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Finding the Perfect KPI for Accounting Firms

Let’s talk KPI for accounting firms. Sneak on in here, everybody let’s see if we can get this sucker to go live. So, let me just double check and make sure that this worked. We did it, we made it. I always forget sometimes when I do this live, I use this little software, and I’m looking at it right now.  Some of the comments below what I put here were from my last live, where I talked about inside of $800,000 accounting firms. So, we can go ahead and get some of those deleted after this, but you know, technology on a Friday. I want to shoot you this video because I came up with a really helpful method to look at your firm. It’s kind of interesting because when you look at a tax and accounting firm, they are not completely seasonal generally, but they’re also not completely monthly.

Now there are some exceptions because if you’re doing CFO services, then a lot of times that’s mostly monthly. If you’re doing just tax prep, that’s mostly seasonal. Even if you’re doing CFO services, you tend to get some cleanup work where you have a huge spike in one period, right? When you’re doing tax prep, you have the regular season, the extension season. This year we got our third season. So it’s not a completely clean cut case of how to look at, am I growing? Am I doing well?  It hit me because I was on the phone with one of my clients here, the day he came on, I’m just not hitting my goals. I’m just not hitting my goals. 

And I said, maybe I can hit your goals. You look like you’re a zombie right now. But what is a good KPI for accounting firms? I asked the guy, and I’m going to show you his numbers here in a second. I said, so, “Like where are you?” I ended up going back through every single month that he has been in business and looking at what his cash sales were over those time periods. Now I know some of you guys say “Andrew, I don’t care about the sales. I care about the profits.” I hear you. I care about the profit too, but one thing I have noticed is that it is a lot harder to grow sales than it is a margin. Once you have sales, it’s way harder. So, I always focus on growing top line, knowing that we can rinse clients, get the cost structure in line and so on.

I like to focus on top line revenue, then ask about margin. Very few people do that. I see people focus on profit, profit, profit. It’s like focusing…they have no profit. So, I like to get a lot of sales, then make sure that we can adjust our margins up into those sales. But I ask them to say, “So what are they?” We went back over the last 12 or 18 months and I’ll show you the numbers here in a second, but it was a good lesson because a lot of times you feel down because maybe your sales are down from the last month. So let’s say that you’re looking at the month of June, right? And your sales go down from May or typically for most tax and accounting firms in the month of May your sales go down from April, because April is tax season and so on.

So, you’re going to have some weird periods, this guy felt down because his sales were down. You have to really be careful on how you look at time frames, because I like to look at all time frames, I’m going to show you specifically how to look at it here in a second. You have to look at all time frames, because imagine I sat down with you and I looked at your sales every Friday. Then I looked at your sales every Saturday. On Saturday we sat down and we said, “Oh, our sales are down.” Every Saturday you got depressed. “All my sales are down on Saturday.”

You’d be looking at that time frame. So why do you look at a month? If you look at another month,  you don’t really have a clear reason. What is the reason, or maybe we should look at a week, should we look at a week? The answer is, it’s not necessarily one period or the other. I like to look at all periods. I like to look at what are we doing on daily cash sales? What are we doing on monthly cash sales? What are we doing on a weekly cash sales? What are all these periods?  I want to know what all of them are, but in particular, I’m interested in this one metric…and I’m going to explain it to you right now. Then I’ll share my screen and show you an example of this inside of a firm that went from just getting started to over $60,000 a month in sales by the 18 month period.

The thing that I look for is… are your cash sales higher than last month? Or are they higher than that same month in the previous year? If your cash sales went up from last month,  great. Doing better than I was last month. I’m getting the direction moving in the right way. But let’s say from April to May your cash sales go down and you feel depressed. What if your cash sales are double what you did last May? That’s pretty good. Isn’t it? So the reason why this is so important is because it’s kind of like the news. Have you ever noticed when you watch the news, you watch the news and you’re like, is this bad news or is this good news? You can’t tell sometimes. 

When you look at your business, sometimes you look at your numbers and you look at your performance,  and you don’t know how to feel. You’re like, am I doing good? Am I doing bad? Should I feel good about this? Should I feel bad about this? It has a lot to do with what goal did you set and how are you measuring what it means to be successful? I find this to be one of the most helpful, because if I told you that every year your cash sales were going to go up from one month to the next, or you were going to beat the previous month, you’d be like, that sounds good. Right? I’d like to do that, which I don’t even try for that. What I try for as a goal is to get 8 out of 12.

So, if I can get eight months to be positive versus the previous month or higher than the previous year, then I’m happy with the growth. So, let me actually go ahead and share my screen here. I’m going to go to walk through this and show you a real example. This is my  unusual growth KPI that I find to be helpful. When it comes to numbers,  a lot of accounts don’t understand what’s accurate and what’s helpful are both important. We have some reports in our company where I purposefully make people do the reports wrong so that it drives a different behavior, which ends up being more helpful for the real number.  That’s a whole other topic on that, but I’m going to go through this.

