Client Accounting Services Are Redefining the Role of Accountants

The Modern CPA Success Show: Episode 131

In this episode, the hosts, Tom Wadelton and Adam Hale, introduce a discussion on the evolution of Client Accounting Services (CAS) and advisory services within accounting firms. Tom and Adam explore the differences between traditional accounting practices and the more corporate-like structure of mature CAS practices. They emphasize the importance of leveraging resources, delegating tasks, and focusing on advisory roles rather than traditional compliance work. The episode also highlights the benefits of a subscription-based model for advisory services and the need for regular client meetings to manage expectations and prevent scope creep.

Intro 00:00:00 Welcome to the modern CPA Success Show, the podcast dedicated to helping accounting firms stay ahead of the curve. Our mission is to provide you with the latest and greatest insights on cutting edge tools, innovative marketing strategies, virtual CFO services, and alternative billing methods. Join us as we change the way people think about accounting.

Tom 00:00:22 In this episode of the modern CPA Success Show, Adam Hale and I are going to do just the two of us talking, but it's going to be something that we talk an awful lot with other firms as we talk about CAS practices, advisory services. So, Adam I would love to hear more your thoughts. So, at maturity, what does Cass practice look like and how might that be different than what people think more traditional accounting firm structure. Yeah.

Adam 00:00:46 And real quick let's define CAS. Right. So excellent CAS. It used to stand for client accounting services. And I think there's been a shift. They always called that like 1.0. And now they call it client accounting and advisory or client advisory services.

Adam 00:01:02 Sorry. So, they swapped out accounting for advisory. I personally still think it's CaaS client accounting and advisory services. and the reason being is because I think that at scale, depending upon what kind of client you're serving, Tom, you and I have both kind of felt this, that, it's really hard to decouple accounting from, working with small businesses. You just can't, you know, if it's a $100 million organization, they have an FNA team, they have all this stuff. You can come in and just be the advisor. but I think that you need to have a baseline understanding of what their accounting model looks like. Help them architect it in a way that tells a story.

Tom 00:01:42 I agree, and it is, you know, most of our clients need some accounting help up front to get things cleaned up. And if you don't have that, you don't have that foundation to be able to do much advising on top of.

Adam 00:01:52 Yeah. And how it looks different from like the traditional firm because I think, you know, if you're operating within a department of a larger CPA firm, I'm sure there's a lot of tension there just because it does operate so differently.

Adam 00:02:06 and I would say at maturity, it's built more like a corporate structure, you know, because it's all about leverage. Not to say CPA firms don't have leverage, but it's less about like the partner's driving revenue. And it should be more of like pushing everything to the lowest level. And, you know, of course, in the ideal state, again, that's the way it's going to be. But instead of having the BD team, you want to like create a system so that they're coming for the brand. So, you're really selling, you know what your what your company is doing rather than the individual. but in their infancy stages they can operate a little bit like that because typically if you're the owner and it's just you, you know, you're the BD person, you're the person that can handle big work. you know, in terms of the more complex work and stuff of that nature. So, as you start to build out your cash practice, you know, you have to be really intentional, separating yourself from the day to day work, and try to, you know, make that bold move.

Adam 00:03:03 Bring somebody in offshore, help. Maybe you outsource the resource to affirm or something and partner up, but you want to push all that other work down to the furthest level that you can, so that you can focus more on the heavy duty work. And eventually, if you want to scale and be more than just you as an advisor, then you have to be put yourself into a position where, you know, you can kind of slide more out of that that day to day and really upskill people.

Tom 00:03:29 Yeah, yeah. And as you know, most of the accounting firms that we coach when they get started, they're in that very traditional model. And the really common complaint that we have is it's the owner saying, but I'm doing everything, including even reconciliations in the cash flow meeting in the forecast. I want to get out of that. And so, we do start talking to them about a little bit better structure, like you need to start pushing those things down or you'll never be able to grow.

Tom 00:03:51 You're limited by your own capacity. In one example of that is, you know, the clients I have in the cash flow meeting, I never go to the cash flow meetings. I've got a senior accountant who is really good at doing that, and they also know that they delegate to the offshore team most of the prep work. And that's part of that decentralized model that, you know, if everything goes sideways, then I might have to get in and get involved to do that. But that's rare. And the clients get to learn that they don't expect me to come to their meeting and know everything that happened that day. That's getting to some of that corporate structure. I think you talked about.

Adam 00:04:21 Yeah. And I mean, financially, don't get me wrong, for people listening to this and say, hey, I just want to be a solopreneur, you know, I want to be basically just self-employed and do this work. That's fine. The financials and the system are going to be pretty easy for you.

