June 2022

Say (or scream) it with me: Tax season sucked

I’ve talked to multiple firms since busy season ended and the overwhelming mood of the group is properly conveyed in one firm owner’s response: “I don’t want to encounter another busy season like the one that walloped me in 2022… that paradigm just ain’t going to cut it!”Honestly, there are few to no accountants who like tax season–it’s grueling, it’s thankless, it keeps us from evolving our business and it negatively impacts work-life balance. COVID-19 compounded these issues over the past two years, making the recent tax season an absolute nightmare.

So, what we know is that tax season this year was the worst. What do we do about it? Well, we work to make sure that this is the last tax season that sucks.

Life on the other side of tax season

Tax professionals need not be at the mercy of any given tax season. Now is the time to put plans into place to deal with January 2023 in a whole new and intentional way.

How?

Take back control!

Over the past two years, firms have incrementally added new tax clients because the busy season was extended. These were easy growth numbers—you didn’t have to work overly hard to pull in a surplus of clients.

This most recent season went back to a normal due date, which created significant pain and…well, you know the story.

The residual problem here is that the duct tape methodology you cultivated to deal with 2022 customer surpluses and tax pitfalls is not sustainable.

Arguably, the most significant risk right now is losing the overworked and stressed-out staff members you rely on to help serve clients. And without skilled staff, you’ll be unable to serve clients—the beginning of a downward spiral.

To get to the greener grass of a hellish tax season, the first step is to change your business model. And, like, pronto.

Make room for a modern business model

In today’s world, the wrong business model can be disastrous for your firm, leading you down the road of overworked staff, the loss of your best employees and the inability to serve clients well, and potentially even losing clients.

Staffing challenges, as you know, have become a significant risk in all businesses, including our own. No, we’re not working busy season hours. Rather, at Rootworks we foster a healthy, positive work environment.

We have great benefits, which include unlimited PTO with a work-from-wherever-you-want office policy. But even so, our employees are not immune to tempting job offers where, with the right expertise, they can make more money. And neither is yours.

This is where a new, modern business model will help immensely.

But I already have a sound business model in place

Correction—you had a business model that may have worked prior to the pandemic. But, oh, how times have changed. Today, the reality is that you took on tax clients beyond your firm’s capacity. And this is incredibly disruptive to your business model.

The good news is that there’s hope—a way to ensure your team sees a path forward and the team remains on staff while balancing your overflowing roster.

With this in mind, I have two goals I would love for you to consider for the rest of the year:

1. Calculate your firm’s capacity for tax clients and develop a plan to deal with the excess.
2. Develop a plan to grow your non-tax client base so you can serve them year-round. This revenue stream can come from client accounting, payroll and/or business advisory services.

Concentration on these two goals will help make next year’s tax season run a whole lot smoother than it did this year.

Expounding on your strategy

I’m sure you’re now asking yourself: “How do I calculate my firm’s tax client capacity?”

I’m glad you asked.

But, before we delve into the Rootworks formula, I highly recommend that you first evaluate your tax processes. Are they efficient, streamlined, automated? Maximizing revenue while minimizing time spent is what I’m suggesting here.

To do that, make sure you first:

• Identify a client communication manager to oversee all tax season communications. This will help increase efficiency by ensuring process adoption across your broad tax workflow.
• Implement an end-to-end digital tax pipeline. Get rid of all paper, client source documents, scanning and even tax return copies. Be sure to also make digital signatures the standard.
• Create different levels of tax returns (i.e., levels 1, 2 and 3). For example, level 1 denotes an easy return that doesn’t require review while level 2 represents a more complex return that does require a review. Level 3 could be the workflow for an outsourced return. This easy-to-follow system will help to move returns along by eliminating bottlenecks and unnecessary reviews.
• Implement an opt-out fee for IRS audit and correspondence protection services and make sure your client communication manager executes this for every tax client. This can help elevate tax season revenue significantly.

Finally, calculating your tax client capacity

To calculate your current tax client capacity, you’ll need some information from your practice management system. For this exercise, print off your tax season billing information and have it handy.

Ask yourself, what is the average time spent per tax return (for illustration, let’s assume 1.5 hours).

Which of your tax clients has the highest realization rate?

Also, try to assess your staff utilization percentage outside of tax season. Is your staff 75% utilized—or is it more or less than that?