The goal is to grow more than the previous month. That makes sense. Everybody’s on the same board with that. If I could increase my sales in June from May, great. Or if I can have more sales, by the way, this is on a cash basis, more than the same month in the previous year, I’m going to put that into your cash basis.  I think that is really the way that I like to think about “am I successful in the effort of growing my business?” I think this is one of the most helpful metrics I’ve found. The reason for that, and I don’t remember who said this or where I originally heard this, but it’s just so true that the direction of something is more important than where it is. Let’s come back before I share these numbers. I’ll explain this concept to you very  briefly.

Let’s say that you are going out on the dating market.  You’re looking at husbands and you’re like, do I want this husband? Do I want that husband? You see husband number one, husband behind door number one has $10,000 in net worth, but he’s been at $10,000 in net worth for 15 years. Or you could take door number two, where the husband has a negative $100,000 net worth, but it was a negative $300,000 net worth 18 months ago. He’s making $300k a year, which husband do you want to take, you want to take husband number two. Now, you can do the same thing on the wife side, right? You’re a husband, you go to the west side, you look at the wife, “Hey, I got a wife over here.” 

$10,000 net worth for 15 years. Number two over here, negative $100k net worth. But it was negative $300,000 18 months ago. I’d rather take the person who has a smaller, lower net worth, but has stronger direction and stronger potential, right? Over the lifetime, I like to think about human beings like assets with a depreciable life. It always ends, right? Between the time that you meet them and the end, how much cash flow is that human being going to generate? It’s the same thing like a machine or a lot of people will look at a company that way, how much free cash flow is that company going to generate over its life. I think about that with humans. That’s why when I come across somebody, their age is very important to me because we’re going to have a certain number of years and your goals are going to be different given where you’re at at that age.

Given how many years you have left…so now I’m going to show you how this number factors into a specific person. It’s important. Remember the direction of something is more important than where it is. So, let’s go ahead and look at this. This was from an actual client of mine, where we sat down, by the way,  I’m not promising we’ll get this and certainly not promising, you’ll get this. If you watch one of my free Facebook videos here, I think this is illustrated because this is inside the life of a real accounting firm. This individual, I took this guy’s name out of here because it doesn’t really matter, but the numbers are very helpful. He quit his job in September, 2018.  So, he’s making about $6,000 a month at his job.

Then he made $7,500 in August and had $1,800 in September. Then he made $1,600, then $9,000 and then $19,000 in December. You  could see that was his first year and a partial year in 2018.  So, you can see here and his job incoming quit, came down. As soon as he quit his job, bam. Starting to make more in sales. Then that’s his first year.  I don’t remember exactly what I calculated here. I think I calculated the first 12 months versus the last 12 months. I don’t remember. But besides the point you can ignore these numbers at the top. I don’t remember what the calculation is. I have to go back and look at the original spreadsheet, but let’s look at January 2019.  So, good months. But I started looking at the last 12 months.

When I come across somebody, I typically look at their last 12 months and I asked myself,  “So over the last 12 months, how many of these months are sales going up or how many of these months are they higher than the previous year?” So in June, his sales went down from May. So sales went down. You would think that’d be red, but I asked them, what were your sales in June of the previous year? $13,000 was higher than those sales. Then his sales went up to $25k. So obviously that’s a green. Then it went up to $30k, that’s a green and they went down to $27k.  Now the $27k in 2019… let’s go back and look here at 2018. They’re higher. So, you can see here, 2019 is higher than 2018.

I would also give that a green because even though you’re down from August to September, you’re up from the previous year. Then sales go slightly down again. October is higher than the previous October and November is also down but higher than the previous November.  So, even though you have some down months on a monthly basis,  this is an example of when someone would feel really bad. Now we get to December, December also goes down $15,000. Even if you look at the previous December, it’s down from the previous December, that’s not good. That would be a bad month for me. I would say, why did my client have this month? I would be like, “Hey, you know, what’s going on here?” We talked a little bit about that.

Then sales went up, $15k to $27k. That’s good. Then $47k, then $60k.  Here’s the thing. Remember I told you at the beginning of this, he got a little depressed because you went from $60,000 down to $40,000 and down to $34,000?  Here’s the problem. Let’s look at the previous, April, the previous April was $19k to this. April was $40k, previous May was $30k…was $18k to $34k.  We are doubling what he did in the same month and the previous year, but he feels depressed. The problem with that is that when you feel depressed, you don’t do as well. So the reason that I’m bringing this up is because yes, your sales go down at a certain period, but you shouldn’t get down on yourself because you’ve got to look at that secondary metric of am I going down in sales?

