Why Accounting Will Continue To Be The Most Profitable Industry In The US
Things are going well for privately held accounting firms. Data provided by Sageworks, a financial information company, reveals that accounting, tax preparation, bookkeeping and payroll services (NAICS code 5412) was the most profitable small business industry in 2017, as measured by a pre-tax net profit margin of 18.4%. That’s over double the average US private company net profit margin of 8.9%.
It’s a familiar position for an industry that uniquely combines premium expertise with low overhead. Fortunately, it looks likely that the good times will roll on for for accounting & finance firms that offer a degree of industry-specific business expertise. Here’s why.
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The ingredients of profitability
Accounting firms have always enjoyed a unique combination of low overhead and premium revenue. Given that all it takes to found and operate a firm is a few computers, and that they charge for a professional level of service in an area no business wants to cut corners, accounting firms operate with margins among the highest of any industry—if not the highest outright, as has been the case for the past two years.
Furthermore, data from the Rosenberg MAP Survey of the CPAs specifically shows that profitability growth is catching up to revenue growth. This is an encouraging trend. Before the financial crisis, income per partner (IPP) growth outpaced revenue growth. In the first half of this decade, IPP growth hovered between 1–3% while revenue grew slowly. Since then, IPP growth has exceeded 5% annually, and crucially, it’s begun to catch up to revenue growth. This is a sign that profits are growing sustainably and that organizations are capturing more of the value they’re creating.
Healthy revenue growth isn’t the only reason CPA firms can look forward to growing profitability. Rosenberg reports that the metrics most correlated with IPP are those pertaining to rates (what the firms charge) and leverage (how much the firms need to divide revenue). Specifically, the most correlated metrics are fees per partner, fees per employee, billing rate, and crucially, professional staff to partner ratio.
The positive outlook here pertains to leverage. Automation in financial software means that CPAs and teams are able to create increasing value with less professional staff. These tools are getting better at taking over the kind of entry-level work that professional staff typically perform. Without so many people to support, firm profitability will rise. In addition, functions like data entry, reconciliation, and financial report generation will be more accurate and timely.
CPAs are trusted business advisers
In an environment of growing automation, accountants might be concerned that their jobs are liable to be replaced sooner or later. But for the foreseeable future, that will not be the case.
As automation takes on the kind of work that will allow accounting firms to lower their staffs, CPAs will increasingly become consultative resources to their clients. It’s a role similar to what finance professionals inside of companies are growing into—a wide-ranging manager of organizational performance—with one important difference.
CPAs with industry-specific knowledge provide irreplaceable expertise to small businesses that have no other way of getting it. Accounting firms are the ones who have access to the inner workings of businesses, long-term relationships with the players in a given space, and constant exposure to the market. The advice CPAs provide can be strategic, but it can also be insight about industry-specific tax reporting or financial benchmarking. CPA firms are sources of valuable counsel. That’s not going away with automation.
Economic forecasts are sunny
Not only are there solid dynamics within firm, factors in the wider economy also portend strengthening demand for accounting services. The world economy is outperforming expectations for the first time since 2010. In the US, GDP growth is expected to continue around 2.5%, according to OECD predictions. Moreover, a massive tax reform law just went into effect—a once-in-a-generation change to the tax code that the member firms of NAICS code 5412 will be uniquely situated to help sort out for their clients. In other words, business will be booming for accounting, tax prep, and bookkeeping.
Rosenberg data shows that accounting firms’ profitability has been on a steep incline for the past decade, from $360,000 per partner in 2007 to $430,000 in 2017. Based on the advance of automation in accounting software and the premium rates CPA firms will be able to continue charging clients—and the general uptick in economic activity for the foreseeable future—the industry’s outlook has never been stronger.