Every article in every business magazine I read tells you to “consult your CPA”, “turn to your CPA for advice, and “your CPA will advise you.” What is wrong with this advice? There are three ideas I hope to convey. First, most CPA’s aren’t very good business people. Second, running your business is your job, not your CPA’s job. Third, you can get great service from your CPA, but you have to know how. For this post, I'll tackle the first one.
About ten years ago, we hired a young CPA, named Gerry. Gerry’s father ran a small CPA firm. So we were certain he would catch on to our business and procedures pretty quickly. Gerry was a portly young man. All right, I will say it; he was a jolly, fat guy. Everybody liked him, including my business partner, Paul, and me. At the end of his first year, we sat down with him for his annual review and raise. At this point, I should give you a little inside information about our CPA firm. Our overhead per billable staff person was about $40K per year. Gerry’s salary way back then was about $45K. For the experienced business people reading this, you undoubtedly have an important insight. Our breakeven billings for Gerry were $85K per year. For those of you less experienced in costing, this number comes from adding Gerry’s salary of $45K per year to our overhead per employee of $40K. That yields $85K as the amount of billings we needed from Gerry to break even. Gerry billed about $50K that first year. Obviously, we lost some money on him, but the quality of his work was good. We thought with time he had the potential to make some money for us.
During our performance review, we gave him a 5% raise. For the serious math geeks among you, that was an annual raise of $2,250, which brought his salary to $47,250. Gerry seemed satisfied, and we were happy in that we thought we had a chance to break even in his second year.
The next day, Gerry asked to meet with us again, and told us he felt his raise was unfair. Paul is more of a touchy feely people person than I am and had the gentle human insight to ask him why Gerry thought a 5% increase wasn’t enough given his $50K in billings. Gerry responded with the most unique rationale for getting a raise I have ever heard, “My expenses exceed my income. I need at least $50K to live.” Not laughing wasn’t an option. I had to cover my mouth with my hands. Paul had a great follow up question in store. “Gerry, to make $50K how much do you think you should have to bill?”
Jerry replied, “$55K.” Gerry was offering us the privilege of receiving $5K to cover our overhead and provide a profit for the firm. Do you think Gerry was much of a business person? Knowing Gerry’s personal situation gave me a clue as to why he needed the $50K. Gerry was married to a beautiful young lady – not the sort of wife you’d expect a fat guy to have. I figured one of two reasons made her marry him. Either Gerry had some assets not readily apparent when he was fully clothed, or she thought she was marrying a meal ticket when she married a CPA. I think she was sadly mistaken – at least on the meal ticket part.
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