Adam 00:04:35 Money in. It's all yours. Call it a day. but if you want to grow a practice and you want to scale, or you already have a practice and you're trying to figure out, you know, the shift and profitability, how it works, because this is really the rub. If you're if you've been a traditional firm, if you're a traditional tax shop, those kind of things. I think in most instances financially a firm has always, you know, the terms that I always heard was a third or third or third, right? That means you spend a third of your money on production, you spend a third of your money on things like overhead and sales and all that kind of stuff. And then third goes to the owner, and then, you know, depending upon the size of the company, you know, 40% could go to owners. But whenever I used to go looking around trying to buy tax shops, my challenge was, is I would see 30 or 40% at the bottom line, and then I'd see a lot of partners just working a ton of hours to get to that 40%.

Adam 00:05:27 You know, they'd be working like 3000 hours. And I'm thinking to myself, wait a minute, I'm not going to do that 3000 hours. So, if I even just look at it at a regular rate and I have to hire two people to accomplish that work. Yeah, not really making 40%. So, whenever you hear CPA firms go, oh, I want a 40% or a 50%. Bottom line, are the owners working for that 40 or 50%, like you got to bring that down to a normal level. And I would say in contrast, like a cast model, if we're thinking about it from a if we're thinking about it from a corporate structure kind of a standpoint, we still want to achieve like a minimum of like a 20% bottom line. Ideally worried about a 25 to 30% bottom line and so, but we're doing it completely leveraged like the owner necessarily is, is already included in that is kind of like an admin wage. You know, if you get to that 20 to 25%.

Tom 00:06:18 Yeah.

Tom 00:06:19 And if you think of it similar to corporate structure, and we talk internally about you've got your gross margin that you're trying to hit just like normal company. And what are those production costs that you have in managing to that. And we know internally what do I need to make on each individual client, where around 70 to 75% is our target for that. And if we realize that, then we can hit about a 50% gross margin. And then you start taking away what's the overhead, including owner payment, sales and marketing everything to get down to what looks very much like a corporate kind of income statement to do that. And I think that's a really important way to look at it. Also, for the CFOs, as you know, it's the way we tell our clients to look at their business. So, we're kind of doing our own kind of analysis. But as we work with them, it's the same thing. I just got off the call with a client where I was saying, let's reorganize your income statement so that we actually understand the gross margin.

Tom 00:07:07 And we can benchmark this as a brand new onboarding client. And they love it. But I said, here's all these things. The only benchmark it can tell you is how you're doing net profit wise. And you're below. So, let's organize it in a way that I can understand kind of where the problem is that we're trying to improve.

Adam 00:07:21  Yeah, I would say that one of the biggest challenges, obviously, because, if I'm working with a client on a really fractional basis, I can charge them five, 600 bucks an hour and they don't, you know, they might not like it, but they have to get this one thing done. It's like a car repair, right? You got to do your tax return. And so, if that tax return cost $5,000 and I can charge 500 bucks an hour, great. But if you're working with them on a more regular basis, a weekly basis, a monthly basis, and you're doing things like, you know, bill pay and payroll and stuff like that you can't charge those hourly rates.

Adam 00:07:57 You can still get better than those hourly rates, obviously. whatever. You're just doing the advisory side of the house, but most cast Cass practices kind of mixed blend. The back office, the accounting because they have to in with the advisory and whatever you do that like you mentioned Tom our targets 50%. That's what we want after all. Team costs. That's payroll taxes, that's benefits. That's everything. All in. We even put our technology in there. Which one's about 3%? However, in some of the reports that I see in the industry, most CAS practices run about 35% margin and so in you know their gross profits right around 35%. the high performers are doing right around you know 43, 44%. And right now that's really where we are now. We target for 50%, but we're closer to that 43 to 45% right now. with aspirations of continuing to, to be able to, to leverage and get to that point. But, that's a that's a different business model than that third or third or third that people are kind of used to and being able to the trade off, though I think one of the biggest things is, is that you have this annuities service, which is going to make the business worth more.

Adam 00:09:14 It's going to make the business more stable. And you're not always just like hunting for new clients. You can actually stack clients more on top of each other easily.

Tom 00:09:24 Yeah, yeah. And that longevity as you look at your team of people, right. When I first came in, you had me start working with one client that I still have multiple clients, but one that I think of so much easier to work with five years later. And they know me. They know what things we have. I know what's important to them to do that. And so, some things become a lot easier. And that's sort of that long term piece that you have versus everything just kind of being a one off and being difficult. But the point you made, I think around the margin is really good, especially if it is that they, I really want to be a one person shop if I'm going to do everything, I'm really expensive to be coding in bills coming in and things like that just if you want to stay at that size maybe that works but you just can't grow.

