Pricing Accounting Services

The problem with pricing by the hour is that the assumption is that the price per hour is correct (often calculated by a salary multiple) and the time to do the task was correct. The assumption is that time multiplied by the rate equals the correct price. In my view, nothing could be further from…

Revenue Profit & Cash in an Accounting firm – video # 13 – People to Partner ratio

To increase profits per partner you have 4 key strategies only: 1) Reduce costs whilst maintaining revenue 2) Increase revenue whilst maintaining low costs 3) Reduce the partner headcount whilst maintaining revenue and low costs 4) Maintain partner headcount whilst growing revenue and lowering costs Many “high profit percentage firms” have low leverage of people…

A project is not the annual fee with a client. Annual accounting is a project. A business plan is a project. A finance proposal is a project. A tax return is a project.

What is your average project value? It’s simple to work out. All you need to do is divide the number of invoices sent into your revenue for the year. If you have multiple invoices for one project then that should be classed as one invoice.

Your average project value multiplied by the number of projects per client per year will equal your revenue per client.

It’s a great way to look at your client base. If you have a very small average project value (but lots of clients) you will have a large administration function just for invoicing. The objective should be to increase the average project value whilst increasing the number of projects that each client buys from you each year.

If your business clients are not spending at least $20,000 with you annually and buying at least 4 projects from you (therefore average project value is around $5,000) then I think you are under-servicing your client base.

I have written an extensive report on Accounting firm performance. You can download the full report here.

Enjoy video # 11.

What waste it is to discount before billing. Often called write offs or write downs. It’s measured by the value of the time charged to work in progress (WIP) less a discount applied before billing. So if $2.3M was charged to WIP in the year yet only $2M was billed then the write down was 13%.

In some countries they record it in a more positive light by using a bigger number– “we had an 87% realization rate”. What a complete joke. Trying to put a positive spin on a negative number.

Face up to it – you discounted 13% or $300,000 in work last year! That’s an apartment or a house in some locations. You destroyed a small house. You would have had more fun if you burned the house to the ground and watched it burn whilst having a cold beverage.

Most firms have them and most firms justify them with blame and excuses like “we couldn’t charge the amount on the WIP” or “the client would never pay that much”. My question is HOW DO YOU KNOW?

Writing down work is at the heart of the self-esteem issue with partners of accounting firms. Why do it? You made a decision to write down – so make a decision to stop it.

If you price in arrears then your business model says whatever is on the clock you should charge – not a minute more. Writing up after pricing in arrears goes completely against your business model and is considered fraudulent behaviour. It’s ‘ripping people off’.

If you price up front, you have agreement from the client on price and scope of the project, and then you do the project in the most efficient means possible you’ll have an abundance of write ups. Much more of a positive result!

You should be aiming for a positive result with write ups – no negative numbers or numbers less than 100%.

I have written an extensive report on Accounting firm performance. You can download the full report here with all 12 KPI’s in it.

Tell me what you think of video # 5….

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