2017 Accountancy Benchmarking Report

Transcription

1 2017 Accountancy Benchmarking Report

2 Britain s the place to be Contents Foreword 3 Executive summary 4 Introduction 6 At a glance 10 Fee income 12 Profits and drivers of profit 14 Lock-up and working capital 22 Finance 24 Comparison with the legal sector 26 Images: Gallery Stock, Getty Images

3 Foreword Steve Arundale Head of Commercial Professional Sectors, NatWest As the Head of Commercial Professional Sectors, I spend a fair proportion of my time travelling the country meeting with legal and accountancy firms. One question that arises time and time again is: How does the performance of our firm compare to other firms you meet? I wouldn t feel comfortable answering that question without some facts behind me, and this is one of the reasons why we look to employ our data to provide meaningful insight for the benefit of our customers and the wider sector community. The annual legal benchmarking report has been well received for many years now, and in 2015, we published our very first accountancy benchmarking report. Due to popular demand, we re delighted to publish this, our updated 2017 report. The report is specifically designed to help those accountancy firms sitting outside the top 50 by enabling them to reference financial performance against their peers at both a national and regional level. We believe firms can employ this report to target areas of improvement to enhance profitability and improve working capital management. NatWest remains committed to supporting accountancy firms in developing a successful and sustainable business. Our specialist relationship directors understand the professional services sector and benefit from accredited training and regular sector updates. If you would like to speak to one of the team, please do get in touch. Finally, we would like to thank Robert Mowbray for once again sharing his sector knowledge and experience in the production of this report. 03

4 Executive summary The report is a comprehensive review of accountancy firms with fee income of up to 35m. A total of 88 firms employing more than 6,000 people took part in the survey from across England, Wales and Scotland. The total fee income of the firms in the survey was over 370m. Profits and fees The headline finding from the research was that median profit per equity partner reached 141,000 ( 21,000 higher than in legal firms), with the lower quartile at 59,000 and the upper quartile at 222,000. The variance in figures at the margins might appear dramatic, but the good news was profit per equity partner grew by 6%. With inflation during the last financial year well below the 2% target set by the Bank of England, this 6% growth was significant. Perhaps to be expected, there was some difference between the performance of small firms compared with their large and very large counterparts. The former posted gains of 10% in profit per equity partner, whereas the large and very large firms recorded gains of 3%. It s also worth noting that there were some significant differences by region, with the median profit per equity partner being highest in London & South East region at 237,000. This was compared to the North East, North West region, where the median profit per equity partner reported was less than one third of this figure at 69,000. Annual fee income per equity partner showed considerable range, reflecting as much the focus among firms to control their costs as it does their focus to increase fees. The overall median figure was 551,000, with the lower quartile at 401,000 and the upper quartile at 863,000. For very large firms, the figure was almost double that, at 1,001,000, showing the economies of scale that impact the bottom line. Across the sector, fee income was up by 6%, showing that fees grew at the same rate as profits, and well above inflation for the period. The median of profit as a percentage of fees was 23%, with an upper quartile figure of 31% and a lower quartile figure of 16%. However, productivity was reported to be poor, with median recorded chargeable hours per fee earner standing at 1,054. Lock-up and working capital Despite healthy growth figures, accountancy firms need to review their approach to working capital, WIP days and lock-up. For instance, the median firm took 115 days to turn time spent into cash, a figure that should be improved upon. If a firm had fees of 551,000 per equity partner, it needed capital of one third of this ( 180,000) to finance the lock-up before any other investment could be considered. Interestingly, there was no significant change to lockup across small, large and very large firms. Whatever the reasons for this, there is an irony at play, given the advice that many accountants offer their clients regarding the imperative to limit the number of lock-up days. In the legal profession, lock-up was 113 days during the same period. While firms weren t borrowing too much, it didn t follow that they would be able to avoid running into a cashflow crisis fairly quickly. According to the data, a median firm would run out of cash if it did not receive any more money from clients in the following 36 days. Finance While they may have not been concerned about lockup and increasing working capital, accountants have remained prudent about borrowing. The median bank balance at the year-end was 48,000, and partner capital was typically 28% of annual fee income. These figures approximately matched what was locked up in WIP and among debtors. 04

