because businesses make money, right?
by rob nixon
the purpose of any business is to find and keep customers. so you have a marketing and sales function to find them and then you have great service and services that “wows” them into staying with you.
more on strategy: sales is like workflow management | 4 sales systems and some secret sauce | marketing must generate leads | be an ‘object of interest’ | marketing must be about sales | turn your knowledge into products | 8 ways to build team engagement | is your business by design or default? | the profession disrupted: compliance commoditized
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that’s all well and good for your clients. what about you? you’ve taken a risk to start/buy your business (it’s not a practice and you need to stop practicing – you’ve been practicing long enough) and you need to be rewarded.
in my opinion you need to be rewarded very well for your intellect, your contribution and your risk. i think the benchmark is >$1m profit per partner with partners doing minimal client work. unfortunately the average partner makes around 1/3 of that number.
now you may be comfortable with your current number and that may be ok for now. the problem with comfort is that you stop seeking, striving, developing and then apathy tends to kick in. you need a healthy discontent for the present to change. the output of change is profit and cash.
here’s a dialogue between my son hugh (when he was 6) and me.
me: hugh, it’s time to teach you about profit.
hugh: dad, what’s profit?
me: it’s the selling price minus the buying price. (equation on the whiteboard)
hugh: oh, sell take off buy.
me: yes, mate, the profit is the result of sales minus costs.
hugh: oh.
me: hugh, what’s profit?
hugh: profit is good!
me: hugh, how much profit should we make?
hugh: hmmm – as much as possible.
you’ve gotta love young capitalism. instill it into them young, i say. we still talk about that conversation all these years later (at the time of writing he’s 19) and in business it’s a very important part of life.
the 6-year-old kid got it. do you?
sadly, the accounting profession seems scared to talk about their own profit and money. why, i ask. it’s not a dirty word – it’s a healthy word. a healthy vibrant business makes lots of it. a driven business owner makes decisions to get more of it.
and here’s the kicker. if you are supposed to be a leader of business then why are you not making more money than your clients? i think you should be making more than all of them who you advise on business matters.
ok, rant over. you get my message. i think you deserve more profit and you have the business vehicle to do it. but to maximize the profit you have to change your business model.
here’s how you increase the profit of an accounting firm. there are eight primary ways…
- your mindset and culture
- your pricing structure
- your cost structure
- your efficiency model
- your number (and type) of clients
- your services
- your clients buying more services
- your leverage
your mindset and culture
i have heard it time and time again: “we’re not motivated by more money” or similar trite answers. it’s a rubbish answer. there is not a business owner on the planet who if they were handed an extra $1 million in income they wouldn’t take it. i don’t care if you give it away to charity or your kids or waste it at the casino. either way it’ll make you feel better.
i understand that you don’t promote the fact to your clients that you want to make more profit but i do think you need a profit-driven mindset within you and your team. that means you are always looking for cost-saving ideas, new revenue and better pricing methods. you are always looking for ways to sell something new to clients (only if they need it) and always looking for new clients.
according to the 6-year-old, profit is good and you should make as much as possible!
your pricing structure
here is the best pricing advice i can give you:
stop pricing by the hour!
seriously, it’ll keep you in the poorhouse and the overworked house. it’s a really dumb way to price anything. it assumes the hourly rate was correct and the time to do it was correct. neither are ever close to being correct. the worst model is when you price based on time taken x hourly rate after the work has been done. this model causes inefficiencies, waste, padding of time sheets, go-slow mentality and other nasty behaviors.
what if you priced every job up front with a 15 percent increase on last year? and please don’t write it off. what if you assessed your value contribution to the project and priced (in advance) on your value and then worked as hard as you could to deliver the project in the least amount of time possible while maintaining quality control?
according to the 6-year-old, profit is good and you should make as much as possible!
your cost structure
many firms we work with are seriously looking at (or have already implemented) offshoring with their business. the biggest cost structure in any accounting firm is how much you pay for labor. there are not many savings to be made in an accounting firm other than labor. when you can hire five-year qualified cpas in the philippines for $5 per hour it does make it very tempting to at least explore the opportunity.
if you have accountants in your office who spend most of their time processing work and doing administration (which means they are not really adding value to the client), then you can get that done elsewhere for four times less cost. the accounting firm of the future is one that has a local client-facing team and everything else is done somewhere else in a more cost-effective location.
