The Key Performance Indicators You Should Be Tracking To Grow Your Firm With Mike Meilinger

 

Mike Meilinger is the owner of a CPA firm focused exclusively on litigation support, forensic services, divorce accounting, and business valuation. In this special bonus episode, Mike shares the importance of tracking Key Performance Indicators in your accounting firm and how he’s grown his firm to almost $2 million in revenue with just 75 clients.

Here’s a few things we talked about:

If you’re ready to focus in on what’s really important to grow your firm and your revenues, this episode is a must-listen! Special thanks to Mike for taking the time to chat.

Connect with Mike:

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Listen to the podcast here

 

The Key Performance Indicators You Should Be Tracking To Grow Your Firm With Mike Meilinger

This is another bonus episode. This show is for you, where accounting professionals come to learn all the efficient, powerful ways to grow their firm, sharpen their skills, and still have increasing revenue during these trying times. We are covering KPIs. We also cover topics from pricing, finding your ideal clients, cashflow, setting boundaries with clients, and so much more. You can show your clients your expertise, never give any of your knowledge away for free, and get paid your value.

Before we welcome our very special guest to the show, I also want to share that I have an upcoming eight-week sales mastery class starting in the summer of 2020. This has only been available for my high-end clients before, but I’m excited to share this with others. I am giving you a free coaching session as long as you’ve had your accounting firm for two years. This is where you can learn how to build that dream practice of the clients that you love, so you can have more time with your family and your kids, or maybe you’ve had too much time with your family and kids lately, and you want to focus on serving your clients.

If you’re frustrated and stressed about getting the right referrals and you have no control over who you’re working with, and you take on every single client, then make sure to head on over to TheAbundantCall.com to book a call with yours truly, me or my partner, Denise. Once again, head on over to TheAbundantCall.com. This episode is brought to you by Xero. As an accountant, when you join Xero, you’ll gain access to a full range of practice management tools so you can manage your practice and your clients from almost anywhere. To learn more about building a better practice with Xero, visit Xero.com.

Let’s welcome our very special guest. His name is Mike. He’s a CPA out of North Carolina. He has a very successful firm and helps with very complex financial issues in several different situations, including divorce settlements, forensics, business performance and valuations, and many other services. He has three kids and a wife, and only works now 40 hours a week. Let’s welcome Mike to the show.

Hey, Michelle. How are you doing?

I am awesome. Thank you so much for being with us again. It’s always great to have you. You always have so many great stories. Now, we’re talking about an important topic. Before we dive into the topic, can you share with all the other accounting professionals reading who you are, where you live, and the firm that you’ve built up?

I’m a CPA. I have a CPA firm. Currently, we have eleven employees. We service about 75 customers. Most of our customers either fall into two categories, they’re high-income business owners, probably between the age of 50 and 65. We have a young entrepreneurial mindset in businesses. These guys are the guys that are growing very rapidly and doing some amazing stuff. They’re fun to work with, full of energy, and things like that. I’ve been a CPA since 1995. That’s a long time. I don’t even want to figure out how many years it is.

I’ve had several iterations of my firm. My current firm has been around since 2007. It started out as a litigation firm where all we did was work with lawyers and do business valuations. We did a lot of divorce work. Because I had sold a previous firm, I couldn’t do traditional county work until 2011. My current firm started growing in 2011.

You have 75 customers. Your revenues are upwards of what right now, just so everyone has some context around this because this topic will help you increase your revenue?

We’re hoping to hit $2 million in 2020. That’s our goal. We are trailing 12 by around $1.8 million.

$1.8 million is your trailing 12-month revenue. I know this just doesn’t happen. People are wondering, “Mike, how do you do that just with 75 clients?” On this episode, we are going to have a very important discussion of one of my favorite things to track, which are your KPIs, your Key Performance Indicators. That’s what we’re going to dive into.

Mike, if you were to define what a KPI is when you first heard the term, and someone said, “You need to track this if you want to grow your business and make it more efficient.” Number one, what did you think about that when they told you that? How do you define it to your peers, so they know, “That’s the definition. Now we can go into which ones we should analyze?”

