Most owners want to pay their staff well. Some feel dictated to by the market - so they pay what they think they need to, to be competitive and snag that applicant! But in either case, of course it needs to make sense for the business.
The first step occurs when determining who to hire in the first place. You want to ask yourself, 'what work do I need to offload and what rate can we get for that work?' Although not always practical, generally it works out best if you have enough tax work to keep the person busy - or - if you need them for bookkeeping, that you have enough bookkeeping to keep them busy, because if we mix different types of work, it can get harder to get enough billings from them to be profitable on their work.
This is because lower rate work will reduce their revenue output and we need them to bill 3 to 5 times their cost. Their cost includes all expenses associated with their income e.g. payroll taxes, health benefits, retirement plan, etc.
It takes 3 to 5 times because you have to get a percent of your budget for your software, marketing, administrative staff costs etc., out of the revenue they generate.
If you are about to hire a billable staff member, here is a formula you can use:
Take 75% of their hours (this would be a higher % if part-time) and that gives you 1560 hours. Multiply that by the hourly rate you expect to get for their billable work, so for the sake of example, say that is $200 an hour. That gives you $312K - so that is the revenue you expect them to generate for the annually firm. In this example, the maximum you can pay them is a third of that - $104K a year.
So the trick here is to start by working backwards from the estimated revenue that will be generated, instead of starting with the salary itself.
This is easiest to do with billable staff but a similar formula can be worked out for administrative staff too. This way you ensure that each new hire generates more revenues for the practice and increases profits, rather than just becoming additional overhead.
Ciara MacMahon
Author Bio: Having worked with accounting practices since 1998, and prior to that working as an attorney in a set-up, very similar to a CPA practice, Ciara MacMahon, CEO of Phase Two Management Consulting, has successfully boosted revenues of accounting practices by 3 – 4X, while allowing the owner to take more time out of the practice. Accounting practice owners are faced with endless deadlines and the challenges of managing workflow, finding the right staff, staff training as well as securing the acquisition of quality new clients! They are also often tasked with the not too pleasant responsibility of imparting bad news regarding taxes due, that the unprepared client is unhappy enough about, to oftentimes ‘shoot the messenger’!
As no two practices are the same and each owner has his own vision for what he/she wants, the first step is a Planning Session to work out the owner’s goals and a strategy to obtain them, in the fastest time period, and for the highest return. To schedule your one on one complimentary practice analysis and consultation, email Ciara MacMahon at consultantciara@gmail.com today. www.PhaseTwoManagement.com