Most accounting firms plan their revenue and profit in one (or a mix) of the following ways:
- Our revenue (or profit) was $X last year. Let’s add X% for our target. Our costs are pretty much fixed, so now we’ll work out how many people we need, what the charge rates need to be and the chargeable hours per person. A work back scenario.
- We have X people right now who can generate work. Let’s put their charge rates up by X% and their chargeable time up by X% and reduce the write downs by X%. Then we’ll multiply it all out and get a revenue figure. Then we’ll work out the salaries and the overheads and that will build the profit model. A work back scenario.
I am going to suggest that these methods are fundamentally flawed for driving profit. I think you should do what I like to call ‘inside out planning’ – ‘not work back’ planning.
Let me give you a real example of a firm I worked with on my Firm of NOW seminar program.
Michael K has a small accounting firm in the suburbs. He has been in business for a number of years and has a fairly solid, predictable business. Here are his vital statistics for the last 12 months:
- He has 4 people (3 accountants and 1 administration) plus himself – total 5
- He has revenue of approximately $650,000
- He was ‘writing down’ $50,000 before billings
- He has $125,000 in work in progress at any time – 70 days
- He has $150,000 in receivables at any time – 84 days
- He has an average hourly rate (client hours) of $141.45
- He has an average hourly rate (all team hours) of $77.04
- He has 60 business client groups representing 85% of revenue
- He has 120 other clients representing 15% of revenue
- He has a profit before partner salaries of $210,000
- After a notional $150,000 salary for himself he has a business valuation of approx. $300,000
In front of 110 people and over a 20-minute period I did a ‘makeover’ on his firm and the results were staggering. At the end of the 20-minute planning session he was targeting a $664,709 profit (up $454,709), revenue of $1,187,709 (up $537,709) and a valuation of $2,573,545 (up $2.2M)!!
Once he understood the resources, training and methods available to him from us he committed to implementing the following 14 step plan:
- A 7.5% price increase for existing client work. He will add value by doing a business performance review with each client.
- Meeting 100% of existing business clients following a very specific meeting agenda and having 50% of them buy a new service from him. Normally we get up to an 80% conversion however we allowed a 50% conversion this time.
- Of the 50% that needed something new the average new service was priced at $4,000. This was priced based on value based fees rather than time based billing.
- Finding just 24 new clients (12 from referral and 12 from marketing method that we suggested) at an average fee of $12,000.
The first 4 implementation projects rounded out the revenue model of $1,187,709. Now he needed to deliver the $500K plus of new revenue. He did that by committing to…
- Being 25% more efficient in all the work the firm did. We showed him a way to get 50% more efficient however he elected for 25%.
- Targeting an ‘average hourly rate’ of $275 for new services to existing clients. The new services would be based on value based fees and normally much more than $275 however they needed to be his numbers.
- Targeting an average hourly rate of $215 for new clients. He felt comfortable with this result.
- Having his accounting team be 75% productive (1265 hours) for the year
- Himself being 40% productive (675 hours) for the year
- He needed to employ .5 of an Accountant so he elected to hire 1 new 5 year qualified CPA off shore (in the Philippines) at a total cost of $25,000.
These 6 projects enabled him to create capacity and deliver the work. Next we looked at his cost structure and cashflow:
- He decided to give his team a 10% pay increase
- He would focus on ‘writing up work’ rather than ‘writing down’ work and by following our ‘eliminating write downs’ program he would get to +5% write ups
- He would implement our work in progress training program and reduce WIP to 15 days
- He would implement our receivables management program and reduce receivables to 30 days
This plan works for any size firm. It’ll work for Michael and it’ll work for you. If you’d like to see it live I’ll be presenting it at my upcoming Firm of NOW seminar tour all over the USA. Click here for tour dates.
The full details of Michael’s make over are below.