calculate exactly how many clients you need.
by sandi leyva
the complete guide to marketing for tax & accounting firms
when i started my business, one of the first things i did was teach a quickbooks class at the local adult education center. i was paid a lousy $20 per hour to teach a six-hour class of up to 12 entrepreneurs how to set up a chart of accounts, create invoices and enter bills. after the first class, some of the entrepreneurs came up to me and said, “this is good, but i don’t want to do it. do you want to do my quickbooks for me?” and i started getting clients.
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the thing about how i started my business was that it was completely reactive; i was at the mercy of who approached me. i wasn’t actively selling. the result was that my business grew incrementally and slowly. i truly didn’t know where i was going, and i didn’t have a plan.
the good news is there is a better way!
my business did work out eventually, and yours could too if you keep doing what you’re doing now. but if you want to take more control, grow faster, get the rent paid and not borrow as much money, then the answer is to go in reverse. it’s counterintuitive; that’s why so few small business owners get it right.
the answer is to start with your end goal revenue number and create a revenue plan that meets it, and that’s what i will show you.
the traditional revenue plan takes your current income and adds perhaps 2 percent, 3 percent increase. and then you have your revenue plan for next year. that’s not the kind of revenue plan i want you to make. i want you to start with the end in mind – your net take-home pay.
how much do you want to make?
let’s say you want to take home $50,000. that’s after taxes and overhead, so that equates to your net pay if you were employed. now we need to reverse into our revenue figure.
to keep it simple, let’s assume you work at home. your expenses include the following:
phone/internet/cell phone: $3,000/year
computer (replace every three years): $1,000/year
office supplies: $1,000/year
cpa license and memberships: $1,500/year
website, business cards and other marketing: $2,500/year
insurance and legal: $3,500/year
gas and car allowance $1,500
stuff you forgot to list: $1,000 (this is your padding!)
total: $15,000/year
first, let’s gross up the net to include self-employment taxes. thirty percent is commonly used; you are welcome to plug in the exact numbers.
50,000 * 1.3 = $65,000 gross pay before taxes
then add the overhead expenses:
$65,000 + 15,000 = $80,000 revenue needed for the year
you need $80,000 in revenue to make $50,000 net.
if you’re not a solo practitioner and you have payroll expense, plug in those numbers and create a budget for your bigger practice. the numbers will be bigger, and there will be more expense categories, but the process is exactly the same.
do take the time now to plug in your own numbers based on history or your better estimates.
confirming your revenue number
your revenue number for the year is now $80,000. you’ll need to bring in and collect $80,000 worth of business in order to take home the net you want.
now let’s see how to get to the $80,000. it’s as simple as multiplying the number of clients you need by the average annual revenue per client.
let’s oversimplify, then we’ll add the complexity you need.
note: if you don’t bill hourly, then don’t worry about this part. you can go straight to your client number.
a working year is made up of roughly 2,000 hours. (take 52 weeks, subtract two for vacation, and multiply by 40 hours per week.) we can’t quite bill that much because we need time to do our overhead: our marketing and selling, training, running errands, paying bills and interfacing with vendors. the average accountant bills between 1,200 and 1,600 hours per year.
you’ll need to decide how many hours you feel you can bill, and this will be based on your years of experience, productivity, how well you know the industry of the client, how complicated the client problem is, etc. the number of hours you need to work is also dependent on the rate you can charge. here are some possible scenarios:
1,250 hours * $64 per hour = $80,000
640 hours * $125 per hour = $80,000
1,600 hours * $50 per hour = $80,000
so the amount of hours you need to work will depend on the price you charge (or can get) for the work you are doing.
if you charge less than $50 per hour and cannot get more in your market, then you’ll need to rethink your expenses or your expected take-home pay. at least you can see ahead of time how the numbers work together so you can reset your expectations or plan differently.
your client number
the ultimate goal of your revenue plan for marketing purposes is to compute the number of clients you need to bring in to your business. if you have been in business for at least a year, you have some history you can look at.
