By Peter Brown, Senior Consultant, Sageworks
After opening up its private company database
for free to US accounting firms, Sageworks
looked at the top ten most popular industry codes that accountants were running. Looking at the number-one industry report, it appears that CPAs are most interested in, of course, the accounting industry. In many cases, they were most likely pleased with what they saw.
Looking at the net profit margins of financial statements from September 2012 to September 2013, accounting firms were the second most profitable industry in the Sageworks database (see sidebar). Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance. This can be a crucial selling point when interacting with your business clients or talking with potential new business.
Industries with Highest Profit Margins
The following five industries had the highest net profit margins in the last twelve months:
- Legal services – 19.5 percent
- Accounting, tax preparation, bookkeeping, and payroll services – 17.4 percent
- Oil and gas extraction – 16.2 percent
- Commercial and industrial machinery and equipment rental and leasing – 14.8 percent
- Outpatient care centers – 14.2 percent
CPAs are often in a position to dictate just how much influence and access they have with their clients. The difference between quarterly tax accountant and trusted business advisor can be a few meetings with the right kinds of insights. After all, accounting firms have had some of the highest profit margins over the last twelve months, a sure sign that CPAs know how to manage and maintain a business. Having access to proprietary industry benchmarking data can help you connect the dots and show your client how to best address their strengths and weaknesses as compared to their competition.
Brad Schaefer, an analyst at Sageworks, says that accounting firms have had consistently high profit margins over the past ten years or so, according to Sageworks data.
"Time and again, year over year, accounting firms are profitable. CPAs have demonstrated a strong and comprehensive command over their financials and are able to deliver profitable outcomes in good years as well as lean ones," says Schaefer. These results are particularly notable in light of some of the other industries on the most profitable list.
"Industries such as oil and gas, the next best industry performers, are also able to deliver consistently high profits, but have several important drawbacks that should be considered," says Schaefer. "These industries require huge amounts of up-front investment and capital, whereas accounting firms and other professional services industries typically are able to run with comparatively small and barebones start-up and maintenance costs. As the saying goes, you need money to make money, but accountants need a whole lot less and oil drillers need a whole lot more."
Accountants' reliable profit margins can be used as a great way to get your foot in the door. Nearly all companies could benefit from increased insights from their financial statements, and far too often those insights are desperately needed. CPAs who can demonstrate command of these reports can easily step into a business advisory role, helping clients to improve financial operations and cash flow, increase stability, isolate problem areas, and identify business strengths.
By highlighting their own performance over the last twelve months, accountants can make a strong case for themselves as not simply tax preparers and bookkeepers, but as trusted business advisors.
About the author:
Peter Brown is a senior consultant for Sageworks. He brings experience in technology, business, and financial services into his role. Graduating with a computer science degree from West Point, Peter successfully navigated the challenges of running a small business in a competitive marketplace. Afterward, he worked in financial services working for Fidelity Investments. At Sageworks, he uses his unique background to provide superior advisory services to Sageworks largest clients.