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SIC: 8721 NAICS: 541211 - · PDF fileIndustry Forecast and Structure Industry Forecast Sales...

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  • CPA PracticesNAICS: 541211

    SIC: 8721

    prepared July 10th, 2018

  • Table of ContentsIndustry Forecast and Structure 3

    How Firms Operate 5

    Working Capital 6

    Capital Financing 8

    Bank Product Usage 9

    Risks to Watch Out For 11

    Industry Trends 13

    Quarterly Insight 16

    Web Links 22

    Business Valuation 23

    Just the Numbers 25

    2017 Vertical IQ, Inc. or its licensors, all rights reserved.

  • Industry Forecast and Structure

    Industry Forecast

    Sales for the US CPA practices industry are forecast to grow at a 4.68% compounded annual rate from2016 to 2022, faster than the growth of the overall economy.

    Vertical IQ forecasts are based on the Inforum inter-industry economic model of the US economy.Inforum forecasts were prepared by the Interindustry Economic Research Fund, Inc.

    Last Update: January 2018

    CPA Practices Industry Growth

    Industry Size and Structure

    The average CPA practice has just under $2 million in annual revenue and 9 employees.

    Any accountant filing a report with the SEC is required to be a Certified Public Accountant (CPA).There are about 53,300 CPA firms in the US operating about 56,500 locations and generating about$97 billion in annual revenue.About 88% of firms have less than 10 employees.About 40% of firms are single CPA practices with no employees.CPAs are licensed by their State Board of Accountancy. All States require passage of the UniformCPA Examination prepared by the American Institute of Certified Public Accountants (AICPA) forlicensing. Less than half of candidates pass all four parts of the exam on their first try.Nearly all States require CPAs to complete a specific number of continuing education hours beforetheir license can be renewed.

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 3

  • The business structure of CPA practices is 12% corporations, 55% S-corporations, 17% individualproprietorships, and 15% partnerships.26% of CPA practices are female-owned and 12% are minority-owned.

    CPAPractices

    53,300 practices

    SUPPLIERS

    Office Supplies

    IRS Regulations

    FASB Standards

    Information Technology

    NEWENTRANTSAccounting Graduates

    Foreign Outsourcing Firms

    SUBSTITUTESTax Preparation Software

    Accounting Software

    BUYERS

    Public Firms

    Private Firms

    Non-profit Organizations

    Individuals

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 4

  • How Firms OperateKEY CPA PRACTICE METRICS: Net Remaining Per Owner: $248,000 Net Client Fees/FTE Professional: $182,000 Utilization Rate: 70% Realization Rate: 86%

    Best Practices

    Developing expertise in specific vertical markets or services.Training all staff members that marketing is part of their job and making them aware of the firmsservices and types of clients.Expanding value-added consulting services as a trusted advisor to clients.Investing in continuing education to keep staff up-to-speed on changes in regulations.Using information technology to increase staff productivity and client collaboration.Taking advantage of cloud computing to save money and eliminate management of servers.Using part-time staff to manage seasonal demand.Reducing work-in process (WIP) through more frequent billing.Accepting credit cards from individuals and small businesses to reduce collection issues.

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 5

  • Working CapitalSell and invoice

    New engagements are sold by partners or designated "rainmakers" within the practice. Firms relyheavily on existing clients for referrals and banks for new business. Likewise, CPA practices are anexcellent source of referrals for bankers. On average, firms only spend about 1% of net client fees(revenue) on marketing activities. For auditing or accounting work, firms typically prepare a formalproposal to bid on the project.

    CPA firms often have high work-in-process (WIP) - hours worked for a client that are not yet invoiced.Small jobs, such as tax returns, are billed upon completion. Progress payments may be invoiced forlarger jobs. These are tied to specific milestones or percentages of the total estimated hours for thejob. An upfront retainer fee may be requested for certain jobs or clients, particularly if the firm has tohire or contract out for special expertise.