Tom 00:10:06 So, a big part of what we've talked about is how do you get other people like offshore, like seniors? And as you know, a couple of years ago, the huge push we had was how do you delegate work? Because people are too expensive the time that they're spending doing certain things.

Adam 00:10:19 Yeah. So, I mean since the business model is a little bit different sort of the metrics that we really look at. So traditional firm, obviously you're talking utilization, hourly bill rates and of course realization. You know, how much of that bill rate are you actually getting? for somebody whenever they're doing it. And, you know, I think most firms shoot for 85, 90%. Some are better, some are worse. You know that kind of a thing. and there's no disputing that the traditional model works. I mean, it's profitable. CPA firms aren't going broke. I'm not advocating against, that model at all. I'm just saying, in general, Cass is going to work different.

Adam 00:10:59 and it has to work different because we're more utilized, which means our bill rates, our average bill rate is probably going to be less. But whenever you multiply those two things out and of course you got to take into account realization, you know, hopefully we're realizing all of our money, those things should kind of work themselves out to a very similar model. You know, it shouldn't be different. but I think that rather than measuring that, I think because you're selling this mix of services and access and hopefully, again, more access than service, but you kind of have to do some of those accounting things. I think that what we're talking about is, you know, rather than, again, charging that compliance type work, we're talking more about Book of Business whenever we do things. So, I know if I have Tom, for instance, if a team member costs $100,000 and another teammate cost $100,000, there's two of them. You know, you take them together.

Adam 00:11:59 They're a team. They're $200,000. Well, if I want to hit 50% all in that, I know they've got to work a $400,000 book of business. Because remember, they're sharing that book of business. So, each one of them has to work a $400,000 book of business, not independent of one another. They're a team, you know, so it's $400,000 total. and of course, you got to add in ancillary direct support. You know, for us, you know, we have other pieces of that pie that kind of work into there. But what we really do is rather than managing how many hours people are working, it's more responsibility based. So, we're not really looking at we can utilization, bill rates and all that kind of stuff. But I know that if I have a target for a senior accountant to be able to do a $900,000 book of business, I know I'm going to be profitable. I'm going to be making my 50% target with no problem if they're going to be able to hit that 900,000.

Adam 00:12:55 And that's the bogey that I go at.

Tom 00:12:57 Yeah. So just to be clear in your organization, do you have an hourly target for team members? Are you telling us that, hey, I'm expecting you to be right at 1800 hours a year or something like that.

Adam 00:13:08 What's your target, Tom?

Tom 00:13:10 I don't have one. That's the question. Yeah. So.

Adam 00:13:13 Yeah, no, I understand. I was just teasing you, but yeah. No, we don't write.

Tom 00:13:17 But just to emphasize that we don't do that. Yeah, but.

Adam 00:13:20 You. But you have a book of business target. You know what your book of business target is? and the cool thing is, is, you know, don't get me wrong. Like, it also goes into the compensation structure and how you can kind of play those things out as well, because, you know, in a traditional firm, it's like, hey, I'm going to work all these hours and then I'm going to get a bonus at the end of the year.

Adam 00:13:39 Bonus is kind of black box. You know, some people are trying to put frameworks around it, but they don't really know what it is. And whenever I hear some of the bonuses at the end of the year and I'm thinking to myself, but you work 2300 hours, so you worked, you know, an extra couple hundred hours over a 20, 80-hour year, and then you got what kind of bonus? And then whenever I run, the math is like, doesn't even work out to time and a half. You know what I mean? It's like straight pay if that. Yeah. And so, so, yeah, you're not asking people to work necessarily more and then bonus them for working more in that instance. But what we can do is we can say each role should cost us as a percentage. We call it the penny game. But as a rule, I know that CFOs are going to cost me $0.15 on the dollar. Right? So, if a CFO says I want to make $200,000 a year, no problem.

Adam 00:14:35 Oh, you want to make $300,000 a year? No problem. 300,000 divided by $0.15. That's your book of business targets, right? And I can do that for every role. and, and kind of walk through what those percentages look like. And if I build my team model up, then I know that if everybody's hitting their salary, expectation or goal, then they can, they can do that. Now, of course, you still get paid your base pay. And all I'm saying is we have seniors, for instance, where, you know, maybe their base pays 65,000, but they're on track to make $100,000 a year because they're running a book of business and their numbers a little bit different than this. But say it's 10% and they want to make $100,000, then they've got to run $1 million book, right? Right. And so, they have a very clear understanding of what their bonus is going to be, how to get their bonus. And it's not a production game either. So, a lot of times, you know, people are like, well the only challenge with that is what you're telling me is the more I work the more money I can make.