Like most accountants, I’ve always just thought of it as a term and thrown it out. To me, if we wanted to use what a KPI is, it’s a clarifier. It clarifies what’s going on in your business. There are all sorts of definitions. There are leading KPIs that you should be looking at on a regular basis that will tell you exactly how your business is going to do or give you a good indicator of your business, and then there are KPIs that are lagging, and you got to look at both of them. A lagging one is something that you measure on a monthly basis or a quarterly basis that clarifies. It clearly presents your business.

 

Why are KPIs important? We’re going to talk about a few things around KPIs, but if you had to summarize it and share how it became probably the number one thing you look at in your firm and how you grew it to over almost $2 million, hopefully by the end of 2020, why is it important and how did you realize that that was the important thing that you needed to fix in your firm? Share with us that story from maybe 2011 to now.

One of the things we talked about all the time is that, as business owners, we like to lie to ourselves. We like to think everything’s going well. We also like to manage what we think is going on. KPIs are important because, first, to profitably leverage your business, you have to understand the key performance indicators of a professional service firm. If not, you’re going to do what I did, and you’re going to hire people and not be profitable, and you’re going to wonder why you’re not making money when you have employees.

That’s one of the biggest things that I try to tell people. If you don’t know your numbers, you can’t leverage your business. If you can’t leverage your business, you’re always going to have a job. The thing about CPAs, and I’m one of them, is we’ll work hundreds of hours and not get paid. The sad thing is your employees won’t do that. You have to pay them.

If you don't know your numbers, you can't leverage your business. And if you can't leverage that, you're always going to have a job. Click To Tweet

The employees won’t just work 60 to 90 hours a week and say, “I’ll get paid in the future one day.”

One of the things we’ve always discussed is limiting beliefs. One of the limiting beliefs CPAs have is, “I can’t afford good help.” I don’t know if it’s that they can’t afford good help is that they work the people to death, and don’t pay them. They would make more money at Costco sometimes than working in the CPA firm and have a 40-hour work week. If you want to leverage your business, you’ve got to understand your numbers, and you’ve got to understand the key performance indicators that we’re going to discuss.

Like my firm right now, as you grow and you’ve doubled over the last several years, your KPIs will indicate if you’re growing healthily or if you’re not and how to manage the administration of your firm. KPIs ensure that you grow profitably, or they enable you to quickly adjust your staffing in order to grow profitably. The biggest thing is that it creates clarity in your business. Once you get clear on the numbers, what they should be, and how they should look, then things will fall in place, and you’ll do the necessary things to get not the business that just happens, but the business that you want. To do that, you got to have clarity.

Clarity’s important. Mike, maybe you can go back to 2012 or 2013, when you were running your employees out the door, working them so hard, and not paying them enough. People are inundated with the amount of work they’ve got. Especially now, we’re going to be either in a recession or entering one. It’s tough times out there. Accountants are the number one phone call most business owners are making right now because everyone is so confused with everything. As you said, you have to have clarity. When it gets tough for you, how do you make sure that you still manage and monitor your KPIs on a weekly basis?

There’s one number that every CPA should manage on a weekly basis, and that’s the utilization. The utilization number is a leading indicator of how efficient your firm is. Going back to 2007 and 2008, the reason I sold the first firm was because of all that stuff. This firm, because of the loan, had employees work 50 hours. We had to work Saturday to get some loan packages in. That was the first week in the history of the firm that we had won a mandatory Saturday to work until we had the average employee work about 45 to 50 hours.

There's one number that every CPA should manage on a weekly basis and that's the utilization rate. Click To Tweet

The biggest thing I’ve struggled with is how you work a 40-hour workweek.  How do you keep your employees’ 40-hour week and compete effectively with the larger firms that are working people 60 to 70 hours a week? That’s why KPIs are important to me. I have a team that I’m very thankful for. We don’t have any turnover. The competitive pressures out there are what they are. That’s why it became important to me to measure the KPIs and hold our team accountable for those. Every business should give each employee one number. It should be very clear what that number should be.

