How Profitable is a CAS Firm?

Read Time: 5:37 minutes

✋Welcome to The CAS Cache! This newsletter is designed to grow CAS offerings in accounting firms. I will give my take on a topic to grow your CAS offering in each issue.

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Benchmarking is a commodity trap. Per Ron Baker's book Implementing Value Pricing, "The major problem with benchmarking studies...is that one is studying the results of an interdependent system, not the process itself. They tend to confuse cause and effect.

I agree with Ron. Benchmark studies tend to be an echo chamber. For example, if everyone is talking about doing bookkeeping at x rate. The only differential a prospect hears is price. Therefore, a competition on price ensues and the race to the bottom begins.

My initial reaction to the 2022 CPA.com CAS Benchmark Survey ("CBS") was that the numbers were low without comparing them to mine. So I did what I hate doing and compared my firm (a2 advisers) to the survey while writing this post.

This is not a humble brag. Instead, it is a perspective for others considering creating their own CAS service. And, I have enjoyed Logan Graf's and Scott Scarano's open approach below, so I am doing the same.

Here is a brief background on my firm before I jump into my numbers. I started my business in April 2021, so 2022 was my first full year. I only focus on advis(e)ry work and do light bookkeeping for one client. I have been doing and talking about CAS for over six years in CPA firms before going out on my own, so I have an extensive network built up.

Before making the leap, I had a commitment from three clients totaling $4k/month. Within a month, I added two more clients (+$12k/month) I had been working with but wanted approval from the relationship partners before engaging them.

These facts are important because building a solid base takes time. And comparing yourself to others is a dangerous game. Now, onto the rounded numbers.

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Total Revenue - this is purely for perspective. Revenue is a vanity metric to me. Larger firms need to focus on growing revenue faster than smaller firms to cover larger overheads. Smaller firms have the flexibility to use pure value-based pricing, giving them an advantage in some of the following metrics.

Recurring revenue - in the following two metrics, I use recurring revenue. I pulled out assessments and projects from my total revenue.

Recurring revenue/FTE - I don't love this metric. For example, I could have two employees making $100k each, only producing $250k in revenue. My metric would be $125k, but I'm only making a 20% margin.

I prefer Greg Crabtree's Direct Labor Efficiency Ratio, but that was not included in the survey. Either way, my ratio is low since I have a part-time contractor and hired a full-time contractor in Q4.

This is where benchmarking goes wrong. I run a lifestyle firm, so I am okay with this metric being low. I would rather have more freedom than more money.

Recurring revenue/FTE - I am a fan of this metric. It gives me a high-level overview of capacity. I think a fractional CFO can handle a maximum of ten clients, and a fractional bookkeeper can handle a maximum of twenty clients.

My metric appears to be well above the survey. However, my target is $33k. This is the minimum I need to be at based on the estimated clients and an above-market pay for a CFO paired with an analysis.

Gross margin - I was stunned by this one. I assumed they included partner compensation in the metric. However, the glossary states, "net client fees for CAS services – CAS expenses before CAS partner salaries or draws." Yikes, those are some low numbers! For reference, my firm was at 42% with my compensation. My target is 50%+.

Owner reward - I included this because people own a business to make a decent living at the end of the day. This includes my salary, solo 401(k) match, profit distributions, entertainment expenses, and tax distributions.

Operating margin - I included this to give people an overall perspective. Ideally, I want this above 20%, but I can live with these numbers as long as, my days in the field and on the course are above average.

Percent of practices reporting CAS staff 100% dedicated to CAS services only - this stat is not listed above, but I find it critical. My contractors are 100% dedicated. My biggest pet peeve running CAS service lines in CPA firms was staff members setting recurring CAS work aside for deadline work. Not dedicating staff will lead to client and employee dissatisfaction, guaranteed. The stats in the survey were 67% dedicated for TP and 54% for ALL. These are too low, in my opinion.

In summary, CAS firms can be very profitable, but avoid using industry benchmark studies as your north star. Instead, a better approach is to look outside our industry. I have done this by looking at different clients' financials over the years and reading other professional service industries' benchmark reports.

This method is also discussed in the Harvard Business Review article below called, How to Measure Yourself Against the Best. Ron Baker also recommends it in his book mentioned above. Remember, comparing yourself to others is a dangerous game because you will rarely have the full picture.

Choose Your Own Adventure 🚶‍♂️🗺

Guru Cache 👂📚👀

👀 Logan Graf's 2021 numbers and 2022 numbers - subscribe to Logan's YouTube channel, so that we can see a couple more 00s next to his YouTube income next year

📚 Scott Scarano's numbers - the most important ones in my opinion were hours worked

📚 How to Measure Yourself Against the Best - an oldie but goodie on Xerox and L.L. Bean looking outside of their industries for benchmarking data

Client Cache 🗣

This one is a bit different, but my client newsletter is designed to help entrepreneurs grow in business 📈, mind 🧠, body 💪, and spirit🧘.

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Thanks for reading, Luke Templin!

P.S. There are 2 ways I can help you grow your CAS offerings when you are ready:

1. Mini courses on CAS

2. Book a 1-hour CAS consulting call