Accounting firms of all sizes generally enjoyed a great year in terms of both revenue and profits, at least partially due to the rise in client advisory services and the increased use of value-based versus time-based pricing.
This is according to a survey of 728 accountants and bookkeepers in practice across the US, conducted by accounting solutions provider Xero. The data showed that 75% of firms overall reported greater revenue while 73% overall reported greater net profits compared to the previous year. The most common reasons cited by practitioners was a rising number of clients (58%) and rising number of service offerings (53%). In contrast, just 33% attributed their good fortune to increasing their fees.
A big part of these new clients for new services has to do with more firms offering CAS, including forecasting, budgeting and financial strategy. The report said that CAS is offered at 41% of firms overall. For 19% of these practices, it is a new service that has been added to their offering in the last 12 months, indicating a recent shift. Overall, firms which made this shift report that their clients are more satisfied with their services. The role of CAS is further evidenced by the fact that 73% of firms who did not offer the service reported increased revenue compared to 78% of those who did.
Another factor, though, is a shift away from billable hours and into a more value-based model, whether that means a flat per-service fee or a subscription-like service plan. Just over 60% of practices surveyed reported having at least 25% of their client base on either value-based pricing models. Of those using value based pricing, it is a new initiative for 31% who say their practice has introduced this billing model in the last year; 60% of respondents, though, said they always offered value-based pricing. As for why, most commonly it was because it’s easier for clients to understand, with 43% citing this as a reason. Of note, however, is that 38% said it was more profitable and 37% said it has resulted in more revenue.
Different sizes, different capacities, different services
The survey also examined the types of services offered by U.S. accounting firms. On average, firms offer four different services, and the mixture can vary depending on size. Micro firms, defined as having one to 10 people, were more likely than anyone else to offer services related to recordkeeping (e.g., keeping and matching bank records, managing documents including proof of purchase, payments and invoices) at 64% versus the 49% average. Small firms were most likely to offer internal reporting (e.g., compiling reports, financial and operational information for internal stakeholders such as employees) at 56% versus the 47% average.
Medium firms were most likely to offer management of annual taxes at 55% versus the overall average of 49%, though 57% of micro firms also offer these services. Among large firms, the most likely service offered (like small firms) is internal reporting at 46%, but they are also more likely than any other kind of firm to offer external reporting services (e.g., compiling reports, accounts production and annual accounts for external stakeholders such as investors, board) at 42% versus the average of 39%.
However, which services a firm is more likely to offer does not mean this is where they draw most of their revenue. For micro firms, managing annual taxes made up the biggest proportion of revenues at 30%; for both small firms and large firms, it was billing and payments, which make up 25% of average revenue; and for medium firms, the two biggest revenue sources were invoicing/debt collection and managing sales taxes, both making up about 24%.
It might be noted that while micro, small and midsized firms have large swings in their revenue mix (internal reporting, for instance, made up only 13% of micro firm revenues), large firms tended to have a relatively even mixture of all services, ranging between 21% and 22% in most cases.
CAS, meanwhile, accounted for 21% of average firm revenues; for micro firms it was 16%, for small firms it was 24%, for medium firms it was 23% and for large firms it was 22%. This might be reflective of the fact that 56% of firms overall said they were experiencing challenges in implementing CAS, especially at large firms, where 71% said this.
Despite the call, echoed by many, for firms to wind down compliance-based services, they made up 32% of revenues overall from firms; similarly, while firms have been exhorted to abandon routine bookkeeping tasks in favor of more strategic advisory, bookkeeping services were the biggest chunk of firm revenue overall, 41%.
“It’s been a good year; our data shows growth across the board, with a majority of practices of all sizes reporting increases in revenue, client numbers and profit. Additionally, those practices surveyed who offer CAS or use cloud, were more likely to report these increases,” the report concluded.
Survey was conducted May 15–June 25, 2023.
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