A buddy of mine is a CPA, and his real profit margin is way higher than ours. The difference between them and us is that they know how to legally write off more than we do, put the profit they make in retirement trust accounts, and utilizing actuaries to help them calculate out how much to put in their pension plans. We have to hire CPAs and actuaries to calculate these things for us with a mega cost, and they don’t. My CPA and actuary both make way more than I do with less staff and overhead.
Your perceptions are interesting. In reality, I believe CPA “firm” profit margins to be lower than dentists. I think the biggest difference is in the labor, our industries statistics suggest that the benchmark for labor is 35% and as much as 40% is probably quite common. Dental practices float around 25%, maybe as high as 30%.
All of our other “fixed” OH is probably between 30-35%, the rest is for the ownerCPA and if you consider their compensation for CPA services I bet our profit margins aren’t much higher than 10% and that’s on the high end of the range. Larger firms can achieve higher return rates and that’s only because they provide other non-accounting consulting services to larger companies that bring in lawyers like hourly rates of $500 per hour+ with many of these consulting jobs priced as success fees, similar to a broker getting paid 10% on a practice sale. With an efficient and quick practice sale of say $500k, the $50k if calculated on an hourly basis is probably like $1,000+ per hour.
Why is our labor so high? Maybe the best comparison is to look at our “assistants”. Lets assume a CPA is akin to the doctor, the CPA is the rainmaker of their “firm”, the one that has to getsell the client and the one responsible for ALL production. Note I said responsible, they don’t do ALL the producing, our “assistants” (junior accountantsCPAs) earn MUCH more than the $20/hour that most dental assistants make. The starting salary for a “junior” accountant is probably about $50k+ and it can go as high as $70k, depending on the type of CPA work you do. Even our most basic staff person probably makes an annual salary of $30k per year, whether they’re a bookkeeper or an administrative assistant.
Space used to be another large part of our OH, however, with technology today, space OH has been declining with firms allowing more people to perform some of their functions from home. However, that technology comes at a cost and that cost is slowly replacing the space cost.
The thing is, I KNOW what my dental clients make, they DON’T know what I make and what I KNOW is that maybe less then 20% of my clients earn LESS than I do AND more then 80% of my clients work LESS than I do. I have many clients who work 3.5-4.5 days per week ALL year round and earn at least $300k+.
While you MIGHT find a CPA that can work 3.5-4.5 days per week for 9 months of the year, we have busy seasons where we work the equivalent of 7-9 days per week (8 hour days) that covers 3 months AND even if we do make $300k+, I suspect if you calculated our compensation on an hourly basis and compared that to a dentist, you’d see that the majority of dentists make more than a CPA.
There are the exceptions of course.