CPA Firm Profitability

It's one thing to understand Pareto; it's another to execute

Colin Dunn
October 4, 2021
minute read

We are receiving some very positive feedback on the Fragility, Scalable, Danger and Insanity Zones in our Pareto for Profits module.

The terminology is really resonating, but more importantly, it is creating EMOTION, which in turn, creates ACTION.

It’s one thing to understand your firm’s Pareto, but it’s another to execute on what you discover.

To clarify some terminology:

  • Fragility Zone: clients paying a lot of money but placing high demands on partners
  • Scalable Zone: good clients, typically paying between $3,000 and $25,000 a year. This is where scale and leverage can be found if the service delivery is structured appropriately
  • Danger Zone: clients who may be marginally profitable for your firm, but who demand too much, given what they pay you
  • Insanity Zone: clients who are below breakeven for your firm once you allocate labor and overhead. Typically once a year, standalone tax returns who do not need additional services and/or do not value what you do.

One interesting point that some of our CPA clients have raised is that when you terminate a batch of loss-making clients, your breakeven price will increase, and you’ll find clients that were previously in the Danger Zone now drop into the Insanity Zone. In other words, clients that were previously profitable are now loss-making. That’s because the costs that the clients you terminated were absorbing now need to be absorbed by the remaining clients.

Many accountants use this rationale to justify keeping the new loss-makers as clients. We don’t think this is smart if you’re pursuing a Target Clients only strategy.

Here’s why.

Clients in the Danger Zone (whether they are still there or have dropped into the Insanity Zone) can be the most difficult to serve.  They are probably small, place high demands on your time (remember, some of them probably landed in the Danger Zone because you raised their price by promising more contact), only require low level, once-a-year compliance services, they may be uncooperative, or your systems and processes are not well suited to them.

The key point is that clients in the Insanity and Danger Zones are certainly consuming resources that could be better deployed if you could find more target clients and as long as you continue to serve them, you will not have time to position your firm to attract target clients.

In other words, it’s a never-ending game where your goal is to consistently upgrade your client base… AND your team, so that they can handle more target clients. That’s why you should be recruiting and marketing all year round.

Food for thought as you start to think about how to stop the madness, so that next tax season is very different from what has happened in the past.

For now, consider how Pareto for Profits and Targeting the Targets can apply to your firm.

Taking Action:

If you're interested in more insights like these, consider signing up for our Renewsletter: Alternatively, if you'd like to discuss your CPA firm's specific needs, feel free to schedule a call with us:

About the Author:

Colin Dunn, a Chartered Accountant with extensive experience in the accounting industry, is passionate about helping accountants transform their firms and lives. With over 25 years dedicated to creating content for to help CPAs improve their profitability, Colin shares valuable insights into the Pareto for Profit model. Colin believes that CPAs can create a better work-life balance by learning from past experiences and applying these insights to their firms, allowing them to spend more time with their families and pursuing hobbies and leisure interests.

About Renew Group:

Are you tired of being on the diet but not seeing results? Most consultants to the CPA Profession do lots of talking and deal in 'fluff'. But there's no accountability and no focus on RESULTS.

At Renew, we start with your numbers. Our firms complete a Pareto for Profit analysis EVERY YEAR, set new targets to improve their profitability and then 'weigh in' regularly. We give you a roadmap to transform the profitability of your accounting firm by accessing our content, collaborating with other firms on a similar path and being held accountable by our coaching team and your peers.

Get paid what you're worth, create a better life based on a scalable business model and eliminate tax season insanity once and for all!

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