5 About the author Robert Mowbray is a Chartered Accountant who has worked in, trained and provided consulting services to professional firms for over 30 years. His involvement with law firms began in the late 1980s and quickly developed into a niche business. His book, Maximising The Profitability Of Law Firms, published in the mid- 1990s, was the first on law firm financials. He s been involved in a large number of surveys in the legal profession that have focused on the financial health of legal businesses as well as other aspects of law firm performance. Robert also has considerable knowledge and experience of the accountancy sector, having trained at Price Waterhouse & Co before spending time at Buzzacott & Co and then becoming a partner at Macintyre Hudson for 20 years. Robert works each year with about 80 professional service firms, helping them to improve their financial performance. He has assisted in many areas, including improving the quantity and quality of time capture, as well as increasing the ability of fee earners to negotiate fees with clients. He s also helped them introduce more creative fee arrangements, manage lock-up to improve cash flow, roll out profit-sharing arrangements that reward improved business performance and implement strategic and business planning. 141,000 The median profit per equity partner among the 88 accountancies surveyed 6% The median growth in fee income and profit was above the Bank of England s 2% inflation target 115 days Firms took, on average, more than 16 weeks to turn time spent into cash He has consulted with professional service firms in over 30 countries and has worked with close to 1,000 firms in total. His clients range from the global elite, through to major regional firms and a large number of small firms and sole practitioners. He is also an owner of Taylor Mowbray LLP. This is a niche business that focuses primarily on professional firms and which he runs with Janet Taylor, who is an authority on the SRA Accounts Rules. If you have further questions for Robert, please feel free to contact him via Robert Mowbray Owner, Taylor Mowbray LLP 05

6 Introduction Table 1 Firms by location London & South East South West North East, North West Scotland Total Very large firms The man in the street might assume that all accountants would run their own firms in a profitable and sustainable way. This report looks to see if that s true and reveals there s a varied financial performance across the sector. The report highlights the financial KPIs that should be tracked and provides data on these KPIs that firms can use to assess their strengths and weaknesses. Writing the report entailed meeting with a range of accountants from across the country and from firms of all sizes. It includes people who have been in practice for years and to those who have only set up a firm more recently. Not surprisingly, there are differing views about what firms need to do to improve their profitability, as well as the major threats they will face in the coming years. The increasing pressure on fee levels is inevitable. As cloud and other accounting software systems become simpler to use but more sophisticated in what they can do there is a client expectation that fees should fall, so it s been challenging to move towards value-added, consultancy-type arrangements and away from traditional compliance work. Firms therefore need to focus on productivity and invest in staff and technology so the best people aren t enticed away and the business can deliver sustainably profitable services. Clients will pay for a good service, so firms must focus on how they re differentiating in a competitive market if they re to attract premium work; developing a specialism is going to help, and this can be done by even the smallest firms. However, professional firms continue to struggle with managing their lock-up, which begs the question: is it time to start talking to more clients about a monthly cost rather than an annual fee? As NatWest has also published a legal benchmarking report for the past five years, that data has been available to compare and contrast the performance of law firms with the accountancy firms included here. At the outset, it wasn t obvious which profession would perform better financially, and this survey demonstrates where the differences lie. All the data was collected by NatWest from its customers. Table 1 shows that the survey reviewed the results of 88 accountancy firms spread evenly across Scotland, England and Wales. In order that benchmarks could be set for different-sized firms, the survey identified them as either small or large. Small firms are classed as those with a fee income of less than 2.25m a year, while large firms generated fee income of more than 2.25m a year. The firm with the highest fee income generated fees of 35m. The survey therefore provides information for very large firms, which are defined as having fee income in excess of 5m per year. These very large firms are also included within the data for large firms. The report provides median, lower quartile (LQ) and upper quartile (UQ) figures. Firms want to be the best at everything, but this is clearly unrealistic. They tend to talk about what they re good at and try to 06

7 Firm structure Firms surveyed 1. London & South East 26.1% 2. South West 19.3% % 4. North East, North West 26.1% 26.1% Company 34.1% LLP 39.8% Partnership 5. Scotland 17% 07

