The 40% Net Profit Margin Myth

The 40% Net Profit Margin Myth

If you’re an accountant either running your own practice or thinking about starting one you will have come across the 40% myth.

How achieving a 40% net profit margin is the Holy Grail of running an accountancy practice and what you should be achieving and if you’re not…

…you’re a loser with an under-performing business

…you don’t know what you’re doing

…you’re leaving money on the table

…your prices are too low

…you MUST be suffering from scope creep

…your practice is inefficient

I could go on but you get the idea.

Well let’s make it clear, this talk of 40% net profit margin as being some sort of industry standard which defines a successful business is rubbish.

To many small practices, especially those starting out, it’s a meaningless measure.

To those practices who are looking to scale and build a great culture its not an accurate benchmark.

Let’s stay away from the marketing hot air and look at why it’s a poor metric.

If you’re running a start-up or small accountancy practice a key driver is you being able to earn enough money to pay the bills and feed your family.

You don’t think about margin, your focus is on cash flow and winning more clients.

You’ll pay yourself a small salary and dividends to stay tax efficient.

So, the likelihood is if it’s just you, possibly with some part-time help, your net profit margin will be way over 40%.

Ah ok, so you need to factor in a ‘notional’ salary. A figure a practice owner should be earning.

Really?!  What is that? What one practice owner wants or thinks he or she should be earning is very different to another’s.

And if your practice model is based on being a ‘lifestyle practice’ – this is what mine is, the reality is you’ll achieve optimum size when turnover hits between £100k and £350k. At this point you should or can achieve balance and freedom.

You’ll earn enough money to enjoy the lifestyle you want, have time to do the things you want with the people you care about and you’ll be less stressed.

All this and no mention of 40% net profit margin. Actual real profit, free time and a free mind are what count.

If your practice is one that is based on a performance model you’ll be looking to push turnover on past £500k, to £1m and beyond.

So, should you be looking to achieve 40% net profit margin if your turnover goes up to £1m and beyond?

No.

Having recently been in conversation with two very successful, high profile practice owners whose turnover has gone past £1m, the conclusion is that a 40% net profit margin can on one hand be a sign that things are very wrong, but also unobtainable if you are looking to build a sustainable, attractive and resilient practice.

 A 40% net profit margin isn’t sustainable as you scale your business.

You need to invest more in your practice as it gets bigger:

  • Invest in your team
  • Invest in customer care
  • Training, benefits, flexible working
  • Build a better culture
  • Make accountancy a more attractive career choice, there’s a lot of talk about finding it difficult to recruit the best talent to accountancy because of its boring image

All of this takes time and money which will naturally erode profit margins.

But does this matter? I’d say it doesn’t if you are looking to grow a business. Which would you prefer:

  1. A practice with a £1m turnover, 40% margin but facing constant issues will staff and client turnover.
  2. A practice with a £2m turnover with 25% margin, growing quickly and finding it easy to recruit a great team and attract A grade clients.

A higher margin could be a sign that you’re not investing in the continued growth of your practice. If all you want to do is hit £1m turnover and have as high a margin as possible – great, but be prepared to find it hard work to stay there.

If you plan to push on beyond this, make the investment.

So please don’t get caught up in this 40% net profit margin nirvana bullshit peddled by some who have cut and paste a theory from someone else’s work.

Speak to other practice owners, those that you respect. Many of them are happy to share their KPI’s and what they consider accurate and healthy profit levels to aim for.

Ultimately, for all of us it comes down to running the practice we want, the way we want.

So, have conversations, work out what it really is you want and go and get it.

And…

…if anyone wants to talk about real turnover, profit levels, client numbers; then get in touch I’m happy to share what we are doing…

…collaboration helps provide clarity over what is achievable and realistic and is beneficial to you, your team and your clients.