Cynthia Kett, CA, CGA, CFP, RFP, fellow of FPSC, Stewart and Kett, Toronto
Professional services firm
Professionals, senior executives, entrepreneurs
The professional services model is to divide total revenues into thirds. One third should cover overhead, the next third salaries, and the last third profit.
Overhead costs consist primarily of rent ($105,000 per year), and the following expenses, which total about $75,000 per year:
- Professional dues and memberships. I have several designations, so my dues alone are $5,000 a year. My partner David’s dues cost a bit less. We pay the dues of our four associates, and give each $1,500 a year for continuing education.
- Computer systems and software, plus outside IT support ($15,000 per year)
- Telephones ($5,000 per year)
- Directory advertising—Yellow Pages and the like ($3,000 per year). Luckily, we don’t spend a lot on looking for new business, because our clients do great referrals.
- Meals and entertainment ($3,000 per year).
- Web site maintenance
- Office supplies
- Courier and postage
- Subscriptions to industry publications
As Tom Trainor of Hanover Private Client notes, many professional firms use a 2.5-to-three times multiplier, so each employee should bring in about three times salary to cover costs.
If an employee makes $100,000 per year, she should bring in $300,000. The first third recovers salary, the second third recovers overhead, and the last third is profit.
Then we determine a fair profit level, and the number of chargeable hours we anticipate during a year. We don’t have administrative staff, only professional staff, so some of their time isn’t chargeable. Then we take desired total revenues and divide that by our chargeable hours.
Our salaries take up more than a third of revenues because we’re lighter on the overhead side. In lean years, we’ll take a bit off the profit third, too.
How costs translate to fees
We have four billing rates:
$75 per hour for our first year associate with no designations; $125 per hour for our second-year associate; $175 for our third-year associate; and $325 for our senior advisor and the two partners.
We issue engagement letters saying fees are based on the time required by the person assigned to the file. Hourly rates vary according to the degree of responsibility and skill required.
All meetings, report presentations and reviews are billed at $325. Associates who bill $75 do accounting and some financial planning, but with guidance. Someone at $125 or $175 does personal and corporate tax returns, financial planning, and reporting; but the partners review the files before they are presented to the clients. An associate doesn’t have the same experience or big-picture perspective. That’s what the partners provide.
At minimum, a full plan would cost $4,000. A financial checkup would be between $1,000 and $1,500.
Our billing rates are about 20% to 25% lower than those of large accounting firms—their partners bill at $500 per hour, but they have a lot more staff beneath them. We’re flatter. Our rates are comparable or slightly higher than those of firms with fewer than 10 professional staff.
How costs translate to growth
I want to double revenues within five years and we average 20%-to-25% revenue growth per year.
I also choose to work a 30-hour week. So I’ve divided the target revenue by the average number of hours we bill per year to see if we need to hire anyone. I also take into account that a new associate can’t bill $125 right away.
For clients on an annual retainer, we tend to do the same type of work each year, so we know how much it will cost. We still keep track of our time, and if we’re a little over or under we’ll ignore it. If it’s consistently higher, we’ll raise the retainer.
How I do it
Most of our expenses are recurring and predictable. After we take care of our fixed costs, everything falls to the bottom line.
When David and I started Stewart & Kett, we each had our own businesses, so we weren’t starting from zero. But when I started my own practice, I needed to know I could keep the doors open so I estimated revenues and expenses, then halved the revenue projections and doubled the expense projections. Then, I mapped out monthly cash flows for the next two years, assuming revenues would take 45 to 60 days from the billing date to be received.
Accounting and law firms are good examples of how to structure fees.