For the past 24 years I have interacted with over 175,000 Accountants across the globe and directly coached 434 firms adding over $850M in new profit to those firms. In that time I have seen all sorts of revenue / profit planning methods. From no plan, finger in the wind (hope is not a strategy), to the typical (worst) kind.
Here’s what a 2 Partner firm planning discussion might go like:
Partner A: What do you think our revenue target should be this year?
Partner B: Well, if we look at the current team we should be able to work it out
Partner A: So there is me and you + 8 Accountants + 3 Admin
Partner B: Let’s aim for 1300 hours each per accountant and the admin are not chargeable
Partner A: Ok, we’ll put their charge rates up but remember we’ll need to put their salaries up as well.
Partner B: Good point. So by the time we average it we should hit $175 per hour per person. Ranging from $120 – $225
Partner A: So the revenue from the 8 accountants should be (8 x 1300 x $175) $1.8M – provided we (or they) don’t write any off
Partner B: What about you and me?
Partner A: What if we each increase our hours to 700 and increase our charge rate ever so slightly to $350 each
Partner B: So that’s $490,000 for us
Partner A: That’s total revenue of $2,290,000
Partner B: We could never do that – we only did $1.75M last year! I think at a stretch call it $2M
Partner A: Ok – let’s target $2M.
Partner B: What about the profit?
Partner A: The fixed costs are pretty well fixes – let’s add $50k there, we’re not hiring any more people and all we need to is add the salary increase to justify the higher charge rates.
Partner B: So on our current salary multiple what works out to be an extra $75K in salaries
Partner A: That means the $250K revenue increase minus the $75K salary increase and the $50K overhead increase we are left with is and extra $62K each for us.
Partner B: And we’re working harder this year and we’re still grinding away running the business. Are you OK with this?
Partner A: This model sucks. There has to be a better way
This IS a typical planning model all over the world. It’s a labor for hire business model that sells time. You do not sell time! You sell what you know. I am coaching a number of GOOD firms right now with the objective of them becoming GREAT firms.
Before the coaching program started this is what they looked like:
Pretty typical of most firms in the world. Solid profits but very much a labor for hire business model. Once they went through my planning process and learnt what (and how) to implement they target completely different numbers.
What this data tells us is the following:
When you implement different strategies…
- You do not need to hire too many more people to increase revenue by 59%
- You need to focus on average hourly rate for all hours worked
- There are many more services that existing clients will buy if you know how
- Profit per partner is derived from partners working less hours not more
What the data tells us is you need a different planning model, different strategies and different implementation model. I like to get profit before partner salaries above 60% (whilst the partners are doing less chargeable time), profit per partner above $1M / £1M / €1M per year, average hourly rate for all hours worked above $250 and revenue per full time equivalent person above $500K.
In year one these firms are well on the way.
OH, nearly forgot. Can’t you leave you hanging there. Here is a better planning process. In order….
- Last years revenue plus a price increase – need to justify the increase with packaging – maybe 10%
- Existing clients – goal setting meeting and then match new services to help them achieve their goals – X% will buy
- Value price the new services for existing clients
- Market assertively to find new ideal clients – value price them also.
- Price everything in advance, get rid of charge rates (keep time sheets) and implement efficiency gaining strategies to drive the time down
- Target the Average hourly rate for new services and new clients
- Have a healthy mix of productivity (not too high) for accountants
- Have a low client hours target for Partners – get them selling more
- Clean up WIP and Receivables and put everyone on a monthly direct debit for known work
- Hire marketing people and monitor the ROI per marketing spend
- Keep the operating costs low
- Join my Boardroom coaching program to make it all happen
- 1-4 is the revenue model
- 5-8 will determine the volume of people needed
- 9 will fix the cashflow
- 10-12 will determine the profit
Food for thought for the next time you plan your numbers.