If you have a biller, someone who’s productive in our firm, the number is 80%. We want our billing staff to stay 80% billable. Now, they don’t always get that, but that’s the target. Overall, we want to have a utilization rate when we take everyone into account of about 60%. The biggest thing when we start thinking about other KPIs, they might be getting ahead. One thing that CPAs who want to grow their business should track is how much of their time is billable. Most CPAs don’t track their time, or many people don’t.

I’m going to give you a weird answer. You shouldn’t be spending more than 30% of your time if you’re the owner of a CPA firm in a billable role. It should only be in value creation, and not in doing the work. If you’re spending 60% to 70% of your time, let’s say you’re billing 30 to 35 hours a week, you’re probably working 60 to 65 hours a week, but the highest hourly rate that you can make is meeting new prospects or meeting with your current clients, and offering them additional services that are profitable.

The sales staff, Mike?

Salespeople are the highest-paid people in the world, and there’s a reason. It creates value. The next goal for my business is where I’m not doing any sales. The thing is, “How do you create an automatic sales system?” I’m not even close to that yet, but it’s a goal.

What about that limiting belief? There is a mindset shift that has to occur in order to even see this as a possibility. A CPA might be reading. “Mike, this sounds all great. I wish I could spend only 30% of my time on billable work and 70% on value creation and have my staff be efficient at 80%, but I can’t afford good help. There’s no way I can pay them. The turnover’s too high.” How did you make that shift that you could share with someone reading so they can go and implement this in their firm immediately?

I wish I was as intelligent as I sound, but unfortunately, it did take me a while of banging my head against the wall and almost getting divorced to realize this. To go back quickly, my first firm, I started out of my house. My wife just asked me if I could make the house payment. Within two years, I was working 80 hours a week and probably making $40,000 a year. Sometimes, I’d clip 100 hours a week. I had bad employees and everything. I’m going to be brief on this. I almost ended up getting divorced. It was just a real traumatic experience because we had three kids and this and that, and it changed my perception.

I merged with another CPA firm, another CPA who had a vision. It was funny because I even made him hold the stock in escrow because I didn’t think he would want me as an employee. The first thing he did was double everything I built. My firm instantly went from maybe it was $150,000 in revenue at that time to $300,000. He kept me because I could meet with people because not one client left. That was my first introduction to that. You’ve got to start, and you got to have a vision. There’s an old saying that says, “The best time to plant a tree was twenty years ago. The second best time is now.”

You got to start measuring, tell yourself the truth, and then set a clear vision for what you want. Your KPIs should be part of that vision. One of the significant things when we talk about utilization, there’s also this thing that every CPA can track no matter if they track their time or not, and it’s just the average hourly rate. You take the revenue of a firm and divide it by the total available hours. Every month, you measure that. Every trailing twelve, you measure that. You back out the time off and paid time off in holidays. That’s a good performance indicator that will tell you how your firm is measuring.

You’re adding yourself in there for 30%.

You add yourself for how many hours you work because you want to know out of all the total hours available what your hourly rate is. Generally, we put 40 to 45 hours for me on that. That’s the biggest thing about KPIs. You can be doing it wrong as long as you’re doing it consistently.

 

Be consistent. Do it wrong every week and every month, and you’ll be good to go.

The measurement will be there. The measurement will the same, and it’ll show you an increase and decrease. For people running the problems, they’re not consistent in the way they measure it. Utilization is one. Average hourly rate’s one because one thing that people realize once you start getting into employees is they tend to take longer than you do to do a job. You might price a job, and you don’t like pricing stuff an hour. You might put in a flat fee. Let’s say we put a flat fee out there of $2,500, and you might think, “That should take me five hours. I’ll make $500 an hour.”

You want to leverage that, so then you get an employee to do it, and all of a sudden, it takes twenty hours, which is still okay because that’s what you paid the employee, $125 an hour, but you need to know that. What I have found as I’ve experimented with flat fee pricing and moved into flat fee pricing, people ask me, “How can you price so high?” I was like, “I know what it costs because I priced stuff wrong.”

You learn the hard way. When did you figure it out when you used to price stuff? Did you have to double it or triple it? When I was always doing stuff with my last company, I learned that if I thought something was going to cost $10, it really is $20. If it was going to take 3 months to do, it took 6 months. I always went with the 200% of whatever you think.

