Despite the widespread availability of inexpensive technologies that boost the efficiency of bookkeeping and back-office operations, Business Management fees have continued to rise over the last decade, as if the Internet doesn’t exist. Some of the established firms have minimum fees of $2,500 or more per month. And for those firms that charge a fee based on a percentage of the client’s revenue, the Business Manager can reap a six figure windfall in a year when the client has a big payday. Firms that charge by the hour also have sky-high billing rates that defy logic. Bookkeepers are billed out at as much as $100 per hour and accountants at up to $350 or more per hour. Business Managers will argue that they provide sophisticated accounting and financial services including tax compliance (although many bill extra for the tax services), and that their rates reflect the complexity of their work. But ask yourself: does it make sense to pay $30,000 or more per year to have someone pay your bills, track your expenses and monitor your deposits?
The mainstream firms get away with charging high rates simply because they can: There is little in the way of competition to drive down pricing in the profession. Entertainment industry clients accept the 5% rate as a matter of convention. Unfortunately for the clients, many business managers have agent, money manager, and attorney envy and that attitude is reflected in the fees. The writers, directors, producers and actors who break the $1 million threshold pay $50,000 or more for their bookkeeping and accounting. No one seems to question those rates. Well, we do. We reject the income method of calculating fees. The percentage approach may be appropriate for agents and attorneys who have a strategic role in the generation of a client’s revenue. But the Business Manager has no such role and we believe it is inappropriate to link the fee to a client’s income. In addition, the time it takes to manage an account is about the same whether the client makes $100,000 a year or a million a year. A client should not have to give up $50,000 of hard-earned money in a successful year just because an arbitrary formula dictates that result. Those windfall fees can add up to hundreds of thousands of dollars over the course of a career.
One must keep in perspective what Business Managers do. We are number crunchers. We handle a client’s bookkeeping --- paying bills, tracking income, projecting cash flow, preparing budgets. That’s not a bad thing. But it should not be an expensive thing. The core role of the Business Manager is to oversee the client’s general ledger. Yet many Business Managers shun using the word bookkeeper when describing their work. Why? To justify their fees the significance of the bookkeeping function needs to be minimized when promoting their services.
It’s not Rocket Science
Business Managers tend to embellish the description of their services with language that conjures an air of importance and sophistication. The websites of business management firms are predictable. You will see references of the need for specialized financial analysis, high level tax planning, comprehensive insurance review and various other specialized, high-level and comprehensive services. You will read a standard narrative about tax structures and strategies and the need for in-depth analyses to determine if a loan-out company or a pension plan is warranted. Business Managers perpetuate the view that if you are in the entertainment industry (actor, producer, director, musician or writer) your finances are complex and require pricey professional services. All of this discussion has an air of importance and mystery – that is not unintentional. It is accounting drama to justify law firm level fees. The highfalutin semantics obscures the fact is that most of what Business Managers do is not particularly complicated.
Consider a loan-out company. Accountants tout the importance of establishing and managing a separate legal entity (LLC or Corporation) through which all business activity is filtered. A loan-out company generally will garner tax savings through the elimination of deduction limitations and the avoidance of the alternative minimum tax. But the setup and administration of a loan-out is an accounting non-event. It is one additional Quickbooks file within which accounting data is managed. The marginal time associated with managing a loan-out is not material. Business Managers may warn of the need to carefully administer the corporate or LLC filing requirements such as the preparation of annual minutes. But the fact is that the annual minutes are nothing more than a template that needs to be updated. One could argue that a loan-out company simplifies and streamlines the accounting by segregating the client’s business activity in a separate set of books. When all is said and done, many Business Managers elevate the importance of the Loan-out as yet another justification to inflate their fees.
Behind the times
Pricey Business Management fees reflect a global failure by the profession to embrace technological advances that boost the productivity of back office operations. Above-average fees are required to maintain an archaic platform that is heavily dependent on an underpinning of expensive labor. The mainstream firms are built on a pyramid of managers, accountants, bookkeepers and clerks. Otherwise simple tasks are distorted into complex productions through the introduction of layers of bureaucratic policies and procedures. The intent is noble but the execution is clumsy. Consider the basic task of paying a routine, recurring invoice such as a utility bill. Even to this day a gas, electricity or water bill is managed in an arcane workflow involving the snail mail delivery of paper invoices, the preparation of hand-signed checks and a cumbersome review and approval sequence. Start to finish the processing of a single payable could consume 15-20 minutes of labor.
Fast forward to the present. With ACH Autopay an invoice is instantaneously checked off the to-do list in a process that essentially consumes no labor. Paperwork that cluttered the process is eliminated. The bottlenecks associated with the cumbersome review protocol disappear. By deploying digital technology the labor hours required to handle the accounts payable function is a fraction of that under the old-school approach.
The accounting function is similarly leveraged with data import applications. Under the analog approach bookkeepers manually enter row upon row of credit card and bank transactions into the respective accounting registers. This is a slow and tedious process subject to human error. The hours spent searching for transposition, transcription and other keypunch errors is time not well spent. All of this inefficiency is eliminated when data is electronically transferred into the accounting system, literally at the speed of light. The time to process information under a digital regime is a fraction of that using the outdated analog approach. We are experts in the use of data import applications and our know-how is reflected in fees that are substantially lower than those charged by firms that plod along in an old-school paradigm.
Price competition might eventually bring the fees charged by the mainstream firms to a more reasonable level. Potential clients at least now have some meaningful choice when it comes to pricing and product. Newer firms come into the field with an arsenal of technology that changes the entire dynamic of the practice of Business Management. We view our firm at the forefront of the new approach to business management and we fully embrace technology that will revolutionize the practice.