The 10 biggest mistakes CPA firms make.

THE 10 BIGGEST MISTAKES CPA FIRMS MAKE

Although all poorly managed CPA finns may not be alike, they usually make one of several common practice management errors. Marc L. Rosenberg, CPA, national director of management consulting at Practice Development Institute, 401 North Michigan Avenue, Chicago, 60611, offers a checklist of those to avoid.

Firms that can spot and correct these frequently occurring missteps will be one step ahead of the competition.

1. Partners don't act like owners (equity owners, that is). The biggest problem in CPA firm management is failing to hold partners accountable for their performance. A large part of the problem at most firms is a lack of clear expectations for each partner.

Over a period of many years, a situation evolves in which partners perform at widely varying levels, with no system for addressing the weak producers. A common symptom is partners settling into their own "comfort zones"--doing things they enjoy that aren't necessarily partner-level functions or that don't fit the firm's needs; doing administrative work that should be performed by a firm administrator is a good example. As a result, some partners conduct themselves more like senior employees than firm owners.

Partners must see themselves as business owners--people with no one to rely on for income but themselves. Each partner must approach every day's work with this perspective.

2. Partner compensation systems are not performance-based. Partner compensation is the most sensitive aspect of CPA firm management. Because it is so hard to deal with, many firms develop systems that are largely based on seniority or that pay everyone equally. These systems may enable firms to overcome the sensitivity issue in the short run, but in the long run they fail because they don't create incentives or rewards for partners who excel.

The most effective partner compensation systems are performance-based. They can recognize seniority or allocate some income portion equally, but the largest income segment should be apportioned on the basis of performance if the firm is to get the most out o the partner group.

3. Marketing is neglected. One of my clients once told me that "in the old days, all you needed to be successful was to be a good accountant, have reasonably decent interpersonal skills and hang out your shingle. Business would eventually come your way."

Although our business environment has changed dramatically, the low priority on marketing is built into our personnel systems. As staff members progress, we do very little, if anything, to encourage them to market our services or to help them develop marketing skills. Then we make them partners and expect them to bring in business. Marketing must be a focus of as many people in the firm as possible, as early in their careers as possible.

Not everyone is a rainmaker, but every partner can make a contribution: Some can sell, some can give speeches and some can write articles for newsletters and trade journals. Further, everyone can network, join organizations and support those who enjoy marketing.

4. Partner retreats aren't held. Partners are busy people. The pressure of dealing with clients and internal, day-to-day matters makes it difficult for them to focus on what is best for the firm and where they want it to go. Partner retreats are an excellent way to get away from the office and discuss feelings about the firm and its priorities, outline personal goals and plan firm strategies. Well-managed firms have been doing such things for years and swear by them.

5. The billing philosophy is ineffective. These are some of the worst problems in this area:

* Billing too often is based on quantitative factors (for example, the number of hours worked) when it also should include qualitative factors, such as the value provided to the client.

* Clients are not given detailed engagement terms, including fees, in advance.

* Billing is done when a partner has time--possibly months late if he or she is really pressed.

* Ancillary costs, such as those for clerical work, photocopies and messenger services, aren't billed.

* Clients are "financed" because firms wait to bill them until the end of an engagement rather than bill on a monthly basis as the work progresses.

* Firms don't recognize the single biggest controllable cost to CPA firms is work-in-process write-offs.

If CPAs put as much effort into managing their engagements properly as doing the client work, they will be much more profitable.

6. The firm has poor collections procedures. To solve this problem, firms should

* Have the firm administrator make as many of the collections calls as possible.

* Penalize partners who don't collect their receivables. Compensation usually is one of the best ways to convey the message.

* Establish a credit-hold policy. One of the biggest mistakes CPAs make in this area is continuing to work for clients who haven't paid prior bills.

7. The firm's management strays from the basics. The need to keep up with new technology and competition has helped push many firms away from the basics. But CPAs can't afford to allow these other issues to overshadow the fundamentals needed to operate their businesses effectively. The major concerns are

* Timely, accrual-basis monthly financial statements.

* Budgeting, including analysis of monthly variances.

* Billing, completed on schedule, every month.

* Analysis of key monthly management reports that measure productivity and realization.

* Thorough supervision of engagements as they progress.

8. There's insufficient emphasis on developing the firm's biggest investment: its people. Turnover always has been a part of our business. Although they once considered it a necessary evil, more and more firm partners are realizing that good, productive people are hard to replace. To safeguard their investments in people, firms should

* Assign someone (preferably a partner) to do everything in his or her power to help staff members succeed.

* Offer plenty of feedback. Two of the most common staff complaints are that there is no meaningful, job-by-job feedback on performance and that performance appraisals are not worthwhile. Effective staff appraisal is a critical ingredient of staff productivity and retention.

* Help the staff establish meaningful goals for themselves, and help them achieve them.

9. No partnership or shareholder agreement exists. Incredibly, many CPA firms still do not have partnership agreements. Although these firms claim they don't have time to create them, the real reason is partner anxiety about having to agree on key issues, such as allocation of income, partner withdrawals and retirement and the covenant not to compete.

Yet, with alarming regularity in CPA firms across the country, partners have a falling out with other partners and leave their firms. When there is no agreement, costly disputes arise over the terms of the separation.

Avoiding these issues doesn't make them go away--they just get larger and more difficult than ever. And the longer one waits, the harder it is to reach agreement, particularly in the case of retirement. (For more information on partnership agreements, see "The Importance of Partnership Agreements," page 92.)

10. Owners don't recognize that the firm's number-one client is itself. We have all heard the story of the shoemaker whose children had no shoes. Our clients would be shocked to hear how poorly we manage our own firms.

STEPS TO SUCCESS

Planning the firm's future direction, implementing strategies, motivating others and holding them accountable for their performance, managing the marketing function, recruiting and training quality people--these all are critically important activities that should be given just as high a priority as the firm's clients.

Most well-run firms have a managing partner who functions as a chief executive officer and a firm administrator who is the chief, full-time management employee. Depending on firm size, the managing partner need not devote full time to CEO duties, but he or she must spend the time necessary to ensure the firm is managed properly. All of the firm's partners must recognize their own responsibilities in making the firm a success.

EXECUTIVE SUMMARY

* THERE ARE 10 common practice management mistakes CPA firms make:

1. Partners fail to act like owners.

2. Partner compensation systems are not performance-based.

3. Marketing is neglected.

4. The firm doesn't hold partner retreats.

5. The billing philosophy is ineffective.

6. The firm has poor collections procedures in place.

7. Firm management strays from the basics.

8. Insufficient emphasis is placed on staff development.

9. No partnership agreement exists.

10. Partners don't realize the firm is its most important customer.

* FIRMS MUST IDENTIFY the important management activities that should be given just as high a priority as clients.