8 As accounting software becomes simpler to use there is a client expectation that fees should fall get even better at this rather than focusing on areas of under-performance where improvements might more easily be achieved. When looking at the tables, it s perhaps best to focus on the areas where your firm might currently be below the upper quartile figure and to think about what needs to be done to generate better results. The information in the report is historical and relates to the most recently ended financial year. Most tables are then broken down into five regions. The total figures are built from all the data, but the regional figures are compiled from a reduced volume of data and are more likely to be distorted if there are a few unusual results in the region. In some tables, regional data has been restricted. While you ll be interested to see the regional variances that are shown, it s probably best to start the benchmarking of your firm against the total figures, which are based on a larger number of firms Table 2 shows the breakdown of firms taking part in the survey by legal constitution. The most common type of firm is one that s trading as a limited company, which accounts for 40% of the firms in the survey. For those trading as a partnership, it s perhaps not surprising to see there are more LLPs than traditional partnerships. When looking at the very large firms, an LLP is the most common constitution. Throughout the report, the term equity partner refers to an equity partner in a partnership or LLP or to a shareholder in an incorporated firm. Table 2 Legal constitution of firms Partnership LLP Limited Company Total London & South East South West North East, North West Scotland Total Very large firms

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10 At a glance Compared with 12 months ago, the performance of accountancy firms shows signs of growth in several key areas. These include financial indicators per equity partner and for firms as a whole. Firm financials 10% Median capacity in overdraft as a percentage of fees 58% Median bank borrowings as a percentage of partner capital 48,000 Median bank balance at year end Median working capital Lock-up 115 days WIP 38 days Debtor 71 days Large vs small firms +3% Median profit per equity partner in firms with fee income > 2.25m +10% Median profit per equity partner in firms with fee income < 2.25m 10

11 Key numbers per partner Median profit per equity partner 141,000 21,000 higher than in law firms Median fees per equity partner 551,000 12,000 higher than in law firms Profit per equity partner growth Fee growth of +6% 5x Consumer Price Index (November 2016: +1.2%) 1,054 Median chargeable hours per fee earner 28% Median partner capital as a percentage of fees Median fee earners per equity partner 4.2 accountants 3.94 solicitors Source: NatWest 2017 Accountancy Benchmarking Report 11

12 Fee income It s possible to make more profit without increasing fees by focusing on controlling and cutting expenditure. However, this can only be taken so far, and a sizeable increase in profit will always require an increase in fee income. The danger is that fee income increases without generating an appropriate increase in profit. Firms should therefore focus on gross margins and fee-earner productivity to boost fee income, which might mean investing more in technology and training, rather than recruiting more fee earners. A good measure for fee income is per equity partner (or per shareholder in an incorporated firm) because the owner is likely to earn more by maximising their revenue. The overall median figure in Table 3 is 551,000. The table highlights the considerable range around this figure, with the lower quartile figure being 401,000 and the upper quartile figure standing at 863,000. There is significant regional variation, with London & South East the highestearning region, with a median figure of 904,000 of fees earned per equity partner, and Scotland the lowest, with a median figure of 420,000. It s also interesting to see that the median figure of 1,001,000 in the very large firms is nearly double that of the overall median of 551,000, which demonstrates, maybe unsurprisingly that larger firms find it easier to generate more income per partner than smaller firms. This is also evident when you can see that the median figure for large firms is 830,000, while for small firms it s just 416,000. Table 4 illustrates the difference in fees earned when compared to last year s figures. It s reassuring to see It s reassuring that growth is higher than inflation, with fees up 6% overall on last year that growth is considerably higher than inflation, and the overall median increase in fees is 6% up on the previous year. The upper quartile performance shows a stronger 14% rise in fees, while the lower quartile performance shows a rise of 1%. Small firms saw an increase of 4%, large firms 8% and very large firms 7%. All regions saw an increase overall, with the South West showing the highest growth of all at 9% and the North East, North West seeing the lowest rise of 2%. One of the widely used measures of performance in professional firms is fees per fee earner because this demonstrates the level of income being generated by each fee earner. This can then be compared to the salary cost of the fee earner to determine the multiple of salary costs that the fees generated represent. When budgeting to achieve healthy profits, good firms have always talked about the need to achieve fees equal to three times that of fee earner salary costs. If this can be done and a further third is invested in the right overheads, a healthy net profit of one third is earned for the equity partners. If a multiple of three times salary cost is not achieved, it will be difficult for a firm to reach the same level of profit. Clearly, if productivity can be increased and the multiple is higher than three, it should be possible to make even higher levels of profit than have been achieved historically. Table 5 shows that the overall median figure for fees per fee earner is 108,000, with the median in small firms standing at 107,000 and in large firms at 109,000. It s perhaps surprising to see that the equivalent figure for very large firms is 96,000, but this might be explained if it s the case that very large firms employ more junior fee earners and operate with a deeper pyramid structure. The breakdown by region is also not what might have been expected, with the region recording the highest median at 166,000, while the North East, North West have the lowest median at 67,000. These are significantly different figures. Perhaps the most interesting information in this table is the difference between the lower and upper quartile figures. The total figure at the upper quartile level of 198,000 is nearly three times the lower quartile level of 71,000. This difference is likely to make a huge difference to the profitability of the firms. It s clearly important to measure fees per fee earner and to look at ways of improving productivity. 12