That’s a good rule of thumb because, the thing is, you should always probably double what you think the price is. I’ve learned that. Sometimes, that’s wrong, too. In professional services, when you do a flat fee, you are always going to have a little engagement creep, where the client asks you to do stuff, and you don’t want to be a nickel-and-dimer. There’s engagement, which is one of the worst things I do, seep, where I am going outside the engagement and doing stuff.

You want to be careful of that, but you always got to take into account that there’s going to be some of that. People are going to ask questions, people are going to do stuff, and you’ve got to build in pricing to have a margin. If there’s a little seep or creep, it doesn’t kill your realization and put you into a situation where the cost of paying someone to do it. After you pay your labor, you’re not covering your overhead or something like that. I’ll tell you a story.

Let’s hear a story. I want a story on what’s the difference between seep and creep. They both sound creepy and seepy at the same time.

There’s a little subtle difference that I just learned, but it makes sense. Engagement creep is when the client asks you to do something that’s outside of scope. A good example is we have a lot of fixed-price agreements. We went through the Certified Tax Coach, and I liked her program. Some will do a flat BEAT tax planning, and then we’ll do a tax maintenance plan.

 

We’ve learned that the tax maintenance plan is pretty strict, and it defines what’s out of scope. All of a sudden, they sell the business. That’s a whole separate tax planning engagement. I’ve never been a big believer in audit insurance until recently. We’ve been in a couple of audits that we got no change, but that cost a client a lot of money.

Audits are something outside of scope. All of a sudden, you get tied up in something, or complicated tax notices. We usually will include tax notices, and we’ll say that are less than an hour or so, stuff like that. Those are engagement creepers. Engagement seep is when you’ve got such a good fee on the client that you might guilt yourself into doing something extra. You priced it too well, and you just got to screw yourself. That’s what I’ve learned is the number one thing that I have to be careful of.

You’re generous with all of the services. You have your own terminology for what you call yourself, being careful on engagement seeping because otherwise, clients might start to do their engagement creep on you because they’re like, “Mike keeps helping with this. Now we’ve got the audit. He’s doing that. He’s not charging me.” They’re getting a good deal.

A good example is I’m one of these guys that just jump in and do something. I heard about outsourced accounting and was like, “That sounds like a profitable thing to get into.” I had a client, not a good client, and all of a sudden, her bookkeeper quit. I said, “We’ll outsource it. Where were you paying a bookkeeper? We could do it for half that.” I’m embarrassed to say it was $900 a month or something. You can make good money on a small business with an outsourcing engagement of $900 a month. Sometimes, I got a couple of clients who get 120% of 130% realization on.

This lady had cashflow issues. If anyone’s interested in getting outsourced, never outsource people with major cashflow issues. I looked at the billing one month, and we had $10 an hour. Let’s just say it was $1,000. I’m probably lying. It was probably less than that because I tried to hide the pain a little bit. My realization was $10 an hour. We have 100 hours of an employee that I paid over $20 an hour. That was just not payroll taxes, not overhead.

You could have made more at Costco.

Here’s the thing, too. This is why I encourage people, and that’s why mindset’s so important. We learned a lot from that, and now we price those engagements a lot better. If someone has cashflow problems, we don’t do the outsource. We say we can’t do it. It was a learning experience, but you don’t want to learn like that. It was terrible because the client wasn’t even happy. She got mad at us because it was ridiculous. She was like, “Why aren’t you paying my bills?” We were like, “You don’t have any cash.” It was this bad situation where we were doing all this work, not getting paid, and the client was still unhappy.

That’s where your key performance indicators are so important because sometimes there are some rules. I was talking the other day about the mindset with Colin Dunn, and not all clients are good clients. Some clients are bad clients. You’ve got to identify them quicker, and then you’ve just got to have a point of truth with them where they can no longer be a client unless they meet certain profitability measures.

We had that meeting with the client, and we handed the accounting back to her. It was a great situation, but we learned a lot from that engagement. Not only it had bad pricing. It had engagement creep. It didn’t probably have where we were managing cashflow on a daily basis. You can’t do that. I’m going to have to lay down after talking about that engagement. That was bad.

