Private accounting firms tally high margins
April 2, 2013 –Firms that handle accounting, tax preparation and other bookkeeping or payroll services post some of the highest net profit margins of all industries, according to the Private Company Report by Sageworks, a financial information company.
Sageworks’ analysis of financial statements filed in the 12-month period ended February 2013 shows that privately held accounting, tax prep, bookkeeping and payroll services companies (NAICS code 5412) posted an average annual net profit margin of 21.2 percent. Only privately held oil and gas extraction companies (NAICS code 2111) posted higher average margins in that time period, according to Sageworks’ data.
Also at the top of the profitability
ranking: legal services firms (NAICS 5411), lessors of real estate (NAICS 5311) and dentists (NAICS 6212).
Sageworks analyst Libby Bierman noted several of the top industries by profitability are service-based lines of work. “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,” she said.
Chris Kiyohara, founder of Kiyohara & Takahashi
, a Commerce, Calif., certified public accounting firm that specializes in franchise restaurant operations, said long hours and recurring business also play roles in the margin picture.
In addition, accounting firms generally have few major expenses outside of 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.”
As a result, costs relative to sales are low compared with other industries. Average 2012 cost of sales for accounting, tax prep, bookkeeping and payroll services firms was about 7 percent. That’s sharply lower than the 31 percent cost of sales for the broader category of professional, scientific and technical services (NAICS code 54) and the nearly 47 percent ratio across all industries, according to preliminary estimates from Sageworks.
About the Data
Sageworks possesses a proprietary database of privately held company financial statements aggregated by industry. Sageworks aggregates private-company financial statements from accounting firms, banks, and credit unions through a cooperative data model with their clients. The data is segmented and can be queried by 1,200 industry codes, 70 financial metrics, company size, and geographic location.
Raleigh, NC-based Sageworks is a financial information company. Sageworks’ data and applications are used by thousands of accounting firms and banks across North America. The company has been named to the Inc. 500 list of the fastest growing privately held companies in the U.S. and to the Deloitte Technology Fast 500.