13 Table 3: fees per equity partner ( ) London & South East ,094 1, ,151 South West , , North East, North West Scotland Total , Very large firms 834 1,001 1,160 Table 4: fees as a percentage of last year s fees London & South East 103% 107% 110% 97% 104% 114% 99% 106% 114% South West 93% 100% 105% 110% 114% 117% 104% 109% 114% 100% 105% 109% 104% 109% 117% 103% 107% 115% North East, North West 96% 101% 103% 102% 108% 111% 99% 102% 110% Scotland 102% 107% 110% 103% 107% 110% 102% 107% 110% Total 98% 104% 109% 104% 108% 116% 101% 106% 114% Very large firms 104% 107% 117% Table 5: fees per fee earner ( ) London & South East South West North East, North West Scotland Total Very large firms

14 Profits and drivers of profit Profit is the most important measure because it s the profit that is shared amongst the partners. It s amazing how many firms focus too much on fees and not enough on profit. Historically, this has been because firms have always found it easier to measure fees billed than to calculate the profit earned for different types of work, for individual matters and for different fee earners. This has resulted in some strange behaviours, with many partners being too focused on the size of their fee portfolio and having less of a focus on the profit being made. A starting point is to look at profit per equity partner, which is calculated in Table 6. The overall median profit per equity partner is 141,000. The variance around this figure is significant, however, with the lower quartile figure reporting a profit per equity partner of 59,000 and the upper quartile figure standing at 222,000. There is also a very significant difference between the median profit figure for small firms, which amounts to 62,000, and the median figure for large firms, which stands at 193,000. Meanwhile, the median profit per equity figure for very large firms is 248,000. There are also some significant differences by region. The median is highest in London & South East at 237,000, while the North East, North West region has a median of 69,000, less than one third of that reported by the London & South East firms. So how have things changed from previous years? Table 7 (see page 17) shows the change in profit per equity partner from the previous year. Overall, the median figure has increased by 6%, which is confirmation that most firms are delivering a rise in profits that s well above inflation. Small firms delivered a median increase of 10%, significantly higher than the median increase of 3% in large firms and the 1% reported by very large firms. Regional differences The South West leads the way, with a 10% increase in profits per equity partner, while Scotland and London & South East regions saw the lowest increase at 4%, but even this is above inflation. It s also interesting to see that the overall upper quartile figure was a 13% increase, which signals that many firms are seeing significant profit rises. Traditionally, good professional firms have talked about making a third of their income as profit, while average firms have recorded profits of just under a quarter of fee income. A net margin of a third is better than would be achieved in most businesses. It s not a fair comparison because there is no salary deduction for the equity partner in an accounting firm. If a notional salary was deducted, the profit figure remaining would look less positive and the partners might challenge their ability to generate a real profit. Table 6: profit per equity partner ( ) London & South East South West North East, North West Scotland Total Very large firms