- how many clients did you serve last year?
- how much average revenue did you bring in per client?
from this data, make a spreadsheet that looks like this:
please note: all the numbers in this post are made-up examples. so don’t get hung up if they aren’t right for you. our brain automatically compares, and it’s not only not useful, it’s illegal for me to put real numbers in here because of ftc rules. instead, drop in your own numbers, so you can see what you need to do.
drop in your total revenue in column e, and drop in your total number of clients in column c.
from there, you can calculate your average revenue per client.
if you have more than one service that is distorting your average, then break out your revenue and number of clients by service.
if you don’t have any history, that’s ok. you can make your best guess.
now create your worksheet using your revenue number. we’ll continue to use $80,000. create a new column and drop in your revenue number.
do you want to keep the same revenue mix? if so, allocate the $80,000.
if not, you can play with your service totals until you have them the way you’d like. perhaps you’d like to do more bookkeeping and less taxes. you can drop the tax number significantly and bring in more bookkeeping.
using the averages, we can now compute how many clients you’ll need at your new revenue level ($26,667 / 12,000 = 3 bookkeeping clients rounded up and $53,333 / 1,500 = 36 tax clients rounded up).
your client number is now 39. you need 39 clients to make your numbers. it’s now crystal clear what you need to do to make your numbers.
you have marketing clarity!
tweaking
you might not be happy with your results. if so, you can always tweak the numbers. there is a finite number of ways to grow your revenues:
- increase the number of clients you serve (more hours overall)
- increase the average revenue of each client you have (more hours per client)
- increase your price – your hourly rate
- change your revenue mix
- lower your target revenue number
- lower your expenses, but you cannot do too much of this without compromising quality
- move from hourly pricing to another pricing model
that’s it.
using your revenue plan spreadsheet, feel free to create several revenue plans with different hours, pricing, averages, and revenue mixes; then choose the one you like the best.
repeat business and net new clients
continuing our example, the good news is you may not need all 39 new clients. you might have some clients who will continue working with you. so now we need to calculate “net new clients.”
net new clients = # total number of clients needed – # clients from last year – clients you expect to lose
if you’ve been in business for a while and you have services that generate repeat business such as taxes and bookkeeping, the number of net new clients will be fairly small, unless you are trying to double your revenue number.
if you’re new to business and/or you do not have a service with repeat business such as training, setup, troubleshooting or data conversion, the number of new clients you’ll need will be large; you’ll want to be realistic and make sure you can keep the pace of growth you’re planning for.
questions
here are some questions that have come up before when doing this exercise.
q – do you count a client who falls into two or more categories just once or in every category?
a – please break out the revenue and count them in every category because i want you to get an average per bookkeeping client, an average for tax, and an average for bookkeeping.
q – i have one client who makes up 50 percent of my income. should i remove them from the calculation of averages so i don’t skew the results?
a – possibly unless it’s an option to get another big client like that and, as a matter of fact, what you might want to do is put them in a whole separate category and call that a separate service line and see what the numbers look like after that. that’s what i would recommend.
q – what if my numbers simply do not work?
a – then it might be that your business strategy or business model needs reworking. i’ll never forget the first time i did this: i plugged in several million dollars as my end goal. i couldn’t come up with enough services, programs and products to make the number! it told me i need to go back to the drawing board and rethink how i was going to get from where i was to where i wanted to go.
q – where can i get this information in my accounting system?
a – if you are using quickbooks, then you can generate the “sales by customer summary” report, then manipulate the raw data from there.
q – what if i don’t want to work that many hours, but i need the revenue?
a – then you’ll need to hire staff or learn how to create leverage in your business.
q – i am new or want to add a new service line and i don’t know what the averages might be.
a – i can come up with some ranges, but they won’t be too accurate. you’ll want to get a few engagements under your belt, then revisit and adjust this plan.