Is Your Accounting Firm Actually Profitable?

Your accounts say you made a profit. So why doesn't it feel like it?

Perhaps there never seems to be enough cash. Perhaps you're working ridiculous hours. Or perhaps the rewards simply don't seem to reflect the effort, expertise and risk involved in running your accounting firm.

There could be a very simple reason. Your profit might not really be profit. Let me explain…

The Profit Figure That Could Be Misleading You

One of the biggest mistakes when measuring accounting firm profitability is forgetting to put a value on the owner's time.

Imagine your firm reports a £100,000 profit. That sounds great. But what if you work full-time in the business doing work that would cost £80,000 a year if you employed somebody else to do it?

Suddenly, that £100,000 looks very different. Your real economic profit is closer to £20,000. That's the number I believe you should pay attention to.

The Owner’s Salary Trap

As an accounting firm owner, you wear several hats. You might be the owner, salesperson, relationship manager and senior technical expert. And those roles have a value.

So ask yourself a simple question:

What would I have to pay someone else to do everything I currently do?

That is your market salary. You can then use a simple calculation:

Net profit – market value of your work = real economic profit

This isn't about changing your statutory accounts. It's about understanding the true economic performance of your business.

A Simple Example That Exposes the Problem

Consider the Infinity Bikes example. The business has annual sales of £250,000 and reports a £40,000 profit. On the face of it, that's profitable. But there’s a twist…

The owner is also a trained mechanic. They do much of the skilled repair work themselves. If they worked elsewhere, they could earn £30,000 doing that job.

So we need to deduct £30,000 from the reported £40,000 profit. That leaves just £10,000 of real economic profit.

In other words, 75% of what appeared to be profit was actually payment for the owner's work. That's a very different picture.

Why This Matters for Accounting Firm Owners

The same thing happens in accounting firms. If you don't allow for the market value of your time, you can convince yourself that the firm is more profitable than it really is. And that creates problems.

You might tolerate poor pricing. You might keep clients who aren't profitable. And you might believe working even harder is the answer.

It also matters when you eventually want the business to operate without you. A buyer wants a business capable of generating profits after paying the people needed to run it. They don't simply want to buy themselves a demanding job.

Would Your Firm Be Profitable Without You?

Here's an exercise you can do today. Work out what it would cost to replace you. Include every significant role you perform. Then deduct that figure from your reported profit. What remains?

If there's still a healthy profit, great. But if most or all of the profit disappears, you have discovered something important about your accounting firm profitability. And knowing that gives you the opportunity to fix it.

The Nine Drivers of Accounting Firm Profitability

So, how do you make an accounting firm more profitable? Start by understanding what drives profit. There are nine important areas to consider:

• Price
• Sales leads
• Conversion rate
• Average spend
• Number of transactions
• Client retention
• Direct costs
• Fixed costs
• Owner's value

Each can affect your financial results. But price deserves particular attention.

Why? Because increasing price can improve profit without requiring you to find more clients or work more hours. That is incredibly powerful.

Why Better Pricing Can Improve Accounting Firm Profitability

Many accountants instinctively respond to disappointing profits by trying to work harder or cut costs. There are limits to both.

Now, here's the key part… Your accounting firm pricing may offer a much bigger opportunity.

Different clients value things differently. So charging everybody the same standard price can mean leaving money on the table. This is where value pricing for accountants becomes so important.

For complex work, consider creating a bespoke price based on the client and the value of solving their problem. You can also give clients three choices. For example, create three packages with increasing levels of service and value. Clients can then choose the option that best suits them.

You can also think carefully about different groups of clients and what they value. Better pricing isn't simply about putting your fees up. It's about understanding value and giving clients choices. And that can have a significant impact on profitability for accountants.

Stop Measuring Paper Profit. Start Measuring Real Profit

Your year-end profit figure tells you something useful. But it doesn't necessarily tell you the whole story.

You need to know whether the business can pay you properly for the work you do and still make a worthwhile profit.

So ask yourself:

If I had to hire someone tomorrow to do my job at a fair market salary, would my firm still be profitable?

Don't ignore the answer. It could be one of the most useful numbers in your business.

Pro Tip

Once a year, estimate the market salary for every role you perform in your firm. Then deduct that amount from your reported profit. Track the resulting real economic profit from year to year.

This gives you a much better measure of whether your firm is genuinely becoming more profitable.

FAQ

What is a good profit margin for an accounting firm?

A percentage on its own doesn't tell the whole story. First make sure you've allowed for the market value of the owner's work. Only then can you make a meaningful assessment of profitability.

Should an accounting firm owner include their salary when calculating profit?

For internal decision-making, you should allow for the market value of the work you perform. This helps reveal the firm's underlying economic profit.

How can I make my accounting firm more profitable?

Look at the drivers of profit rather than simply working longer hours. Pricing, average client spend, retention, conversion rates and costs can all make a difference.

Final Thoughts

A profitable accounting firm should do more than pay you for your time. It should reward you for ownership too. That's why separating your market salary from your real economic profit matters.

Start with the numbers. Work out what your time is really worth. Then look carefully at the nine drivers of profit, particularly your pricing. Because the goal isn't to build an accounting firm that looks profitable on paper. It's to build one that pays you properly and still makes a healthy profit.

If you found this valuable and would like to learn more about value pricing, we offer a free live online training session on a topic you choose every month. You can attend live and ask any questions you have. Click here to register, and we will send you an invitation to the next session.

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Wishing you every success on your pricing journey

The Value Pricing Academy Team