Like from this month to last month, yes. Somebody could get really down. You’re like, “Wow. I went down $26,000 in sales”, but there’s a lot of seasonality depending on the type of business that you have. He does not completely do tax preparation, but a lot of tax preparation. So you’ve got to pay attention to this. When he comes home, I feel so bad. I’m not hitting my goals. It’s like, well, what exactly were your goals? These numbers on a year over year basis,  look at March, April, May. That’s almost double what he did in the previous year. In February, same thing. More than double. So when you look at that February to May time period, all those months are averaging more than double the previous year. The reason why I bring that up is I think that this is one of the most helpful metrics.

The goal is to grow more than the previous month or more than the same month in the previous year. This is a great KPI for accounting firms. You could see his numbers. When I studied these numbers across a lot of my clients and ever since I discovered thinking about it this way, I’m going to try to get every single one of my clients to fill this out. Since they started working with us and share the aggregate results transparently. You guys can see it. I think it’d be really helpful.  If a firm comes in and works with Andrew and there are at less than $100,000 in sales, how much do they average gross in the year? If they’re at $500,000 in sales, what are they average gross in the year and so on.

But the key thing here is that what I’ve studied in a lot of these firms is that they had these periods. Nothing goes up in a straight line. Typically what I see is it takes two, three, four, five, six, seven, eight months to come down and then come back up and have a new major peak. If you look here right in December, 2019, if you look $15,000 in sales, that was his worst month going back to June, right? So that was his worst month going back to June, but he was one to three months away from literally a quadruple. So, he went from $15k to $60k and you see that a lot where one of the worst months you have ends up being a period where you rinse out some bad clients, you reorganize your systems, you focus on ramping up for the next period of growth.

Then bam, that gives you sort of a catapult to spring to another level. Honestly, before I started looking at these numbers across a lot of these firms, it is really interesting how many of them have these pullbacks before a strike up, they tend to kind of have something where it’s worse than it’s been for quite a few months, right before they strike back up. I’m still studying that to understand psychologically and in reality, why that’s happening. I’m going to try to do that on a more like mass data pole than just the anecdotes of each individual person. It really is interesting to see that. You can see that here too, right? Agreeing that this wasn’t as big of a move and then he couldn’t break his previous highs. Systematically you couldn’t do it then.

Then he finally spring-boarded up. You can kind of see that here as well. Bam, springboard it up, but could never get above that $30,000 level until he finally had his breakthrough moment, at least for that particular high. And then, what I told him is I said, “Of course, when you look at this, okay, you’re thinking, I’m at this level and we don’t know what’s going to happen next. Right? I mean, this could go here? This could go here. We don’t really know what’s going to happen, and you kind of have to be psychologically prepared for all of these”.  Think about it, in the past, when you look at these numbers, there were periods where all of these things happened.

There were periods where sales went down, and so you don’t really know what’s going to happen. Is he going to have a new peak in the next three months? Is he going to have a new valley before he has a new peak? Is he just going to be flat? You kind of have to look at this and think about what makes sense. One of the other things he asked me about was hiring and I said, “Well, look, here’s the thing. Like, you need to plan to hire. If you come in here and you find a great tax manager, you can’t just snap your fingers and get a great hire.”

If you get to that level, then you might say, “Well, I’m going to hold off.” But if you’re planning on succeeding, you start the hiring process now. Then by the time you find a great person, you’re here, you’re going to be like, “Thank goodness. I started to hire  before.” And you’re going to go ahead and pull the trigger on that person and be able to go to the next level that you wouldn’t be able to get to. But what’s important here is I put 11 out of 12 here because you know, 11 out of his 12 months have been growth months per that definition. If your numbers are not good then you’re going to want to figure out what’s going on.

If they’re just not big enough, the jumps aren’t big enough, you’re having to keep hitting this barrier…then you’ve got to ask yourself why? You’ve got to diagnose that. That’s something that I would love to help you guys do. If any of you guys have any questions, that is actually a new presentation that we put out. I put together a presentation on how we break down tax planning from a marketing sales and delivery process, how the pricing works, how the value proposition works, how you can add that into the business, if you’re currently doing tax preparation, or if you’re not, and you want to go straight into tax planning for doing CFO services. So, if you look at that, he did that on a combination of tax planning services, that growth spurt, tax planning services and some of our COVID related consulting services, some of our relief lending cares act, which is tax planning, and then also forecasting. So yeah, if you guys want to learn more about that and how that works I will have my team edit links on some of these posts. I hope that you guys have an awesome rest of your day and I will talk to you guys soon.

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AccountingTax.com by Andrew Argue is now Corvee