9 Sep 2015 05:40pm

Analysis: UK’s small accountancy firms

We analysed the trends, challenges and opportunities facing the UK’s small to medium size accountancy firms

We used exclusive data collected in the NatWest Financial Benchmark Report, produced in association with Rekoop and Taylor Mowbray’s Robert Mowbray  - which examined the financial performance of 184 firms with up to £30m in fee income.

Categorisation of firms:

Small firms = Less than £1.5m fee income per year
Large firms = £1.5m - £5m fee income per year
Very large firms = £5m+ per year

Profit rising above inflation

Profit per equity partner is up 7% on last year. An average partner in an accountancy firm generates median fees of £435,000 (£857,000 in very large firms), at a net profit margin of 25%, thereby delivering a median profit per equity partner of £108,000 - lower quartile is £69,000 and upper quartile is £183,000.

Small firms are out performing larger firms

Smaller firms reported a higher median rate of growth at 15%, compared to larger firms reporting 4% and very large firms showing just 1%.

Steve Arundale, head of Professionals at NatWest, said, “It’s great to see profits heading in the right direction - this will be welcome news after a number of more challenging years.

“The South West was the best performing region, increasing by 12% while Scotland reported the lowest rise at 5% - although that us is still above inflation.”

Geographical breakdown

South West is the top region by performance. Scotland reported the lowest rise.

Regional split – number of firms:

London & South East: 34 South West: 28
Wales, Midlands and East of England: 50
North East, North West: 36
Scotland: 36

Biggest obstacles facing sector

Succession, productivity and technology are among the biggest issues for accountancy firms. Productivity was particularly poor with median recorded chargeable hours per fee earner being just 1,000.

As productivity is a big driver of profitability – firms should measure the relationship between the fees generated and the cost of employing the fee earners.

In addition, firms should invest in training and technology so that individual fee earners can generate more fee income per day.

Age of partners

Since the economic crash, partners have become seven years older and not many new partners have been admitted. Firms are going to have to think about how they can attract younger people into partnership when they might be tempted by alternative jobs in the City or in industry.

Firms need to focus on productivity so that they can deliver profitable services, and invest in their staff and technology so that the best people are nor enticed away.

Accountants take 42 days to issue bills

The report found that 42 days is the average amount of time it takes from the recording of an hour to the billing of that hour.

Meanwhile, 75 days is the average amount of time it takes to get a bill paid from date of issue.

Solicitors generating more per partner

Solicitors generate 9% more fee income per equity partner than accountants.

The profit per equity partner is almost identical in both professions but accountants performed better by £1,000. The margin in accountancy firms at 26% is higher than in law firms where it is 24%.

However, the expenses per equity partner in accountancy firms are lower at £327,000 than in legal businesses, where the figure is £367,000.

Firms should reconsider whether everyone is recording all of their time properly as both professionals recorded 1,000 chargeable hours, which translates to just 4.4 hours per day.

A lawyer recovers £150 per hour while an accountant recovers only £119 per hour. The report suggests this could be because lawyers are providing a more complex service or because these are more confident when discussing fees.

Robert Mowbray said, “If growth continues and accountancy firms can generate more revenue, it is vital that there is a real focus on making this revenue as profitable as possible. This is why all firms should be thinking hard about improving productivity by investing in training and technology so that individual fee earners can generate more fee income per day.”

The full report can be read here.

Sinead Moore and Jessica Fino


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