Tax practice management: how to start a firm.

• Author: Hendrix, Jannet E.

GENERALLY THE TREND IN THE PROFESSION has been the consolidation of firms to gain economies of scale and spread of overhead, but now may be a great time to start a firm and experience the benefits and burdens that derive from being an owner. The need for CPAs has grown over the past decade as a result of the passage of the Sarbanes-Oxley Act in 2002, and the average tax return today is more complicated than before because of the ever-growing Internal Revenue Code. As a result, more people are seeking specialized advice from CPAs.

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Although there are many obstacles to getting started, the most challenging one may be a fear of failure. If establishing a profitable accounting firm is the CPA's dream, he or she must believe that success can be reasonably anticipated with proper planning. To achieve success, a potential owner needs to follow several basic steps: decide which services to offer; conduct research and marketing; choose the legal form for the business; and offer great customer service (Jones, The Start-Up Guide: How to Start a Successful Small Business, p. 9 (Harriman House 2011)).

There are three basic options for starting a CPA practice: purchase an existing practice, find a partner, or start from scratch (AICPA, "Starting Your Own CPA Firm," available at tinyurl.comicea5863). Whichever path a prospective owner chooses, preparation is key. Practitioners need to take time to brainstorm ideas, determine the viability of those ideas, develop a plan of action, and register with the relevant bodies and professional associations to determine the legal requirements for starting a business (Jones, p. 12). Practitioners cannot forget, or minimize, the threats they will face and the weaknesses they will confront. They must make sure their plan addresses these thoroughly. Success is not a straight line. The plan must take into account the bumps in the road as well as the setbacks that will inevitably occur.

Planning and Research

Being one's own boss may sound great; however, starting a CPA firm requires careful preparation to create a well-structured firm that yields substantial revenue while attempting to maintain an appropriate work/life balance. In the early days of starting a business, there is a lot to do, including obtaining clients; doing or supervising their work; hiring staff; collecting fees; making sure the payroll is met; negotiating leases; obtaining insurance; and determining necessary software, systems, and equipment to buy and at what price. Furthermore, the owner may be the only person available to do it. Running the business requires hard work, long hours, and exceptional time management and yields low pay. Nearly all practices are cash flow negative during the startup and growth phases.

The first step in starting any business is creating a written business plan, which serves as a map for the entire process. This step is especially critical if the practitioner is seeking investors or loans to fund the business. The business plan is an extremely valuable tool since it contains detailed financial projections, a marketing plan, and forecasts of the business's performance. The forecasts are highly useful in determining the attainability of the firm's goals. They will guide the business from startup to profitability, establishing milestones along the way (Jones, pp. 47-48). The plan may cover one to five years, depending on the objectives.

A business plan should:

* Outline business goals;

* Identify the business structure;

* Identify necessary skills and experience;

* Describe a potential competitive advantage;

* Outline regulatory and legal...