. Easier said than done right now, right? Cause you got all these different tools with magic links and login to this, login to that. To get like all of that stuff out of a single portal is really hard right now. Oh that was until Copilot. Mm. It is an all in one portal platform. It's not like a here's how to do all your workflow sort of thing. It is a here's a super powerful platform because you know who knows best how to put that together? You. You know what your clients need and you can even customize it down to the client, down to the client group. Got a bunch of great built in functions but you can also embed a of bunch other apps straight there into it. So you have one seamless experience without any seams. Popular apps people are embedding in there calendly. Ever heard of it? Jotform, Airtable, Google Sheets, Power bi, ClickUp, Google Data Studio, Typeform, Excel. You can embed all that stuff straight into their portal. No more hopping around all those different places. To learn more about this one, check out the link in the show notes or head over to copilot.com okay parallels to accounting practices I think most accounting practices struggle with managing the front half of each month because it's really hard not to try to over deliver on timeline expectancy on when you're gonna get that month end close because you can totally get it done by the third, right? Like there's not that much stuff to do. Like you knew if you sit down at the desk and you were the one to close that month you could get it done in 48 hours no problem. But problem is you can't build an entire business around getting it done by the third of the month for everybody. So if everybody expects to get their financial statements by the 10th of the month, that first 10 days are super super hairy and then you got nothing to do the latter half of the month. So I mentioned this in this last Sunday's video on the main channel, but for accounting practices you either need to extend the expected time frame that it's going to take to deliver those month end financials. So bench QuickBooks Live Bookkeeping, for example. The expectation there is like 20 to 25 business days after the month end close. Like they're not turning that stuff around within 10 days. You either need to extend that or you need to build something onto the latter half of the month that is profitable. So if you're gonna get everything out by the 15th of the month, great. But you need to also be selling something more than bookkeeping that you can put on the latter half of the month to keep your team busy that clients will happily pay for. And there's absolutely ways to do that. We did a lot of stuff besides bookkeeping. I think bookkeeping of all the things an accountant can do for a small business or a bookkeeper can do for a small business. Interesting. I learned in Australia there's a big divide in what people call themselves accountants versus bookkeepers. But if you're running an accounting practice, there's a ton of things that you can do to help people beyond bookkeeping. And I think bookkeeping of all those things is the most commoditized of all the services. So we leaned really hard into selling additional support that was not bookkeeping related but specific to what those clients needed. That helped us kind of shift work around the month so that it wasn't all about just the month end close. There's also some people that swear by the weekly bookkeeping cadence. Now there's other people who absolutely don't. In fact, most of the big productized groups do not. They just touch stuff on a monthly basis. But I would argue that this is because they have a much slower delivery cycle. If you're going to plan on delivering by the 20th or 25th of the month, then yeah, maybe there isn't an upside to that weekly bookkeeping cadence because you've got 25 days to get everybody's monthlies done. So you're just hopping into that file once, hopefully. But if you are built around a quicker delivery cadence, it may make sense to look at a weekly bookkeeping sort of maintenance schedule so that when you get to the end of the month, you've already asked a lot of the questions that you may need answers to and you only have a little bit more work to do to close that month. Another thing we did here was we didn't have. We didn't end up having everybody on the same cadence. So we had people with different kind of planned target dates for when we would get that month end close out. And we tried to sort of load balance that way. I do think like the, the projects that we delivered later in the month ended up being cheaper projects and I wasn't super jazzed about them. So I think what we probably would have moved toward more down the road was more people that we are maintaining on a weekly basis. Internally, we may not even have that expectation with the client, but for our own purposes internally we would maintain that stuff weekly so that when the month ticks over, there wasn't an entire month's work to do with all of our clients. For accounting practices, it's really hard for January not to be brutal. Plan accordingly. I don't know that the normal delivery time is always realistic at year end because you're also doing stuff, at least in the US like 1099s obviously front load, all that work there that you can, like getting W9s before year end and all that. But in our case we usually, we, we didn't uphold the same delivery timeline expectation in January just because there's additional sort of year end due diligence to do. It's one of those things where people only expect it a certain way until you tell them like, nope, like this is just, this is our cadence, this is what to expect. And because we're thinking so much about what the system and the process is, oftentimes we don't communicate it to clients at all. Or we under communicate it, that sort of thing. Like you have to tell them several times over, when should I be expecting to get this? In January and that In February. It's a good habit to get into over communicating that stuff so your clients know what's coming. Oftentimes I would get frustrated that their expectation wouldn't be my expectation. But it usually boiled down to the fact that like we just weren't communicating it or it was buried in something that like maybe they didn't read the whole thing. Okay. Second interesting takeaway from this study. 