Benchmarking against the best.

Using the best possible industry practices to establish targets or goals is a critical cal component in the success of every business. For CPA firms, one of the most difficult aspects of the process is obtaining information about other firms' results to see how one's own organization compares. To help practitioners, the Texas Society of CPAs sponsors the annual management of accounting practice survey, which is distributed to CPAs across the nation. Survey results are divided into two categories: the top 25% of the respondents (the top competitors), which were identified based on net income per owner (the sum of owner salaries plus the amount available for distribution to owners divided by the number of owners), and the entire group of respondents.

As in previous surveys, national firms were excluded. The results have been broken down by firm size to allow benchmarking among peers. The 2,100 responses fall into four groups: individual practitioners (51%), small multiowner firms with revenues below $350,000 (9%), medium-sized multiowner firms with revenues between $350,000 and 900,000 (20%) and large multiowner firms with revenues above $900,000 (20%). The response rates for each group were large enough to ensure accurate representation of the population.

FINANCIAL DATA

In the firms' balance sheets and revenues, the spread between the results of the top competitors and of the entire group was consistently widest for individually owned firms. In net income per owner, for example, the top competitors among individual owners earned $143,662, which is nearly double the $74,914 average for the entire individual owner group. The other firm sizes had tighter spreads (see exhibit 1 on page 86). Owners' equity follows essentially the same pattern--top competitors among the sole practitioners had owners' equity of $95,41 1-approximately 208% of the overall average of $45,845. In the other three firm size categories, the spreads between these two averages were not as great.

FIRM CHARACTERISTICS

Firm characteristics are shown in exhibit 2 below. In almost every category, the top competitors reported higher averages than the group as a whole. Generally they had more personnel, charged more hours per person, had higher billing fees and better realization. All of these differences function together to produce firms that consistently reported larger profits.

Exhibit 3 on page 87 breaks down the type of personnel employed. More important than the number employed is the number of professional personnel on staff, as these people generate the billings. As would be expected, the most profitable firms had the highest ratio of nonowner professionals/owners. The top competitors among medium-sized and large firms generally had fewer owners to participate in firm profits than the overall reported average, which meant more profitability per owner.

The report shows that increasing the number of professional personnel generally produces a more profitable firm. Small firms are an exception, however, since their personnel levels are virtually identical when comparing the top 25% against all small firms as a whole. This may be due to the growing pains associated with the transition from a sole practice to a small multiowner firm.

SOURCES OF INCOME

Exhibit 4 on page 87 breaks down, by percentage and type of service, the sources of fees collected by the responding firms. Generally, the smaller the firm the larger the percentage of fees generated from tax services. As firms grew, tax became less important and audit services took on greater significance, but tax remained most firms' mainstay.

There were only a few instances in which there were discernable differences in the sources of net fees between the top competitors and the group as a whole. The exceptions occurred in medium-sized and large firms. Review and compilation services were a larger source of fees for the top competitors in medium-sized firms than for the average medium-sized firm. In large firms, the top competitors did less write-up and tax work than the overall group while providing more management consulting services.

MARKETING

Exhibit 5 on page 87 shows respondents' marketing activities. Medium-sized and large firms were more likely to pursue various activities and to have full- or part-time marketing directors than were smaller firms. The most common marketing method for all firm sizes was public speaking, with the top competitors in the smaller firms ahead of the rest in this category.

LEARN FROM THE BEST

The responses seem to indicate that the most profitable 25% of firms have achieved that status in a very straight-forward manner: They apparently were able to charge more hours per person than average. This may be attributable to various factors, such as accurate time records, working (or billing) more hours or allowing fewer write-downs. In addition, the top competitors reported higher net fees realized per total hour. In reality, no single item produces a top competitor. A combination or accumulation of factors makes a firm a top competitor.

Setting goals and benchmarking provide a road to success, but to compete with other firms it is important for practitioners to keep abreast of how other firms are doing. One way to do this is by using resources such as the Texas survey to see how other firms are doing. These are only a few of the survey results; for the full results, contact Dianne Jones of the Texas Society of CPAs, [phone], ext. 219.

RELATED ARTICLE: EXECUTIVE SUMMARY

[] USING THE BEST POSSIBLE INDUSTRY practices to establish targets or goals is a critical component in the success of every business. To help practitioners, the Texas Society of CPAs sponsors the annual management of accounting practice survey, which is distributed to CPAs across the nation.

[] SURVEY RESULTS ARE DIVIDED INTO two categories: the top 25% of the respondents, which were identified based on net income per owner (the sum of owner salaries plus the amount available for distribution to owners divided by the number of owners), and the entire group of respondents.

[] THE RESPONSES FALL INTO FOUR GROUPS: individual practitioners, small multiowner firms with revenues below $350,000, medium-sized multiowner firms with revenues between $350,000 and $900,000 and large multiowner firms with revenues above $900,000.

RELATED ARTICLE: Other Sources of Information

For members in industry, the American Institute of CPAs management accounting executive committee, in a joint venture with the Hackett Group, a Cleveland-based management consulting firm, offers best-practices benchmarking results of the accounting and finance function to the AICPA membership. Companies that are interested in participating should call the AICPA management accounting division at [phone] for a brochure with additional information about the study (see "Accounting Practices Benchmarking Study Spots Mistakes Companies Make," Jofa, Mar. 95. page 24).

In addition, the AICPA Management of an Accounting Practice Handbook (product no. 090407JA), published by the management of an accounting practice committee, contains CPA firm data obtained from surveys conducted at AICPA MAP conferences. For more information, contact Mark Murray at [phone]. To order the handbook, call the AICPA order department at [phone], menu #1.

DANIEL J. FLAHERTY, CPA, PhD, is professor of accounting, School of Business Administration, the University of Texas of the Permian Basin, Odessa. RAYMOND A. ZIMMERMANN, JD, PhD, is assistant professor of accounting, department of accounting, College of Business Administration, the University of Texas at El Paso. MARY ANN MURRAY, PhD, is assistant professor of production operations management, department of management, marketing and logistics, School of Business, John Carroll University, University Heights, Ohio.