It's prime time for many accountants.
As April 15 approaches, accountants handling tax returns for households are logging long hours to meet the filing deadline. But many accounting firms' staff work long hours throughout the year, thanks to business-related tax deadlines and other types of accounting activity. And with relatively low costs outside of payroll, firms that handle accounting, tax preparation and other bookkeeping or payroll services are turning those hours into one of the highest net profit margins of all industries, according to the Private Company Report by Sageworks, a financial information company.
Privately held accounting, tax prep, bookkeeping and payroll services companies (NAICS code 5412) posted an average annual net profit margin of 21.2 percent, based on financial statements filed during the 12-month period ended February 2013. That's second only to privately held oil and gas extraction companies (NAICS code 2111), data in Sageworks' proprietary database shows.
Legal services firms (NAICS 5411), lessors of real estate (NAICS 5311) and dentists (NAICS 6212) also landed at the top of the profitability ranking.
"A commonality of several of the top industries by profitability is that they are service-based," said Sageworks analyst Libby Bierman. "Accountants, lawyers and real estate agents, for example, don't have to purchase inventories or invest in much equipment, so revenue dollars just have to cover payroll and overhead expenses, allowing these companies to achieve above-average margins."
Caught between telephone calls this week, one accountant said long hours and recurring business also play a role.
"My skewed perspective is that owners of CPA firms probably put in 1.5 times the hours of a lot of other professionals," said Chris Kiyohara, founder of Kiyohara & Takahashi, a Commerce, Calif., certified public accounting firm that specializes in franchise restaurant operations. "Amongst all my friends, they're amazed at how many hours we work."
Accounting firms don't have major expenses over and above payroll, a telephone, software, and sometimes, rent, he said. "I know of a lot of small CPA firms that work right out of their house these days."
That keeps costs low, relative to sales, especially compared with other industries. On average, cost of sales for accounting, tax prep, bookkeeping and payroll services firms in 2012 was about 7 percent, compared with nearly 31 percent for the broader sector of professional, scientific and technical services (NAICS code 54) and compared with nearly 47 percent across all industries, according to preliminary estimates from Sageworks.
In addition, Kiyohara noted, the nature of the business means accountants often don't have to pay many marketing-related expenses - as long as they're busy. "Architects and attorneys have high margins for their clients, but it's kind of a one-time client," he said. "They finish with that client and then they're out running around looking for work. If we impress a new client, that client really comes back to us year after year after year, and it's more of an annuity."
Sageworks analyst Brad Schaefer noted many accounting professionals advise businesses and likely have a deep understanding of their own company's financials, which could also aid margins. "They have maintained high margins relative to other industries even through rough economic times," Schaefer said.
Kiyohara said there may be something to the theory that accountants benefit from their knowledge of business financials. On the other hand, he said with a laugh, "You've heard the old saying that the shoe cobbler's kids have no shoes. We probably don't spend enough time managing our practice the way we should."
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies' operational performance.
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