49% of PROs increase fees once per year, 28% every two years. Which begs the question, what do the rest do? The fact that only a quarter only update it every two years. It's interesting when you talk about how people increase fees. You'll see a lot of people say, yep, every year we do a bump for inflation or something like that. And honestly there's a lot of firms that as the study showed, like don't even increase fees every single year. And I think unless we proactively communicate how that happens with clients and when they should expect it that in our heads it's always framed as a surprise. So maybe we like that's. And that may make us shy away from doing it even more. But unless we are explicit about here's when it happens and when to expect that conversation, then it will always be like this unpleasant surprise to the client. So best thing you can do, in my opinion, when that client comes in, you, you communicate what the annual cadence of that engagement looks like and the fact that there is a annual re engagement where you will each make the decision of whether you want to continue working together. When we talked about the main channel video, where we talked about increasing fees on clients when I was firing clients and how to make that not a personal thing, I really pushed that. You just tell people every single year we review our client list and we reengage the folks that we decide to move forward with. And so your client knows that that's going to happen every single year. And if you're going to part ways with them, like, don't make it personal. Like it is a matter of like, we can only help so many people. It's impacted by a lot of things like regulatory changes that make stuff more work, our ability to staff that work. And there may come a time in the future where we, like, we can't help you, but we're going to let you know about that proactively so you got plenty of time to find help and that sort of thing. Similarly, if you're building that fee discussion into an annual cadence, it's not a surprise for them. It's actually a very important to do that has to happen every single year so they know that conversation's coming. It's not going to be an unpleasant surprise. The other thing that we struggle with, and this especially comes up in accounting practices, is adequately documenting like increases in scope and why that stuff is more work than it was before. In our accounting practice when we would do renewals, we had this sort of like rolling perm file document that was all of the incremental additional work that we did for the client over the year. And oftentimes it would be a whole bunch of little things that would build up. But your client, I can guarantee, has absolutely forgotten what you were doing for them 12 months ago and how it's different. What you want to have particularly relevant in accounting renewals is when you get to the end of the year, whenever you do it, and you put together that proposal for them to renew for the next year, you want to have an abundance of documentation around here's our responsibilities and how they have changed. I've had a lot of conversations with clients where they're like, holy crap, why did our fees double? But then we have this kind of one pager document of like, here's the work that we're doing for you. And framed that way, they're like, okay, yeah, I can understand that. Like, our company's actually grown by 50%. Like, our headcount has grown by 50%. You're doing such a great job on XYZ that we pulled you in on this additional work. But when somebody just sits down in a moment, they're not gonna remember all of those things. It also gave us more confidence when it came to repricing. Cause just like the client's not gonna remember that, we're not gonna remember that either. And so oftentimes we would then like undersell ourselves when we would renew. So it was helpful for us to not miss any of those things and to genuinely build a more like, holistic picture of the things that we're doing for that client and what's changed year over year. Now. I never try to split hairs with clients on this stuff. I try to actually build in a bunch of buffers so we don't have to do all these little micro adjustments. And I don't do menu based pricing. I don't do anything like that as much as I can. I try to price the value of the relationship. But if I'm going to come in and say Your fees are 50% higher this year, like, I'm going to give them a bunch of reasons why. And what that should hopefully be is a list of things that were painful for that client that they're no longer having to manage. And this is a reminder for them that without us, like, you got to figure all of this stuff out on your own. Hey. Today's episode is sponsored