{"id":114103,"date":"2023-07-21t11:57:24","date_gmt":"2023-07-21t15:57:24","guid":{"rendered":"\/\/www.g005e.com\/?p=114103"},"modified":"2024-08-27t17:01:52","modified_gmt":"2024-08-27t21:01:52","slug":"the-damage-that-traditional-fee-methods-do","status":"publish","type":"post","link":"\/\/www.g005e.com\/2023\/07\/21\/the-damage-that-traditional-fee-methods-do\/","title":{"rendered":"the damage that traditional fee methods do"},"content":{"rendered":"
<\/a>the rule of three and cost-plus overlook some key considerations.<\/strong><\/p>\n by august j. aquila<\/i> the time has come for the accounting professional to rethink the paradigm on which pricing has been based. let\u2019s discuss the traditional methods of price setting and how they can have a negative impact on a firm.<\/p>\n more: <\/b>four ways to prepare for new business development<\/a> | ten keys to marketing success<\/a> somewhere along the line accountants began to believe that an hour of their work had a set value to their clients. as we shall see, this false assumption has led to the current state of affairs and has caused accountants to: in short, the hourly billing system, under which we now work, rewards inefficiency and penalizes productivity. let\u2019s take a look at the two traditional systems of setting hourly fees, the rule of three and the cost-plus methods.<\/p>\n \u201cprice is what you pay. value is what you get.\u201d \u2013 <\/em>warren buffett<\/p><\/blockquote>\n the rule of three method<\/strong>\u00a0 <\/em><\/p>\n in the accounting profession, we have all heard of the rule of three. the rule of three mainly applies to leveraged practices, in which the practitioner employs other professional staff and administrative personnel. this rule of thumb states that one third of the fee covers overhead, one third covers compensation and the last third goes to pay the partners or owners. a number of medium-sized firms today would be happy to have a 33 percent profit margin for distribution to the partners or shareholders. most sole practitioners laugh at the rule of three; they follow a rule of two. in other words, they generally net 50 percent on their gross fees.<\/p>\n here is a quick and simple way to figure what your billing rate should be based on the rule of three. if you want to figure your billing rate (i.e., the price you are going to charge for your time), take the salary you want to make, multiply it by three and then divide the total by the number of billable hours you think you are going to work.<\/p>\n the following example demonstrates how a leveraged practice would determine a practitioner\u2019s billing rate based on the rule of three. assume you are a practitioner and want to make $200,000 in your first year of practice. the equation you would use to compute the rule of three is as follows:<\/p>\n $200,000 (desired annual salary) x 3 = $600,000<\/p>\n you and your staff will have to bill and collect $600,000.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $600,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/u>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $250 (average hourly billing rate)<\/p>\n 1,200 hours (projected billable hours)<\/p>\n the preceding example shows that when using the rule of three, billing rates are determined solely by the number of billable hours without any consideration to any other market factors (for example, competition, demand, services offered). the bottom line is volume\u00a0\u2013 that is, production. in other words, the emphasis is on how many billable hours each and every professional can accumulate. added to that, of course, is the emphasis on billable rate and realization of those billable hours.<\/p>\n some firms even kid themselves into thinking that production is the be-all and end-all. they do not realize that production in and of itself doesn\u2019t mean anything if the fees billed aren\u2019t collected. the most profitable firms place just as much emphasis on fees collected, gross margins, client retention and growth and compensate partners accordingly.<\/p>\n another common oversight made by firms that focus too heavily on production and the firm\u2019s need to meet billable hour goals is the lack of emphasis on the client\u2019s needs and providing the services that clients require and want. firms that do their homework and change their pricing strategies are finding out that the rule of three has become obsolete.<\/p>\n the cost-plus method <\/strong><\/p>\n since the traditional accountant\u2019s paradigm is that we sell time, the most popular method of setting fees in the accounting profession has been and continues to be the hourly billing method or cost-plus pricing method.<\/p>\n the real key to the cost-plus method is gaining a complete understanding of the cost of running your practice. the following exercise will help you determine the true cost of providing your services. first, write down the figure you think is the cost of running your accounting practice. next, take a few minutes and calculate the real cost of running your firm. every firm, whether a multi-office or sole practitioner, needs to know what this number is. let\u2019s see how close your estimate comes to the actual cost.<\/p>\n
\nprice it right: how to value accounting services<\/i><\/a><\/p>\n
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the two traditional methods of setting fees<\/h3>\n