In the first article we looked at the IRIS sponsored benchmarking finding that half of all practising accountants earn notional profits of £78,000 or less a year (in fact, the same study showed that 25% of partners earn less than £52,000).
We also saw that, if we use the definition of profits preferred by economists, venture capitalist and Dragons, and deduct a full open market salary charge for a partner grade employee, then well over half of all practices are making “true” losses.
Most partners do not earn enough
But, even if we don’t go as far as that economist’s distinction between “notional” and “true” profits, there is widespread agreement that a great many partners, probably even the majority, are not earning enough.
Not earning enough to properly recompense them for the hours and effort they put in or the risks they take. Not earning enough to properly reflect their seniority, professional qualifications, skills and knowledge. And, most importantly of all, not earning enough compared to their aspirations.
If you are already 100% happy with what you earn, then you probably don’t need to read on, since this article wasn’t written for you. But if you don’t feel that way, I would like to explain what the evidence suggests is usually the biggest cause of not earning enough, and what you can do about it.
The biggest cause of not earning enough is...
... not charging enough.
It really is that simple. After all, on a job by job and client by client basis, profit is the difference between what you charge and what it costs.
Generally most accountants have got a pretty good handle on their costs, but it’s the pricing side of things that really messes things up for them.
And when they charge higher prices, things get better.
“But surely”, I can hear you thinking, “we can’t charge more than the market price, can we?” The answer to which is a resounding “yes you can”, because of the following incredibly liberating fact...
There is no such thing as “the market price” for accountancy services
There is no such thing as the market price in theory. And the evidence shows that there is also no such thing in reality either. Let me explain.
No such thing in theory
Economists tell us that in a perfect market (ie where there a large number of suppliers selling identical products, with no switching costs, to consumers who have perfect information and make perfectly rational choices) there will be a single market price. But it is crystal clear that accountancy is nothing like that type of textbook perfect market.
In the market for accountancy services: most firms have their own ways of doing things; service is all about people, and clients can only get your people from your firm; clients rarely have the skills or information to properly compare and contrast different firms; and there is little transparency over pricing. Consequently decisions to appoint and sack accountants are often inevitably made on emotional rather than perfectly rational grounds.
And in that type of market, according to economists, there will be no such thing as the market price. Instead what we should see is that prices are set by accountants not by the market, and that as a result there will be very big differences between what different firms charge.
And no such thing in reality either
And that is exactly what an October 2010 study of the prices actually charged by 180 UK small independent accounting practices found: very big differences between what different firms charge.
For example, when looking at the price charged for two common services offered by almost every accountant, the study found that the top half of firms successfully charge around twice as much as the bottom half, as the following table shows: