On January 17 2015 I posted (in part) the post below. This Thursday we are running a webinar on how you can make cash-flow (profit, loss, balance sheet and cash-flow) forecasting easy and seriously valuable for your clients. Details of the cash-flow webinar Thursday February 19th, 1100-1200 – Brisbane time, free of charge. If you want to see…
Why is it that a firm will engage a client, start working on the project, wait for the client to send in missing information, finally finish the project 60 days later then at the end of the month send an invoice and be paid 30-60 days after that? A 120+ day process!!
It just doesn’t make sense. You have to pay the labour, the insurances, the rent and everything else in that time yet due to your management processes your client treats you like an interest free bank!
Remember this… “Thee who makes the rules – wins the game”
Why do you operate under this model? Just because you always have is not a good enough reason.
If you ask for some money upfront (and make new rules) many of your clients will pay. If you ask for 100% upfront before starting many of your clients will pay. If you give your clients some choices (and not the pay in arrears choice) many of your clients will pay.
Your monthly receivables balance should be less than 6% of annual fees – or 20 days of annual revenue.
Stop being an interest free bank. Today!
I have written an extensive report on Accounting firm performance. You can download the full report here.
Enjoy video # 7.
Work in Progress (WIP) is your inventory. Like any good cash management program you would advise your clients to ‘turn their inventory over’ more frequently to improve cashflow.
There is no difference with an Accounting firm. Your inventory should be invoiced every single month. If you are pricing up front (and I hope you are) then why not ask for some payment up front as well. That’ll help your WIP balance!
If you have done the work then send a bill. If the client is being difficult or the project is taking a long time then send an interim bill.
Your WIP balance at the end of each month should be less than 3% of your annual revenue – or 10 days of revenue.
I have written an extensive report on Accounting firm performance. You can download the full report here.
Enjoy video # 6.
If you are like most firms you will have a range of charge rates in your firm. Normally charge rates range from $100 – $350 per person depending on salary & experience level. If this is the case then your Average hourly rate (AHR) or net firm billing rate for client hours will be around $150-$200.
It’s pretty pathetic to think that is all you believe you are worth! This is such a silly system for pricing.
I think you are worth much more but you have to believe it and you have to change the way you price projects.
There are 2 measures of Average Hourly Rate.
1) AHR – client hours. Take your revenue (let’s say $2M) and divide by client hours billed (let’s say 10,000). In this case it is $200.
2) AHR – hours worked entire team. Take your entire team (incl. partners, admin & professionals) and multiply by the working hours in a year to get total hours worked (say 12 people X 1750 hours each = 21,000 worked hours). Now divide revenue ($2M) by total hours worked (21,000). In this case it is $95.
It’s important to look at both of them. You can have a fantastic AHR for client hours (>$400) yet very poor on all hours worked (<$150) because of the productivity, people mix & administration process. The ultimate measure is to be focussed on AHR – hours worked entire team. It’s this one that will ultimately drive your profit before partner salaries.
If you are pricing projects up front then there are only 4 ways you can dramatically increase your AHR.
1) Charge more for the same project – straight price rise
2) Be more efficient and have less time on each project
3) Sell higher value projects based on value created
4) Change your administration mix and get more out what you have got
Your AHR should be improving every single month. If it is then that is a reflection on your pricing / sales prowess and your efficiency of throughput.
If it’s not improving (or going backwards) make sure you mention this to our coaching team when they do your Business Performance Review.
I have written an extensive report on Accounting firm performance. You can download the full report here with all 12 KPI’s in it.
Enjoy video # 4
It’s very easy to increase profits in an Accounting firm. Simply have the most senior people (partners) charge more time. The partners generally have the highest charge rates and theoretically the most experience.
Yes you will increase profits but for the short term only.
David Maister, author of many outstanding professional services firms’ books said it best:
“What you do with your billable time will determine your income.
What you do with your non-billable time will determine your future”
Assuming that the partners of the firm are partners for the right reasons (not a glorified / expensive senior Accountant with the title of Partner) then the partners should only be doing 3 things:
1) High end advisory work for a small percentage of time <30% of time. 2) Nurturing existing clients making sure each client has every service they need to satisfy their goals in life. 3) Acting in a leadership position – driving performance, winning new clients & innovation. If Partners spend 2 hours analyzing phone bills and scrutinising the colour of the receptionists new chair - not a good use of partner time. If Partners spend 2 hours doing compliance work for $200 per hour. Hmmm - not a good use of time. If Partners can spend 2 hours in a client meeting and bring back a $10,000 project with a 75% margin then I would consider that a good use of partner time! Enjoy video no. 3
The relationship between profitably and ‘productivity’ (or ‘utilization’) in the old revenue model has always been about ‘billable hours’. How many can be charged to the client/project. As mentioned previously driving billable hours is a ludicrous business model.
Many partners of firms want to drive billable hours and they are quite proud of the fact that they, a team or team member has more than someone else. WARNING! Excessive focus on this metric promotes the wrong behaviour. Team members ‘hog’ work, they ‘pad out’ time sheets and are generally inefficient.
If you want to be as efficient as possible then price the project up front, have an hours budget on the project and then drive the time down – thus running out of work and creating capacity.