You have bad memories coming up. Mike, what other KPIs do you track on a weekly or monthly basis that we haven’t talked about that someone reading should be thinking about? Maybe you can relate to it, especially right now, because as the times have shifted, everyone’s businesses are shifting. I know accountants are so busy. Most of them are thriving right now that I’ve talked to personally, but as this comes or has hit a recession, what other KPIs, in addition to utilization and average hourly rate, do you think one should track and how they should track it if you’ve got any insight on that?

The most important one is utilization if you can track that because that gives you many numbers that you need. That’s the percentage of time that your employees are working on billable stuff. If you have utilization, let’s say, you have a 50% utilization rate, you pay someone $30 an hour, it’s costing you $60 an hour, not counting benefits and everything else for every billable hour that person gets.

The second thing is a lagging indicator, but it’s real important to look at this and clients on a monthly basis. It is what we call realization. You build 100 hours, and that 100 hours should have been $20,000, but we only realized 80%, so that would be $16,000. Here’s utilization which is how busy your realization of what you do what percentage of your billing based on my standard hourly rates.

We talked about the average billing rate, which is real easy to calculate. One thing, especially in the recession, you need to know your average hourly cost. It is real easy, and you can do it at two levels. You can take your total hours available and divide them into your total cost before your compensation. This way you know what it costs you an hour. One thing I always do is take all the total billable hours, divide my total cost by that, and that gives you your cost per billable hour. This way, you don’t do stupid things like pricing outsourcing engagement at $1,000 or $800.

One thing you need to know, especially in a recession, is your average hourly cost. Click To Tweet

You know what it costs because your cost per billable hour when you start adding computers and overhead stuff like that is much higher than your employee costs. To give you an idea, what we come is a bookkeeper here in South Carolina that we pay maybe $21 or $22 an hour. When we add benefits and everything and we took the utilization of 75%, it comes to just a raw cost of about $36 an hour. If you add your overhead, our overhead’s probably $25 an hour. A bookkeeper might be costing you $61 an hour all in per billable hour. You’re thinking you’re making a lot of money at $100 an hour and you’re not. You got to be cognizant of those numbers.

Another good one for people who don’t track anything is revenue per employee. You figure out how many full-time equivalents you have. If you have part-time employees, you take their total hours and divide it by 2,080, and that will give you a full-time equivalent number. You take your full-time equivalents and divide it into your revenue. You want that number to be at least $125,000, and this is low. If you have you and 2 other employees, you should be at least doing $375,000. Ideally, you want $200,000 per employee. Anything above $125,000, I don’t want to say acceptable, but that’s a number that you need.

 

It’s a good target.

That’s a minimum target. A good number would be $150,000. A great number would be $200,000. There are some people that once they get the fixed pricing and get the sales side down, they’re getting $250,000 per head. If you’re doing that, you’re doing well.

Mike, how long has it taken you to start tracking all these KPIs? I’m just going to put my accountant hat on for a second because, for all of you know, I’m not a CPA, but I pretend I am at times because I work with all of you, so I know what’s going on in your head right now. You’re probably thinking, “Michelle, that sounds overwhelming. We have a lot of work to do. We got many clients. We’re inundated with PPL, EIDL, recession hit, businesses closing, and some people thriving.

Mike, how long did it take you to get to tracking everything you shared? For everyone who’s slightly overwhelmed right now, I know the first one that everyone should track is the utilization. What’s the second one out of the 5 or 6 that you shared for the KPIs that someone should start tracking where it’s not so overwhelming? You’re doing all this now, but it’s taking you some time.

It takes me some time to get clarity on the numbers because most of your management systems if you’re using office tools or you’re putting your time in them, they’ll give you utilization. Any accounting management practice will track utilization. They’ll track realization. It doesn’t have to be 100% accurate, as long as you’re doing it consistently. For about a year, when we switched from QuickBooks to doing our time in billing in office tools, there was a little gap between what was being built in office tools and what was being built in QuickBooks that didn’t take into account. We’ve gotten that gap down to pretty much nothing except if we have bad debt.

No bad debt. One other KPI you should all be tracking is your revenue. That’s another one.

