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How to Balance Your Firm’s Risk and Reward

Apr 13th 2016
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business man balancing on rocks
Courtney Keating_iStock_man balancing on rocks

As you know, running an accounting firm means you are running a business. This may seem an obvious point to make, but I believe many firm owners fail to fully realize that they are business owners.

You are required to employ strategy to win new clients, deliver serious value, and build your company. All this means that you are an entrepreneur.

You will truly know that you are an Accounting Entrepreneur if you are doing what entrepreneurs do. Entrepreneurs take risks, plain and simple. The wise entrepreneur knows that taking risks must lead to realizing rewards. And if you fail to identify what rewards you hope to see, then taking the risks makes no sense.

An Example of Risk

I’ll make this more concrete by giving an example of risk my own firm has taken. In our firm, each client is assigned to one of our CPAs to lead the relationship with that client. The CPA is called a Customer Ally. We feel this is a differentiating position for our firm to take, and allows our team to remain focused on just a few clients at a time (each CPA can handle about 10 to 12 clients).

Midyear 2014, we had to let one of our CPAs go, and this caused huge problems that we are still working through in our firm. When a CPA leaves our firm, then there are clients that go without service. This is really bad. Most clients were understanding as we searched for a replacement, but still we lost a few good clients because of this fiasco.

An Example of Rewards

Our team has to be autonomous and super smart to be able to work under this model of business. Our CPAs are effectively on the front lines of serving our clients. This brings huge rewards. Because we are fully virtual and have no offices, we get to hire the best team anywhere in the country. They do not need to be managed, and in fact can execute some of the new services I dream up and sell.

All three of the current CPAs we have now are incredibly gifted in their work, and none of them could work in our firm unless we had the current model we have now. This reward allows me to avoid doing any accounting, tax, or payroll in our firm. I can focus on growing the firm and consulting with clients. This is one of the great rewards of having our strong team.

Balancing Risk and Reward

We still operate our firm under this model of Customer Ally service. “Are you crazy?!” you might say. We’ve been burned, and lost clients because of this heavy risk we bear. But we had to also look at the rewards we receive as a result of this business model. So, we had to ask ourselves, “Are the rewards we are receiving worth the risk we are bearing?” In fact, this is the question all Accounting Entrepreneurs need to be asking themselves.

To help answer these hard questions around risk, I’ve developed the Decision Risk Quadrants model to help Accounting Entrepreneurs make strategic moves in regards to their risk. Here it is:

Decision Risk Quadrants

This model is attempting to help you answer the question “when do you make a business decision based on what you know about that decision?” I see taking risks on two planes: one is the rewards you hope to receive in return for taking the risk, and the other is the probability that the risk you’ve taken will turn out to be a reward. I’ve laid these out in the quadrants above. Further, I’ve categorized the quadrants your decisions fall into as you take various risks while running your firm.

Interpreting the Decision Risk Quadrants

Let me make some points about the Decision Risk Quadrants model above. You are taking gambles when you are making decisions that could potentially give you high rewards, but are improbable to actually work out. We do this in Vegas. We all need to avoid Quadrant I above.

Quadrants III and IV are where most accounting firm owners live. Accountants are generally risk-averse people and thus run their firms with the hopes of low rewards. They don’t mean to, they just don’t want to take the risks necessary to realize larger rewards. Accounting firm owners are staying safe, and making decisions that lead to either improbable rewards or likely rewards. In either case, the rewards are low.

The Accounting Entrepreneur should be moving their decisions to Quadrant II, where the decisions you are making (i.e., risks) offer potential high rewards, with the likelihood of working out. By likelihood of working out, I mean that you have more than a 50 percent chance of gaining some reward from the decision you are about to make. If you are facing decisions in your firm right now (and everyone is), you can use the Decision Risk Quadrants above to ask yourself these questions:

  • What are some of the rewards I hope to realize from the decision I am about to make?
  • How could I possibly increase the rewards from the risk I am about to take?
  • Is this the right time to take this risk?
  • Is this a high-value risk, one in which I expect to realize brand-new value?
  • Is this a normal decision every accounting firm owner is making?
  • How likely is it that I will realize these rewards? Is my chance higher than 50 percent that this decision will work out?

Are You Taking Risks?

Taking risks has been equated to being stupid. But risks are strategic, not stupid. We just have to accurately define what a risk is. The Decision Risk Quadrants model can help you do that. Taking risks is actually a strategic behavior for accounting firm owners. Most avoid taking risks, when really making decisions that involve some form of risk is how you make more money and increase the value of your firm.

Increasing your value directly relates to the price you are able to price your services. Moving to value pricing, or the decision to stop serving individual tax clients, or the owner attempting to step out of the details of preparing tax returns are all risks. But the rewards of these decisions could reap huge rewards.

It’s time to start taking risks. Smart risks. These are decisions that will allow you to increase your price, work less, and really change the lives of those you serve. What risks are you failing to take?

Jason Blumer will be a speaker at the Accountex USA 2016 event in November. The original post appeared on the Sleeter Group blog. AccountingWEB and Accountex have partnered to bring you this content as we share a belief in the furtherment of the profession through greater insights.

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