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16 Table 8 reveals the net margin being earned across the country and for different sizes of firm. The total figures are very close to the traditional figures, with the margins earned in small firms being less than those achieved in larger and more mature firms. Table 9 looks at the percentage of partners who are equity partners. The figures reveal there are not that many fixed-share or salaried partners, particularly in smaller firms. As firms become larger, there are more non-equity partners, and this is particularly apparent when looking at the figures for very large firms. An issue that influences profitability is the relationship between the number of fee-earning and non-feeearning staff. Fee earners need to earn fees and shouldn t be dragged into more non-fee-earning work than is absolutely necessary. The overall Firms have always found it easier to measure fees billed than to calculate the profit earned for types of work. This has resulted in some strange behaviours median figure in Table 10 (see page 21) shows that 63% of the headcount for both small and large firms are fee earners. Broken down, the median figure is 60% in small firms, 70% in large firms and 74% in very large firms. This variance between differentsized firms could be to do with economies of scale, but it certainly helps to explain why larger firms tend to be more profitable per equity partner. Key performance measures It s easy to get lost in the detail of a set of accounts, so it s important to focus on the key measures of performance. The profit per equity partner in all firms is equal to the multiple of four variables, as the model below demonstrates. The first variable is referred to as either gearing or leverage. It s a number, representing the size of each team in the firm, including the equity partner. So, if a partner manages two fee earners, they have gearing of three, while if the partner manages five fee earners, they have gearing of six. Clearly, the larger the team in the firm, the more it can bill and the more profit it can make. The reason why gearing can normally not get too high is to do with the complexity of the work that s involved. Only simple accounting and tax work can be done with huge gearing; more complicated work requires more supervision and experience within the firm. Median profit per equity partner model Gearing Hours Recovered rate/ hour Profit margin 96,000 x 4 x1,000h x 120 Small firm PEP x 20% 504,000 Large firm PEP x 5 x1,400h x 240 x 30% 16

17 Table 7: profit increase per equity partner as a percentage of last year London & South East 10% 25% 29% 1% 1% 3% 1% 4% 25% South West 10% 19% 34% 1% 5% 10% 4% 10% 20% 5% 6% 20% 3% 4% 10% 3% 6% 15% North East, North West 4% 8% 19% 4% 5% 10% 4% 5% 14% Scotland 4% 6% 8% 1% 3% 4% 3% 4% 7% Total 6% 10% 26% 1% 3% 9% 3% 6% 13% Very large firms 1% 1% 2% Table 8: profit as a percentage of fees London & South East 26% 32% 56% 23% 26% 30% 23% 27% 33% South West 17% 20% 37% 14% 27% 33% 16% 20% 33% 5% 17% 23% 19% 22% 32% 14% 21% 28% North East, North West 11% 14% 23% 24% 28% 32% 14% 23% 29% Scotland 8% 14% 18% 25% 27% 34% 12% 22% 27% Total 14% 18% 25% 20% 27% 33% 16% 23% 31% Very large firms 21% 24% 30% Table 9: equity partners as percentage of total partners London & South East 73% 83% 100% 58% 83% 97% 67% 83% 100% South West 100% 100% 100% 57% 67% 89% 65% 87% 100% 50% 100% 100% 75% 94% 100% 64% 97% 100% North East, North West 100% 100% 100% 50% 61% 71% 60% 78% 100% Scotland 75% 100% 100% 100% 100% 100% 100% 100% 100% Total 67% 100% 100% 60% 86% 100% 67% 100% 100% Very large firms 54% 75% 95% Source: xxxxxxxxxxxx 17