Adam 00:15:35 Well, kind of, you know, because that's what the other model was, the traditional model. Was that right? I just told you work 2300 hours and hopefully 1800 of them are billable, and then you get a bigger bonus. That's not how this game works. This game is built off of leverage. So, every role pushes down to a different role. Now at some point it's technology or its offshore team or things of that nature. But if you really want to win the game, you can't do all the work. You know, a senior can't do a million dollar book with the senior, with the CFO above them and an accountant below them. If they're doing the lion's share of the work, they've got to make sure that they're pushing as much work below them. They're automating processes, they're being efficient with their clients. And so, you're forcing them to just kind of understand how to, you know, really kind of manage their book instead of just being a super producer.

Tom 00:16:32  I agree, and we could probably do a whole podcast on why we think the book of business is a really good measure, because I've said jokingly, but I think it would be true around sort of not caring about ours, that if you and Jody found out that I was working 25 to 30 hours a week, but had this book of business and my clients were happy, you probably wouldn't be mad.

Tom 00:16:50  You'd probably be saying, hey, teach other people how to do that, which is much better than often the traditional firm, which is, wow, he's great because he's averaging, you know, 60 hours a week is what we hold up to the measure and we're incentive to say, how do I get more efficient to take on more work and not have to work as many hours.

Adam 00:17:06 Find high fiving and say, let's go play some golf? Yeah, no, if you can. Yeah, If you can get it done in 30 hours, then get it done in 30 hours. I mean, it's about, Yeah, again, it's about oversight. It's about responsibility. It's not necessarily about if you're chained to your desk cranking out, you know, nobody's winning an award here for, you know, telling me that you worked 75 hours last week, I would be like, oh, wow, what can we do to get rid of that? You know?

Tom 00:17:32 So yes.

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Tom 00:18:16 So, what about this idea that we talk about that we're actually selling access when we thought when we talk about high advising kind of services, what's your thought around that. You're selling access because that is a little bit different mindset than some firms.

Adam 00:18:30 Yeah. It kind of goes back to the value bill proposition. Right. It does. You know, a lot of times whenever you're trying to scope a project and you're always kind of coming back to even if you do fixed fee and stuff like that, it always comes back to how much time am I going to spend in this job, right? And then you try to justify how much you're going to charge the client and make sure the math works out.

Adam 00:18:51 That's pretty easy to do with services. You know, whenever I have to do payroll, I have to do bill pay, like there's a certain volume and a certain effort that's going to go into that work whenever it comes to advisory. I don't know if it's going to take me 30 minutes this month or you're going to need four hours from me this month. Like, I have no idea what I'm selling you is, yeah, we'll have a dedicated meeting or meeting cadence, and that might affect the cost. Sure. But what I'm giving you is access to me throughout the entire, month. So, for the months where you only need me a little fine, but you're still going to pay me the same thing. And the months where you need me a little more. I'm here for you, too. I want to be your first call. So again, instead of selling a thing that I'm going to do on your behalf, like pay your bills. Now, I'm just saying a true subscription. You know, you have access to me.

Adam 00:19:41 Use me as you need me. You know, those kinds of things. And if you're worried about scope creep and that kind of freaks you out, like that's where the meetings come in, you know, that's where you can kind of flip things around and go, okay, but Tom, we're going to meet once a month and we're going to go over this, this and this, or I sold you on a bigger package. So, I'm going to say again, access, I sold you on a bigger access package. I'm going to say we're going to have these two dedicated meetings a month or these four dedicated monthly meetings. and then people know, okay, I have access to them if I need them. Feels good. I don't have to worry about getting charged hourly. If I have a thought and I need to meet with them on something important. But at the same time, you've controlled the narrative a little bit by creating these meetings.

Tom 00:20:20 Yeah. So, as we like people to think differently, I think this is a really good framing around if you're in this kind of practice and thinking of growing it are strong suggestions.

Tom 00:20:31 Don't just think of your traditional model. That might be I've got a partner who has two people who will only work for them, and this is how the work is done. There's different ways of doing it, and by our pod structure and other things, we share resources. And that's how it works. Well, that we get a really good group of seniors and a good group of accountants that support them. And so, you got this different as you describe kind of that corporate structure of thinking about that. It is a different kind of practice that you're running.

Adam 00:20:56 Absolutely. Good.

Tom 00:20:57 Thanks, Adam. This is really valuable.

Adam 00:20:59 Yeah. Thanks.

Outro 00:21:01 Enjoy this podcast. Visit our website summit CPA Dot net to get more tips and strategy for achieving modern CPA firm success. We are here to be a resource in this ever-changing industry.