according to the 6-year-old, profit is good and you should make as much as possible!
your efficiency model
there is so much wastage and inefficiencies in an accounting firm it’s not funny. think of the volume of hours it takes to “check” client data or the enormous amount of time it takes to get all of “the missing information” from a client.
the human brain can go so much faster if it is under pressure. people can type faster than they currently can if they are trained properly. accountants spend much of their day doing administration tasks associated with the accounting job instead of doing accounting work. why not do an overhaul on your systems and the way you interact with clients so you are more efficient? why not move all your clients across to a cloud accounting system so you can be more efficient? why not hire professional administrators to do the administration work so you can be more efficient?
a word of caution: unless you price jobs up front, your price will go down with your efficiencies or you’ll end up doing more work for the same amount of money.
according to the 6-year-old, profit is good and you should make as much as possible!
your number (and type) of clients
so you want to improve profit. to do that someone has to pay for your services. enter your clients.
every accounting firm i have ever trained, coached or even spoken to has clients who are costing the firm money. they won’t change, they are disruptive, they are disorganized and they waste accountants’ time. if you are on a fixed fee with these clients then that is profit gone. not to mention the distraction factor and opportunity cost. start by asking them to leave. get rid of the bottom 20 percent of clients. find clients who appreciate your work and you can make a profit on.
every firm has excess capacity (especially when they implement our workflow procedures) and that excess capacity should be used on attaining more clients. if you got rid of the 20 percent who are “bottom feeders” and replaced them with new ones who were “a” class then your profit would go through the roof.
according to the 6-year-old, profit is good and you should make as much as possible!
your services
some services you offer are just not profitable. they are low-value services that attract a low-value price. just like you measure average hourly rate or net firm billing rate on the business (at least i hope you are), why not start by doing that on every invoice and every service? it’s a simple equation – invoice value / hours taken.
you’ll soon start to see which services have a low margin compared to others. once you know the margin you can make a decision – keep or go. if you keep the service or product, then can it be done more efficiently by someone else somewhere else? remember, you are not a community service. you do not have to do everything for everybody. focus on services that have a ridiculously high margin and you’ll improve your profit.
according to the 6-year-old, profit is good and you should make as much as possible!
your clients buying more services
i am yet to meet an accounting firm that has tapped out every client with every service they have to offer. the objective is “every client should be buying every service they need that helps them achieve their goals.” that means you know the goals of the client and you are matching services to those goals. time and time again i ask accountants if their clients need additional services that you have the skills to deliver. i get the same answer every time: yes.
the cool thing about additional services to existing clients is it is not more compliance work. it’s more useful business advisory and value-added services work. and the other cool thing is that these new services can be priced differently because the client has not bought them before and they have more value to the client. more value to the client = more margin for you = more profit.
according to the 6-year-old, profit is good and you should make as much as possible!
your leverage
most firms are overpartnered and underleveraged. this means that the ratio of people:partner is typically low.
many firms operate under the old practice model that they need about $1 million in fees per partner and that means about four to five people in that team. what if there were 15 or 20 people in the partner team? or more? you’d get more leverage and your profit per partner would go through the roof. if you have low leverage then consider restructuring your firm so the next two levels under the partner have much more client contact, thus enabling the firm to have more clients per partner and more revenue per partner.
there are too many overpaid accountants who because of tenure and cash are currently partners. they are not bringing in new business – merely looking after existing business. it’s crazy to pay (with dividends) a partner who adds a minimal growth value of $350,000 when you can hire a senior accountant for 1/3 of that and still get the same effect. yes. fewer partners and greater leverage = more profit per partner.
according to the 6-year-old, profit is good and you should make as much as possible!
here is an example of all of that put together. this firm is a picture of good health. it is not a super-profitable firm at 48 percent before partner salaries (we have some firms >60 percent), yet it is a very solid firm with good client numbers, low risk and a modest average fee per client of $7,000 (project value of $1,750 x no. projects 4) and reasonable leverage of 7:1. in this firm the partners are not doing a huge amount of client work (506 hours), nor is the accounting team (1,265 hours). the focus is not on more billable hours but on value, and the output of value is the average hourly rate (or net firm billing rate) of $307.
what do you want your profit to be? if you are comfortable where you are at then ignore everything i have written. if you are looking for more then there is more available.
to remain relevant in the future you need to increase your profit. the 6-year-old kid thinks it’s a good idea and so do i.