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Natwest 6 Dec 2017 02:58pm

Average fees and profits outstrip inflation

SPONSORED CONTENT: The 2017 NatWest Accountancy Benchmarking Report is a comprehensive review of accountancy firms with fee income of up to £35m

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Caption: Natwest analyses the link between accountancy firms and inflation

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. Robert Mowbray, author of the report, highlights his key findings.

Profits and fees

The headline finding from the research is that median profit per equity partner has now reached £141,000 (£21,000 higher than in legal firms), with the lower quartile £59,000 and the upper quartile at £222,000.

The variance in figures at the margins might appear dramatic, but the good news is that profit per equity partner has grown by 6% compared to last year. As inflation during the last financial year was well below the 2% target set by the Bank of England, this 6% growth is significant.

There is some difference between the performance of small firms compared with larger firms, which is perhaps to be expected. The former posted gains of 10% in profit per equity partner, whereas larger firms recorded 3%. There are also some fairly significant differences by region, with the median being the highest in London & South East at £237,000. This compares with the North East and North West, where the median is less than one third of this at £69,000.

Annual fee income per equity partner shows considerable range, and reflects the focus among firms to control costs as much as it does the desire to increase fees.

The median figure stands at £551,000, with the lower quartile figure at £401,000 and the upper quartile figure at £863,000. In very large firms the figure is £1,001,000, showing how economies of scale can directly affect the bottom line.

Across the sector, fee income is up by 6% on last year, showing that fees are growing at the same rate as profits, and grew at a rate well above inflation for the period. The median of profit as a percentage of fees is now 23% with an upper quartile figure of 31% and a lower quartile figure of 16%. However, productivity is poor with median recorded chargeable hours per fee earner being just 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 takes 115 days to turn time spent into cash, which is a figure that could be improved. By way of example, if a firm has fees of £551,000 per partner, it will need capital of one third of this (£180,000) to finance this lock-up before other investments could be considered.

Interestingly, there is no significant change to lock-up across small, large and very large firms. Whatever the reasons for this, there is an irony at play given the advice that many accountants will give their clients about the imperative to limit the number of lock-up days. In the legal profession lock-up is 113 days during the same period.

Just because firms do not borrow too much does not mean that they can’t have a cash flow crisis fairly quickly. The data suggests that the median firm would run out of cash if it did not receive any more money from clients in the next 36 days.

Finance

While they may have not been concerned about lock-up and increasing working capital, accountants have remained prudent when it comes to 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 match what is being locked up in WIP and among debtors.

 

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