Now, let’s work on the capacity number:

1. Start with the ideal number of hours you and your team want to work during the busy season. Is it 44 hours per week? More? Less? Arrive at your ideal. This is your maximum production capacity during the busy season per person. We’ll use 44 hours per week (110%) for this example.
2. Next, assume your staff utilization during non-tax season is 75%.
3. Considering the steps above, your tax season capacity limit is 35% of 44 hours per tax staff person (110% maximum, less 75% non-tax season utilization), times the number of team members working on tax (assume you have 3). That’s 4 hours at 35%, which is roughly 15 hours per week times 3 staff members—for a total of 45 staff hours per week available to process tax returns.
4. Now, calculate the number of weeks per year that your team will be working on tax returns. Consider 8 weeks of busy season plus 6 weeks of extension season for a total of 14 weeks. In step 3, we calculated a total of 45 staff hours per week, which brings us to a total tax return capacity of 630 staff hours.
5. Divide the total tax return hours available (630) by the average time spent per tax return (1.5 hours). This final calculation tells you that you have capacity for 420 tax returns (630 divided by 1.5).

Overcapacity is a big problem

If you’re doing 700 tax returns, you can see why you might have a major problem.

Here is where the hard part comes in. After your evaluation, if you find you’re indeed over client capacity, you must begin identifying which clients must go. Of course, this isn’t as simple as just firing a bunch of clients. There’s much more to consider as you think about your strategy.

Start by considering how you can generate as much revenue and realization by preparing 420 returns as you did with 700. Is it possible? Remember, you can raise your fees. You can also increase revenue with implementation of the IRS audit and communication protection services as part of a tax bundle.

You could also outsource a portion of your tax work. This could affect your capacity because your average time per return would probably be less. Calculating your capacity is more of an art than an exact science.

The key is to think modern and start making the transition to a better business model.

Let’s never go back

Another busy season like the insanity that was 2022 isn’t sustainable for your firm. Don’t allow your clients, team or work-life balance to suffer. Do not go back!

But bear in mind that the goal isn’t only sustainability; it’s to create a business you love. Seriously, don’t waste time. Put a plan together as soon as possible, and let’s start executing a year that most definitely won’t suck!

Firm staff: Take the data points challenge

Have you noticed a trend in our message these last few months?

Managing your client base is a common topic. Most firm owners will tell you they wish they had more time to dedicate to it—and it’s always a conversation we have with new Rootworks members. Lately, we’ve been using the term Smart Client Management (or smarter client management) even with our long-term Rootworks member firms, because managing your client base is one thing that you CAN control in this crazy world.

If you simply, “Can’t do another tax season like this last one!” it’s time to be smarter about the clients you work with and the services you offer. Smarter client management isn’t just for firm owners; it’s a concept for the entire firm.

This really shouldn’t fall just to the firm’s owner. And while I hope you, the owner, dedicate at least one hour a week (but hopefully more) to reviewing your client list and looking for opportunities, I want to present you—the staff—with a challenge.

As a staff member, you’re just as responsible for managing your clients as your firm’s owner. You work with clients every day and see the changes in their data—which means you have a unique opportunity to raise your hand if you see something vastly different in this month’s numbers than last month. You also have a unique perspective on how a client can benefit from additional firm services. This isn’t a sales opportunity (well, not exactly), but rather an opportunity to make sure the client has exactly what they need to run their business to the best of their ability.

And so, here are a few data points that you as a staff member can look for…and raise your hand to let your partner or manager know how the firm can serve your clients in the best possible way:

• Look for a change in transactions. Is the business spending more? What’s the trend?
• Did the business take out a new loan, or open new credit cards?
• Does it take you longer to work on this client than other clients? Why?
  • What’s the state of their records?
  • Could they benefit from more involvement?
  • Is this business vastly different from other clients’ businesses (meaning it’s outside of the firm’s area of expertise)?
• Look for things that help the client be smarter about the way they run their own business.
• Be mindful of the complete list of services the firm provides vs. the services each client uses. Make sure to stay within the scope of the engagement and raise your hand if you start noticing scope creep.

The above points are just a few examples. The key is to decide as a firm what kind of clients you want to work with, which services you WANT to provide and which data points matter most. Then build from there. If there’s clarity in what the firm wants and needs from its clients, all staff can be proactive in helping to manage the client list.

There are a ton of resources available via your firm’s rootworks.com member account that can help you set the firm up for success. Take a look today—and if you’re a Rootworks member, schedule a call with your coach to decide where to start.