Using Performance-Based KPIs in Accounting Firms

This article was original published in the December 2016 CPA Journal, The Voice of the Profession, a publication of the New York State Society of CPAs. It has been posted here with permission of the Publisher.

Accountants often become stuck using metrics and key performance indicators (KPI) that do not actually tell them how their business is doing. Most of these old metrics deal with timesheets and billable hours. CPA firms should take up the challenge to move away from management based upon time and instead focus on actual production and income. The following metrics provide a roadmap for doing just that.

Net Income

This metric is of course instantly recognizable to CPAs. It is also the most important metric for any business. If net income is decreasing or absent, the firm has a problem.  Internal accounting systems such as Xero are useful for tracking net income.

Gross Income/Employee

This metric is truly comparable across all areas of the business, as well as between firms. It is the best benchmark out there for CPA firms because it levels the playing field. Setting goals for gross income/employee allows firms to focus on how to raise income while keeping the same amount of employees, which means focusing on opportunity cost when it comes to clients. It emphasizes the need to set prices up front and make sure the client is the right fit for the firm. It also helps identify clients that hinder the firm’s ability to get the best value out of employees.

Gross Income/Client

It’s important for firms to know how much the average client is charged. Breaking this metric up between business and individual clients can provide a good idea of how a firm is charging and what clients need to be charged more. It can also help with adjusting the firm’s pricing structure for new clients and repeating clients. If the average individual client is being charged $1,000, but a particular client is being charged $500, then that price may need to be reconsidered. Many billing systems, such as Freshbooks, can assign each bill to a different type of client and then create a report showing the average price for each type.

Income Generated by Employee

Firms also need to know how much each person in the firm is generating in order to set salary and work assignments. This metric is not perfect, because staff often work in teams, making it hard to assign a certain percentage of revenue to each individual person; however, it can still be used as a general measuring stick of how everyone is doing. If someone in the office is bringing in $400,000 in revenue and another person is bringing in $200,000, that needs to be investigated. It could be that the one bringing in $400,000 is overworked, or that the $200,000 employee is being underbilled. Regardless, the metric makes a good starting point to figure out how to reassign and change clients to equal out the work in the firm. A simple spreadsheet of each client, their billings, and the team member assigned makes keeping track of this metric easy.

Work Turnover

This measures how many days it takes for a job to be completed, from when all information is provided until the client receives the product (e.g., completed tax return). Clients value speed and efficiency; in this author’s opinion, one of the biggest reasons why clients leave CPAs is a lack of responsiveness and tardiness on work. It’s important for a firm to know how quickly jobs can be completed in order to keep clients satisfied. This metric is also useful for evaluating team members. If an employee is working too quickly, then the job might not be getting done correctly, or the employee may be working below his competency level. If work turnover is too long, then the team member might have too much work, not know what they are doing, or be overwhelmed. Systems such as Karbon can track completion time for projects to provide this metric.

Client Responsiveness

Like work turnover, responding quickly to clients is one of a CPA’s most important responsibilities, and often the biggest complaint they hear. This author’s firm sets a goal of responding to all communications from clients within 24 hours. If response time falls short, then management works with the team member to figure out a way to improve. Customer relationship management software provides an effective way to track response time to emails; however, a similar method for tracking phone calls may be more difficult to achieve.

Number of Clients/Employees

This final metric gives a general overview of the workload balance among team members. It ensures that team members have enough to do without being overworked. Every client is different, and some take a lot more resources than others, but this metric gives a good general sense of each team member’s workload. Best of all, it can be tracked in a simple spreadsheet.

Performance-based metrics that focus on a firm’s productivity and value to clients provide benefits far beyond those of the traditional time-based method. Devising a set of metrics like the one listed above should be the top priority for any firm looking to modernize its management practices.

By Jason Ackerman, CPA, CFP®, CGMA