Revenue per employee is easy. You take your monthly revenue. Multiply it by twelve. You take your number of employees, which you should know, especially, if you’re a smaller practice, and you divide into that number.

It might just be you. If you’re a solo accountingpreneur, it’s divided by one.

If you add someone, you should be trying to get that $125,000.

In a month.

You’ll be shocked. One of the amazing things is when you start delegating stuff and working with your clients. It’s amazing. The revenue will grow. I was a strategic coach. The first thing I did was to hire a guy in my litigation practice. This was early on. My revenue went from $250,000 to $500,000 the first year. I was very fortunate. It was a little tight labor market or loose labor mark, whatever it is, where there were employees available. This guy didn’t get a job out of college. I hired him very cheaply. I instantly realized how valuable he was. Over the course of a year, I was able to give him six raises. I lucked out on that. I realized that when I can delegate stuff and talk to clients.

When you actually start delegating and working with your client, your revenue will grow. Click To Tweet

Your revenue and profitability goes up.

The perception of the client also helps. I tell people all the time, especially my older clients, “Don’t come in here at the last minute thinking I can do your return because I don’t know how to do them anymore. I haven’t even logged on the software.” The problem is I’ve got spoiled employees. None of them are going to stay past maybe 5:00 or 6:00. Get your crap in because those days are over. Most of these are very easy to do if you have any idea of what your total hours are. You can do even standard.

Put it in an Excel spreadsheet and get it done. If you use Office tools or one of the softwares, it’s all in there.

You can play with numbers, too, so you know where you are, and what would happen if you moved it up. That’s where you can see the power. I’m operating at this utilization, but if I get to this utilization, I’m operating at this average hourly rate. There are firms out there that are getting $200 per working hour. To give you an idea, ours is like $85 or $90. If you take all of our employee hours and multiply it by $90, that comes up to our revenue. We’re a profitable firm. We’ve got high profit for above average. You can imagine if I got the $200 an hour.

That’s your new goal. I’m going to give you that new goal. Everyone reading, you need to get to a minimum of $125,000. At least start tracking one of these by next week. If you track it wrong, that’s okay. Stay consistent. Mike, thank you so much for being here with us on the show. It’s always a pleasure and honor to have you here. It was very insightful. This is the most important time for everyone reading to start tracking this. Thank you so much, Mike, for being here.

Thank you, Michelle.

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What an amazing episode with Mike. Your brains are probably very overloaded going, “Michelle, we can’t handle any more work right now.” As we’re in a recession, it’s very important to measure your KPIs. If you had to choose one, what’s one that you can start tracking? I have a bonus one for you to track because, as you all know, revenue helps you bring on better staff and give out bonuses. One of my most recent students just paid out bonuses. I talked about that in a previous episode. What a great time to give and uplift your staff and your people. It’s time for bonuses.

Lastly, a reminder, I have an eight-week sales mastery training coming up. If you want to chat about that, make sure to book a call at TheAbundantCall.com. My business partner and I will help you build your dream practice, so you have the time and money to maybe go on a vacation. You’ve spent all this time with your kids and family at home, and soon we’re all going to be able to go on a vacation again.

Have the funds to do that, not be frustrated and stressed trying to get the right referrals, and have control over who you work with and how much you charge like Mike. He said, “Double your rates. I can help you with the confidence on that.” If you want to explore and get to the truth of why that might not be happening for you, then let’s chat. All I ask is that you’ve been an accountingpreneur for at least two years. Head on over to TheAbundantCall.com. I hope you all have a great day, and I’ll chat with you soon.

 

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About Mike Meilinger

Mike Meilinger started his first CPA practice in 1997, which he subsequently sold in 2005. Mike is not one to sit still for long, though, and in 2006, he started Meilinger Consulting, a CPA firm focused exclusively on litigation support, forensic services, divorce accounting, and business valuation. In 2011, Mike had the opportunity to start a new tax practice from the ground up within Meilinger Consulting. Today, Meilinger, having doubled in size over the previous three years and boasting 10 full-time employees, has further evolved into a business that caters to the top 1% of business owners, and Mike only sees more opportunities ahead.