18 The second variable is the annual recorded chargeable hours per fee earner. If everyone is busy and confident in recording their time, the number will be high. If there s a shortage of work, or if people are slack about time recording, the number will be lower. It s not surprising that firms that pay most seem to get the most hours recorded. When the first two variables are multiplied together, you are calculating the annual hours generated by each partner through their team. The third variable is the recovered rate per hour billed. The higher this rate can be, the greater the profit margin. Clearly, if work is complex, it can demand a higher rate than if the work is routine. Some firms like to break this variable down into the recorded rate and the percentage of this rate that s been billed. In other words: Recovered rate per hour = recorded rate per hour x realisation %. The multiple of the first three variables determines the fees billed by the partner in the year The final variable is the profit margin. This is the percentage of the fee that ends up as net profit. It s the efficiency with which a firm turns fees into profit. If the firm is efficient, the net profit margin will be high, but if there is working inefficiency, the margin will drop and can become negative. The numbers used in the model on page 16 show that to go from a PEP of about 100,000 to a PEP of about 500,000 doesn t require a fivefold increase in 1,054 The annual recorded chargeable hours reported by small and large firms 1,087 The annual total of recorded chargeable hours reported by very large accountancy firms all the variables. Relatively small increases in one or more of these can still deliver significant improvements in profitability. This is why firms should regularly benchmark against their competitors so they can identify where they can most easily improve. Gearing, which is the total number of fee earners per equity partner (total fee earners including equity partners divided by equity partners) is reviewed in Table 11 (see page 21). Clearly, if a partner can manage a larger team, they can bill more and make more profit through that larger team. But if the partner works alone, there s a limit to the billings that can be generated and the profits earned. It s the complexity of the work being done that will ultimately limit the level of gearing that can be achieved. In other words, if an accountant is doing complex international tax, there is less of a chance of achieving higher gearing than if they were doing simple tax returns for individuals. It s interesting to see just how much the gearing figure differs by size of firm. The total median figure is 4.20, with the figure for small firms at 3.55, for large firms at 6.98 and for very large firms at Very large firms are geared at nearly three times the level of small firms, even though larger firms are normally doing some of the more complex work. This tends to suggest that small firms should be looking to grow fees and gearing considerably before looking to extend the partnership. There are some significant regional variances, too, with the North East, North West and London & South East regions having the highest median gearing at 7 and the South West the lowest at Timing issues But it s not just about getting the number right; it s important that everyone in the team works well. Partners therefore need to commit time to recruiting the best people, developing these people further and ensuring that they remain with the firm longer. The next variable that influences profit per equity partner is the annual recorded chargeable hours per fee earner. If fee earners can focus on their client work, they re likely to be more productive and more profitable than if they re having to spend considerable amounts of time on administrative tasks. 18

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20 Accountants need to get more skilled at selling the value of what they re offering rather than always pricing work based on what it costs The number of hours that can be recorded is driven by the amount of time that people spend working. Firms that pay top salaries are always going to find it easier to ask their staff to put in additional effort than the firms that pay less competitive salaries and where a culture of long working days is less prevalent. Even if a firm is increasingly charging clients fixed fees, it s crucial to measure what things cost and this is what time records show. Table 12 shows an overall median figure of 1,054 recorded chargeable hours per fee earner. But this only equates to about 4.8 hours per working day based on the estimate that there are 220 working days per year and suggests there is considerable under-recording of time among firms. Also, there are no significant differences by size of firm, with the very large firms having a median figure of 1,087. If fee earners don t record their time properly, the firm will not know what things cost and will struggle to set fixed fees at the right level and understand the relative profitability of different fee earners, work types and clients. So how might a firm set about improving the culture around full-time capture? Technology can be of benefit there is sophisticated software available that watches electronically what people are doing and can help a fee earner to capture more of their time with minimal effort. There is also a need for training sessions so fee earners can raise issues around their work and these can be included in a timerecording policy to provide clear guidance to all staff about how they record their chargeable hours. Used together, education and technology can increase time capture by 10% 20%, and this is without anyone having to work any harder, which can make very significant improvements to the profitability of the firm. The third variable that determines profit per equity partner is the recovered rate per hour. If the work is more complex, a higher rate will be payable than if the work being done is routine. We ve seen that median annual fees per equity partner are 551,000 and that median gearing is If these were the averages, they would imply a figure of annual fees per fee earner of 131,000. If the median annual recorded hours per fee earner is 1,054, this applies that fee earners are achieving a rate of 124 per hour. Efficiency planning Firms clearly need to get smarter about the way in which their work is planned in order to improve efficiency and profitability. For this to work, it s vital that any plans they have link in to available knowhow and use IT in the most effective ways. Preparing a set of accounts would once upon a time have been a fairly expensive exercise, but with good accounts production software, good checklists and effective delegation, the accounts can be prepared just as well as previously but at a fraction of the original cost. Accountants will still try to charge on a time spent basis, but in the majority of cases clients will expect certainty and a fixed fee. When fees get fixed, there is still a range of prices that persists in that fixed market. Accountants need to get more skilled at selling the value of what they re offering rather than always pricing work based on what it costs. Sophisticated clients are often great negotiators, and accountants need to develop their own skills when it comes to fee negotiation and alternative pricing methodologies if they want to remain busy with profitable work. If they don t, they are likely to become busy fools. Increasingly, as prices become fixed, more accountants feel that time recording becomes less important. Obviously, the reverse is true: when the price is fixed, it s vital to understand what things cost, and that is what the time records can disclose. 20