The measure is simple – charged time into available time. So if there were 40 hours in a (working) week available to charge and your team member ‘charged’ 30 of them then that would equate to 75%.
If there is plenty of work to do and you have sufficient team members then a healthy mix of ‘productive time’ is expected –around 75% of a normal working week. But not much more.
Enjoy video no. 2
This year I am embarking on my 20th year working ‘on’ the Accounting profession. In that time I have influenced Accountants in 38 countries, had over 85,000 Accountants attend seminars / webinars and personally coached over 500 firms to success.
Although not an Accountant, for nearly 20 years of my professional life has been about Accountants and their success. I started working with Accountants when I was 24 (yes, I know I look younger than that!) and have loved every minute of it.
Some people like science or making things. I like Accountants. In fact I love Accountants!
Accountants can offer so much value to their client base and therefore their community. They are an integral part of the success of business. They are the natural business leader and the true trusted advisor.
They offer an immense amount of value to their clients and they are seriously smart. Yet, they don’t make much money!
If profit per partner is one measure of success then only 2.5% of the profession is earning more than $1M per partner. Most partners of accounting firms make around $350,000 per year. I think it’s a paltry sum for the contribution they make.
The problem is their self-esteem and the business model that they operate under. My business is the Proactive Accountants Network and through our membership and coaching program we help Accountants to:
Maximise their cashflow
Run a more efficient business
Utilize their team better
Delight clients with value added work
Work less hours
Grow their revenue & wealth
Live a better lifestyle
This video series is a ‘secrets revealed’ report focusing on how to revolutionise the financial performance of an Accounting firm. It’s based entirely on what our ultra-high performing firms are doing to achieve success and revolutionary financial performance. As you’ll discover, I do not pull any punches – I just tell it the way it is.
Enjoy getting focused on revolutionising your revenue, profit and cash!
Check back here often for each installment or sign up for RSS feed so you are notified immediately.
Here is video # 1 – enjoy.
Prediction # 7 – Business coaches & consultants will aggressively pursue SME’s
Business coaches or consultants have primarily offered leadership, management, marketing, sales and human resource services to the business community. They too are in business and are looking to expand. With the correct tools they can expand into the accountant’s space quite easily. There are many financial analysis software tools available that are relatively inexpensive.
If a current coach or consultant wanted to skill and equip themselves they could quite easily offer budget, cashflow, financial analysis, planning and monitoring services. When they do, it will erode away the revenue that the accounting firm should have.
NB – A version of this article appeared in the Australian business publication, BRW, today.
Why do accountants take so long to get paid by their clients? They are nice people (bit too nice sometimes), they do fine work that adds a tremendous amount of value to the clients, they have reasonable client relationships, and they are trusted by their clients.
But they are often the last to be paid. Having 50-80 days in average debtors is not uncommon. Are they taken for a ride by their clients – or are they just too soft?
Yes they are too soft – and too nice sometimes!
Niceness aside I think a lot has to do with the traditional billing practice that most firms adopt. Do the work, calculate the bill after write offs (where the client knows nothing of the price) send out an invoice sometime after the work is finished, and then wait to get paid. And finally when the debtor hits 772 days outstanding a lame follow up procedure kicks into gear. I was being facetious about the lame procedure!
So why not fix the problem at the root cause. It’s not the clients fault – it’s the processes fault. Change the process and change the result.
I think accountants should price every job before starting. Give the client an agreed price on the project, what the scope is and what the value of the project is – just like every other business out there. Then when you present the engagement letter or proposal to them give them some choices how they can pay.
Here are some examples of some options on how the client can pay – that you can build into your engagement letters.
Option 1 – 50% upon signing the agreement and 50% in 45 days
Option 2 – 5% – 10% discount if you pay the full amount before commencement
Option 1 – 50% deposit upon commencement, 25% progress and 25% at the end
Option 1 – 5% – 10% discount if you pay the full amount before commencement
A couple of real examples: 4 partner firm in Perth. They gave the client an option of 50% now and 50% in 45 days or 100% now. Heaps of clients paid 100% now with no benefit!
Sole practitioner in Surburban Adelaide. They priced 3 consulting proposals (all of them well over $100,000) in the past 6 months. Each one was given a 10% discount if paid in full. They did.
You’ll have to position this carefully with your clients and you’ll be surprised at their reaction. The side benefit is that when you have all or part of the funds before starting the clients are more motivated to get the information you need – on time. Also, your team are more motivated to do the work more efficiently.
I rest my case.
On my travels I often have an ‘in room’ massage. Not THAT kind of massage – a therapeutic one!
On my last trip to the UK Nat & I had 2 ladies in the room massage us each for 1 hour. Cost £95 each. Or in Australian dollars about $180 or so for the hour. I have paid up to A$225 for a 1 hour massage before.
Anyway, whilst I was laying 0n the massage bed being pummeled I started thinking about Accountants. Yes very sad I know. Why I was thinking about you?
The masseur was earning $180 as an ‘average hourly rate’ for work completed and I know heaps of Accounting firms who are not even close to earning an AHR of $180. Most Accounting firms I get to meet (before we start working with them) are earning $125 – $175 AHR – after write offs.
The work of the Masseur lasts about 24 hours. The work of an Accountant sometimes last a lifetime. Why do you charge by the hour? Why do you charge so little?