in part by Financial Sense and I am very excited to share. Financial Sense is putting on a a virtual conference called WorkflowCon and yours truly will be there talking about how to use AI for workflow stuff. Conferences happen in late October. Got actually a pretty like rock star cast of speakers. Don Brolin, Ryan Lazanis, Kelly Parks. Now, Carter Gray, Veronica Wasek, Allison Baltrell Turner, Nicole Davis. Whole bunch of super smart people use the link in the show notes to sign up for free. Yep, I said it for free. They've got all the sessions organized into tracks, so you can pick something that makes the most sense for you. You know how I feel about conferences. It is the best way to get out of your kind of group, think tunnel vision that we all have within our firms. Come check this one out. Hit the link in the show notes for more information. Hey. This episode sponsored in part by firm360 I know you were just about to ask firm360 practice management system that gives you a 360 degree of your firm. All that stuff all in one tool. And if you listen to me talk software much, you know that I'm an advocate of asking my peers, hey, what are you using? What is working and not working. And you know what? There is a whole bunch of reviews online for Firm360 and I'm not talking about the stuff on the Firm360 website. When you know, you know they just cherry pick the winners. I'm skulking Capterra right now. Come on in. Whole lot of happy people hanging out there leaving reviews for firm360 so I know I can trust them. Let's talk about Tempe B Certified Public accountant. Got a 1 to 10 employee firm quote. Great solution for small firms. We've been using Firm360 for several months now and with each monthly feature update we are loving it even more. We're a very small firm that needed an affordable yet efficient, effective CRM solution and Firm 360 has filled that need. I've implemented other software programs. This one has been the easiest by far to get up and running. What else do you need to hear? Okay, Tempe. Be more like Tempe. Good for you Tempe. Learn more about firm360 in the link in the show notes. Third, interesting takeaway from that study. For the firms in the study, 70% of their revenue came from tax preparation that is putting together the compliance work, 5% from planning that is proactively looking at that stuff, and 12% from bookkeeping. So big stuff that jumps off the page to me. Here is specifically how this third point ties back to the first point. If 2/3 of your revenue comes in 2 1/2 months of the year, why is 70% of your revenue built around this thing that is seasonal? So only 5% of revenue comes from planning. Planning is something that can be done year round, though I do suspect the reason it's this low in the study is because these are more kind of retail tax shops doing simple returns where it's harder to justify paying more for planning. But only 12% from bookkeeping kind of surprised me. One thing I realized the more I got into firm running is there's a really sneakily Sneakily astronomical price, incremental price to doing more work in your busiest season. And this became especially true as we built our team and folks had less to do during non busy season. And the rate at which we just got stuff done during slower season was just way less because there wasn't the same urgency around everything yet. Like in our head, when we would take on a new client and do that mental math of like how much money that client would make for the firm, we don't really take into account the marginal cost during busy season versus the marginal cost during slow season, which is oftentimes nothing, because you got those people available ready to work for you. So it kind of goes without saying, or it should anyway. It's okay to think outside the box of what a normal accounting firm does for somebody. And the more nuanced and specific you get and the type of people that you help and the problems that you solve for them, the more you will find problems that you solve that have nothing to do with tax. And we get pulled into this stuff all of the time that is like, why is this a thing an accountant would do? These are not traditional accountant y tasks. But we get pulled into them anyways because the people trust us and they know that we will get that stuff done well. It's perfectly okay to lean into that stuff. I'm all about anything that is a specific to them problem that hasn't been commoditized, that I can charge really well for. And that doesn't make my busiest seasons of the year even worse. When I would find those like little nuggets of problems that we could solve for people, I would get so excited for those because it was one of those things where like we were the only one that was going to solve it for that client. Otherwise they would have had to go and get that problem solved somewhere, you know, internally, hire another person to do it or something like that. And it makes us an even better solution for that type of person. I think the value that you can drive with those very, very specific solutions is always way more than the cost to fulfill that stuff. I would look for things kind of on that Venn diagram of what is something that is really painful for my client, either because they don't like it or because it's hard to hire for. And what is the thing for me that I can either automate or, or get my offshore team to do. Like that was the biggest thing I would look for if it was CFO work. Like, honestly, I would shy away from that stuff because I didn't have sustainable ways to staff CFO work if it was like cash reconciliation. From a practice management system for a dental clinic to what came through the bank statement, awesome. Like we can automate a lot of that. We can get the offshore team working on it. We can do that stuff all day long. And it's really, really painful for the business owner. Like those are the, the opportunities I got really excited about and they got us away from the work that was like most time constrained in the accounting practice at the beginning, half of the month and actually solved arguably an even more meaningful problem for the business owner. Fourth and final big takeaway from that study. 37% of firms were billing after the work was complete and like the tax return had already been submitted. I think the reason most people don't bill ahead of time or before they release the return is maybe because they have just never set that expectation with their clients if they bill after the fact to then change it to being upfront or before the return is released. Like it's a more uncomfortable conversation than if you just set that expectation from the day that the client came in. But this is another example where you can absolutely start with your next client. Like don't be trapped to the way things are when it comes to what your process is for the next client that comes in. But I would say around billing, like you're not asking too much, asking somebody to pay you before that work is delivered. In my video this last Sunday, I think the bare minimum here is taking payment info when you re engage so that you can then bill them when the project is complete. And in order to do that you have to give them pricing upfront. So I would say as long as the scope is more or less what it was last year, I'm going to bill you this amount, I'm going to bill you within this range. And then when they agree to that engagement, you have permission to then like pull those, pull those funds when the project is complete. Completely removing like the invoicing function, chasing people for money and most importantly the time that it takes from your most senior people to put together those invoices like that is a massive waste of time. It's like time that you're never going to get back the time that you spend billing people. And I think the hardest thing, because I mean I walked a, you know, 1500 client practice through this transition that had like all the traps, all of all of the things that make this hard for a firm. One of the biggest traps here is like not splitting hairs over write ups and write downs on every single like granular client basis. You got to think about the business as a whole. What's ultimately going to drive how the business as a whole makes money. Like think of those clients on more of a portfolio basis. Are you going to come out just the same on a portfolio basis as if you spend a tremendous amount of time like nitpicking every single invoice? The answer is yes. In fact, you'll probably do better because you'll have a ton more time not having to do all of that work. This one for accounting practices, I think it's much easier solved. You just need to get everybody on monthly auto pays and then be sure that you are revisiting that engagement conversation every single year to like build in any additional work that you've done for them. One bit of nuance there and fixed billings. I know there's still people that shy away from credit cards here. I have heard some real horror stories on chargebacks, particularly when you were doing a big monthly accounting engagement for somebody and the client goes back and like charges back like the last nine months and then you never hear from that person again. It's one of those situations where I don't, I don't want to let like that horror story dictate my process for all of my good clients. You know, like, it kind of sucks the fact that you read a Twitter thread from Brandon hall about how they got hosed on a bunch of chargebacks and that that then is going to like inconvenience every one of your clients who may never do that and you may never experience it. Right. So I try to like, try to be mindful of the fact that there's an a hole out there, not, I don't know, like dictating my process. That being said, where we ended up was we basically had a, a pretty high dollar threshold where anything beyond that we did via ach. But for us that was, I mean that was like only engagements over 10amonth or, or something like that. But the whole problem of, of work being billed and not having invoicing and all of that like an accounting practice, I think that's a little more straightforward when you do kind of one off project work. I also try to build that into the monthly recurring. So we talked a while back about selling like app advisory and doing an annual app review. I would sooner build that into the monthly engagement and what they get billed every single month than some like standalone fee. I think the way that that's perceived, like it just feels more expensive when somebody's gotta cut a check or they've got this sort of once a year project billing. Like I said, I'll put a link to that in the show notes. It'll be relevant to you if you do tax in the us. I suspect the like the people submitting to that though are like pretty small retail focused firms, but we all started somewhere. Just know that you've got the power to change it to get to a better place. Hey, thanks for coming and hanging today. Got any other sage wisdom? Drop it in the comments. I'll see you in the next one.