21 Table 10: fee earners as percentage of total headcount London & South East 22% 43% 80% 67% 80% 83% 57% 73% 83% South West 38% 46% 56% 39% 46% 54% 38% 46% 55% 30% 38% 53% 30% 49% 77% 30% 44% 58% North East, North West 78% 78% 83% 53% 79% 86% 59% 78% 85% Scotland 70% 74% 80% 51% 72% 80% 65% 73% 80% Total 44% 60% 79% 43% 70% 83% 44% 63% 80% Very large firms 62% 74% 80% Table 11: total fee earners per equity partner London & South East South West North East, North West Scotland Total Very large firms Table 12: annual recorded chargeable hours per fee earner Total LQ Median UQ Total 1,000 1,054 1,289 Very large firms 983 1,087 1,183 21

22 Lock-up and working capital Accountants understand finance and the need to have either capital or borrowing to finance assets. Indeed, they will castigate clients who fail to manage their working capital well because they appreciate that this can lead to poor cash flow and problems with finance providers. It s therefore quite ironic that accountants are not particularly good at managing their own working capital. The figures used in this report are year-end figures. These are likely to be better than at other points in the year, as firms will have tried to bill as much WIP as possible before the year end. Table 13 shows that WIP days in total have a median figure of 38, and there is little difference between the figures for small, large and very large firms, However, the upper quartile figure is 24 days, while the lower quartile figure is 60. This threefold difference illustrates that many firms can do more to control this variable. To bring WIP days down to much lower levels, it s important to negotiate monthly and interim billing in order to get these bills out promptly and to have disciplines that get people to focus on accelerating work flow. Having good and accessible management information available to all should also help with the control of WIP. Accountants understand finance and need to have either capital or borrowing to finance assets Regional variations 1. London & South East 2. South West North East, North West Scotland WIP days Debtor days Total lock-up days

23 Table 13: WIP days London & South East South West North East, North West Scotland Total Very large firms Table 14: debtor days London & South East South West North East, North West Scotland Total Very large firms Table 15: total lock-up days London & South East South West North East, North West Scotland Total Very large firms Source: xxxxxxxxxxxx 23

24 Finance Despite the fact that many accounting firms have considerable lock-up, accountants are naturally prudent and don t like to take on too much debt. Table 16 shows the overall median bank balance at the end of the year was 48,000, but for the lower quartile figure this drops to an overdraft of 29,000, while the upper quartile increases to a balance of 217,000. Such figures highlight that there is certainly room for increased borrowing if firms want to invest in training and technology to boost fee-earner productivity. While many firms report having no need to borrow too much, they can still be at risk of experiencing a cash-flow crisis fairly quickly. Table 17 considers whether firms could run out of money by comparing the unused capacity in the overdraft as a percentage of annual fees. The total median figure for small and large accountancies is 10%, which suggests that the median firm would run out of cash if it failed to receive any more money from clients in the following 36 days and the firm carried on spending in the way that it had in the past. Firms at the lower quartile figure of 5% will need to be very careful about ensuring they don t run out of cash. Firms can become less reliant on bank finance if more partner capital is introduced and retained. One way of benchmarking partner capital is to express it as a percentage of annual fees. Given that the median firm has a total lock-up of 115 days (Table 15, see page 23), this could be financed by having partner capital equal to 32% of fees. Table 18 shows the median figure for small and large firms is 28%, and for very large firms it s 23%. When firms struggle to make budgeted profit levels, it s important that they look to restrict drawings and not just build up deficits on current account balances. Banks are more comfortable where the percentage of borrowings against partner equity is lower, and where the partners are able to demonstrate that they clearly have a level of personal financial commitment to the firm. Table 19 shows the percentage of bank borrowings (including borrowed partner capital) as a percentage of real partner capital. The lower quartile figure reported by small firms is 6%, which illustrates that there is little debt, while the median figure for all firms is 58%. This figure could be reduced if capital accounts are restored with a strategy to retain profits, which would be a good thing. Meanwhile, the upper quartile figure for very large firms stands at 152%, which demonstrates borrowings that are in excess of real partner capital. Firms in this position should think again about their facilities, the amount of capital being provided by the partners and the ability of the firm to manage lock-up because its bank may become less happy in future about continuing to provide so much finance. Table 16: year-end bank balance ( ) London & South East South West East of England North East, North West Scotland Total Very large firms ,366 24