    Collect

    CPA firms have very little bad debt, but may be forced to lower their billing rates to facilitate clientpayment. Collection periods average 13 to 28 days, though a significant amount of receivables canextend over 90 days. When write-offs occur, they are often caused by clients going out of business.

    Manage Cash

    CPA practices face seasonal demand for tax services, which accounts for about a third of revenues andpeaks in February, March and April. They build cash reserves during this time. Firms may rely on linesof credit to meet expenses during slow months, such as January and the summer months.

    Pay

    The main expenses for CPA practices are payroll and occupancy costs. Salaries for employees average26-28% of revenue. Rent is typically about 4-5% of revenue. Other expenses include computer andphone systems, reference materials on tax laws and accounting standards, and insurance.

    Report

    CPA firms typically monitor hours and fees charged to clients on a weekly, or even daily, basis. Practicemanagement systems collect staff hours worked by client project and use standard billing rates tocalculate fees. Besides client fees versus plan, firms also track the utilization rates of employees,realization rate, client retention rate, work in progress, accounts receivable, and the staff-to-partnerratio.

    Cash Management Challenges

    Revenue Seasonality

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 6

  • Demand for CPA services is seasonal, with peaks tied to tax deadlines and year-end reporting. CPAfirms require additional staffing and work long hours during busy seasons, but face cash shortfalls tomeet monthly expenses during slow periods. Firms rely on cash reserves or lines of credit to coverexpenses during these slow months.

    Timely Billing

    CPA practices typically rely on partners to determine when to bill clients for work performed. Whenpartners are busy, billing can be delayed and work-in-process levels grow. To ensure timely billing,many firms are tracking WIP daily and implementing more frequent billing policies. Some have movedbilling responsibility to the firms financial manager.

    Billing Disputes

    Clients may balk at the amount of fees charged for a project, particularly during a weak economy.Disputes over the hours charged for work delays collection and often results in discounted charges.Doing a better job up-front setting client expectations about fees can help avoid billing disputes.

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 7

  • Capital FinancingCPA practices do not have special equipment needs capital spending is for information technology,phone systems, and office furnishings. Firms invest in information technology to increase staffproductivity and to improve the consistency and accuracy of the firms work. Some firms may also owntheir office space typically, these are smaller practices that do not have plans to grow their staff.

    CPA firms typically spend about 2% of net client fees on computers and information technology. Staffmembers use computers every day to do their work and most have multiple computer screens on theirdesk top. The use of digital documents is making it easier to share information across staff and withclients. Mobile computing increases the productivity of staff working at client sites. Given the sensitivenature of client data, firms are also investing in security solutions and data backup and recovery.

    Except for purchase of their office space, CPA practices rarely use loans for capital purchases. They fundpurchases of computers, phone systems, and office furnishings through retained cash or a line ofcredit.

    Examples of Equipment Purchases

    Practice Management Software$500 - 2,500 per yearSoftware for managing client engagements, preparing proposals, tracking time, andinvoice and billing.

    2017 Vertical IQ, Inc. or its licensors, all rights reserved. CPA Practices 8

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  • Bank Product UsageThe following table provides the frequency of bank product usage by CPA practices with less than $10million in annual revenue. It is provided by Barlow Research Associates, Inc., the premier marketresearch firm in the financial services industry.

    Top Bank Products Used by CPA Practices

    BANK PRODUCT % OF FIRMS

    Business checking account services 95.0

    Business savings or money market account 63.0

    Overdraft protection for business checking 58.0

    Point-of-sale credit card processing 54.0

    Business credit card issued in your company's name (Visa, MasterCard, Amex, etc.) 49.0

    Automated clearing house services (ACH) 47.0

    Credit lines secured by receivables, inventory, property or other assets 44.0

    Unsecured short-term loans or working capital line of credit (less than one year) 39.0

    Business debit card or business check card 38.0

    Electronic payments initiated through the Internet (Bill Payment) 38.0

    Wire transfer services 36.0

    Term loans or equipment financing (one year +) 36.0

    Money market mutual funds or short-term investments 30.0

    Certificates of deposit 28.0

    Commercial real estate mortgage 27.0

    Co

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