Most firms plan their year by capacity.
They work out like this……We have X number of people this year, we expect X % of productivity (chargeable hours per person), the charge rates will be X each and the write offs will be X%. Less of course labour and overheads and hey presto – a budget.
It’s a really dumb way to plan. It is entirely internally focused (where is the client?) and typically charge rates are determined by salary levels, the method does not reward efficiency, there are write offs involved and as a result the firm does not improve it’s profit % as it grows in size. Most times the profit % goes backwards over the years. This method will keep you in the poor house.
A better way is to focus on the clients.
No. of clients X Average project value X no. of projects per client per year = revenue.
If you focus on clients, marketing, sales & services then the revenue will look after itself. If you focus on value based fees, pricing up front and being super efficient then the margins will look after themselves.
Most firms know what their productivity, average hourly rate and write offs are. Yes it is important to know what these numbers are – but whatever you do – do not manage your business by these numbers.
Most firms do not know how many (exactly) clients they have. Fewer will know the average project value (hint: divide revenue by number of invoices) and fewer still will know how many projects (on average) each client buys from you each year.
Work out the new numbers and you will be astounded as to the results. From there set some targets in these 3 areas then introduce marketing, sales, services & efficiency to make it happen. Oh, make sure you price every job upfront and value price them if possible as well.