25 Table 17: capacity in overdraft as a percentage of fees London & South East 4% 8% 12% 11% 15% 18% 6% 12% 15% South West 7% 10% 13% 4% 9% 13% 6% 9% 14% 5% 8% 30% 2% 6% 9% 3% 8% 12% North East, North West 6% 8% 13% 6% 16% 23% 6% 9% 18% Scotland 5% 12% 15% 12% 13% 15% 10% 12% 16% Total 4% 9% 15% 6% 12% 16% 5% 10% 16% Very large firms 6% 12% 16% Table 18: partner capital as a percentage of fees London & South East 0% 5% 26% 22% 33% 37% 9% 22% 37% South West 56% 56% 78% 16% 23% 26% 18% 29% 53% 4% 25% 60% 23% 27% 35% 16% 26% 39% North East, North West 4% 27% 66% 25% 30% 59% 17% 29% 67% Scotland 20% 26% 31% 27% 75% 93% 24% 30% 65% Total 6% 28% 56% 21% 28% 37% 16% 28% 50% Very large firms 18% 23% 34% Table 19 : percentage of borrowed partner capital London & South East 0% 4% 299% 2% 46% 109% 0% 41% 123% South West 15% 21% 22% 19% 52% 82% 19% 22% 69% 58% 137% 1871% 138% 590% 6700% 77% 180% 3650% North East, North West 11% 31% 44% 58% 81% 112% 29% 44% 82% Scotland 70% 112% 130% 29% 73% 168% 48% 100% 146% Total 6% 35% 117% 30% 73% 152% 15% 58% 137% Very large firms 46% 73% 152% 25

26 Comparison with the legal sector The 2017 legal benchmarking report was prepared from the accounts of law firms ending in the same period as is the basis for this report for the accounting sector. The comparison that follows is therefore not unreasonable. While accountants and solicitors provide different professional services to their clients, they're both in effect selling their time. So which profession performs better? The answer was not obvious until this report was compiled, and the comparisons are fascinating. Accountants generate 2% more fee income per equity partner than solicitors. The profit per equity partner is 21,000 higher than the profit for solicitors. However, while accountants record more chargeable hours per fee earner than solicitors, they achieve a lower hourly rate of 124 compared with solicitors, who achieve 161 per hour. Lock-up figures are about the same in total for both, but accountants seem to have more of a problem collecting debts than in issuing bills, so it s understandable that services exist that help professional firms improve their financial performance. Lawyers have always benchmarked against other lawyers and accountants have always benchmarked against other accountants. The author of this report hopes it will encourage both professions to think again and strive to improve their results next year. 2.2% The difference in fees per equity partner between accountancy and legal firms 1,054 The chargeable hours per fee earner in accountancies, compared to 866 hours for law firms 124 The median hourly rate charged by accountants is 37 less than that charged by solicitors Total median figures: comparison of two professions Accountants Solicitors Fees per equity partner 551, ,000 Fees per fee earner 111, ,000 Profit per equity partner 141, ,000 Profit as a percentage of fees 23% 23% Total fee earners per equity partner Chargeable hours per fee earner 1, Recovered rate per hour WIP Days Debtor days Total lock-up days

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