Modern accounting firms have access to a bigger market than ever before. Globalization, the growth of technology and the popularity of entrepreneurship have all created a significant number of prospective accounting clients. That number will only get bigger in the coming years.
This growing market also means significant competition. Without a solid plan and a commitment to executing it, your firm may struggle to achieve your desired level of success and growth.
One reliable way to meet your goals is having a strong sense of your numbers—the metrics that track your firm’s overhead, sales and other key parts of your operation. Below are five of the most important numbers to consider, how to measure them, and a few insights into why they’re so important.
Do your clients tend to stay around for a long time? One of the key principles in any kind of business is a simple one: assuming they’re paying the same fee for the same service, it’s much less expensive to keep an existing client than sign a new one.
Client retention rate is a measure of how your firm does when it comes to keeping clients after their initial decision to work with you. To calculate your client retention rate, find out how long each of your previous clients has stayed on, then divide by the number of previous clients.
It’s best to avoid current clients, especially newer ones: a client that’s only been with your firm for a month may end up sticking around for several years but adding them into your retention rate calculation at the current 30-day mark can skew your rate negatively.
Sometimes known as AR, this metric is also a simple one. Accounts receivable is a measurement of your outstanding invoices in total dollars.
While an excessively high AR isn’t always an immediate problem, if it stays that way for too long it can eventually cause cashflow issues. If your AR is larger than you’d like, it’s a sign to re-examine your procedures for collecting on invoices and accepting payments from clients.
Client acquisition cost (CAC) and CAC payback are technically two separate metrics, but they’re so closely related that it’s easy to address them together.
CAC is the average amount you spend to acquire a new client, typically on sales and marketing campaigns and related costs. Some firms choose to invest in client acquisition with referral programs, where they provide a gift or monetary incentive to existing clients who refer them to new business.
CAC payback is a measure of the time it takes for your firm to earn back that acquisition cost. As you would expect, the lower you can get both numbers, the better. It’s especially valuable if your CAC is significantly lower than the fees your client spends with you, which will shorten your CAC payback.
For accounting firms that aren’t one-person shows, bringing on the right people is critical. Whether they’re seasonal contractors or full-time employees that you intend to keep on for a long time, hiring is a critical element of operations that’s worth investing in.
But hiring costs can become problematic when they get too high, especially if that spending isn’t providing you with the right talent for your firm.
To calculate your hiring costs, add up all the money you spend on recruiting, from posting job listings to the time you or your team spend interviewing and onboarding new hires. If this amount is higher than you’d like, it’s a sign that you need to make some changes in the way you identify and hire talent.
Remember that standard benchmarks for hiring costs can vary widely, anywhere from 5% to 30% of an employee’s total compensation. It’s important to have a benchmark in mind for where you think your hiring costs should be, even if it’s just an estimate. If you track this metric closely, over time you’ll gather enough data on your firm’s specific hiring costs to understand where they need to be.
Every accounting firm needs to spend some money on technology, from basic hardware like computers and tablets to more sophisticated software tools that are designed to help with complicated accounting tasks.
You’ll need to spend some money on technology, but we talk to many accounting firms who aren’t sure how much they should be spending. One of the best ways to track technology spending is to compare it to your overall revenue. Again, these numbers can vary widely.
The ratio will typically increase for smaller firms, since they have less revenue. A recent study from Deloitte put the average technology spend as percent of revenue at 5.49% in 2023.
Again, the best way to understand your own firm’s benchmarks is to track this data for the long term and see where it averages out.
If you’re looking to reduce the amount you spend on technology, consider implementing an accounting practice management software platform. This all-in-one technology solution allows you to do things like streamline employee time and billing, create templates for engagement letters, and manage internal projects—all in one conveniently accessible program.
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