In my role as an accounting firm coach I talk to accountants pretty much every day and see or hear about the profitability of many firms. There is an enormous range of profit numbers from terrible to brilliant. So what is it that drives profitability in an accounting firm? I am going to focus on three drivers, being:
As accountants we all understand that profit = revenue – costs. I consider that pricing is all about revenue, efficiency is all about costs and leverage is about both. Let me explain.
It’s pretty obvious that to make a profit you need to price what you sell at a point that is greater than the costs of delivering it. In many firms the approach taken to do this is charging by the hour where the hourly rate is calculated as a multiple of the cost. This multiple is in the range of 2 to 4 in most firms. If this is your approach you don’t have to think much about it. You just work out hours per person for each job and do the maths. However, I don’t believe that is the best way to approach pricing of much of what accountants do. (By the way, if you use this approach and your multiple is less than 3 you need to revisit it.)
A few observations about pricing:
- Often accountants are not confident and undercharge their clients
- Often accountants make assumptions about a client’s ability or willingness to pay a certain level of fees which if tested would turn out to be wrong and as a result they undercharge
- Often accountants are not talking to their clients about fees in any meaningful way
- Often accountants are not understanding the true value of what they are delivering to clients
Value Pricing and Fixed Pricing are not the same
Sometimes accountants get confused about these two concepts.
Fixed pricing is where you agree a scope up front with a client and agree a fixed cost for delivering that scope of work. For most types of work I am a fan of this as I believe it is what most clients want. They want certainty. You can arrive at that fixed price on an hours basis or you could arrive at that on a value basis. Let me give you a simple example. A client may be considering a transaction such as an acquisition or sale of a business or some significant asset. If you as an accountant come up with a way to structure that transaction that will save the client say $200,000 in tax and it will take 5 hours of partner time at $400 per hour and 5 hours of Senior Accountant time at $200 per hour, what are you going to charge?
A time based fee would be $3,000 which could be agreed up front with the client – thus a fixed fee. Alternatively, you might say that the value to the client is significant and a key reason for you being able to get this great outcome is your years of study and experience. So adopting a value pricing approach you might say to the client I’m confident we can help you structure this transaction in a way that will save you $200,000 in tax and my fee for doing that will be $20,000. You might even ask what the client will do with the $180,000 that they otherwise would not have!
Talking to your clients is the key
You maximise the price you charge a client by effectively articulating the value you are delivering. This is not something that everyone is naturally good at but I believe it can be trained and it results in a genuine win / win. The client sees they are getting value and you get to charge a price that appropriately reflects your skills and experience and gives an appropriate return on your investment in setting up your firm. The key here is that you have to be talking to your clients about fees. That way you get the opportunity to articulate the value.
I define something as being efficient where it is delivered in the lowest cost way with the quality you want. It’s about systems and processes. Here are five important things to think about.
Do we really need to do this? What value does it add? Just because we have always done it does not make it necessary. Does it support our business model? Would anyone notice if we didn’t do it? An example of this is some of the effort that goes into workpapers.
Is there a simpler way to do it? Can we have fewer steps in the process? If we come at it from a different angle does that spark any ideas? This sort of thinking has given birth to cloud accounting applications such as Xero and others.
Standardise and Systemise
Consistently apply the best way to do it every time. And make sure it is documented and known to everyone that needs to know. Learn from within and outside the accounting profession. For example airlines looked to formula 1 motor racing teams for fast turnaround ideas for planes. A standardised systemised approach allows less skilled people to complete a task that would otherwise require someone more costly to do.
Can we get software (or robots) to do it for us? Again, we have seen the software vendors make significant progress in this area – bank feeds for example and the find and correct function in Xero.
Do we need to do it in our office or could be done equally well, or better, somewhere else? Anything that can be digitised can be done somewhere else. For many firms in Australia this now means having work done offshore in locations such as India, Vietnam and the Philippines, amongst others. Cloud accounting and other tools have made this very easy to do. Outsourcing is not always done offshore but often it is.
By leverage I quite simply mean what is the ratio of team members to owners. If you are a two owner accounting firm and have 10 team members working with you then the leverage is 5. Assuming each team member is making a net contribution to profit then the more team members you add the more profit you will have. I see an enormous range when it comes to leverage – from zero (a sole practitioner with no team members) through to as high as 30. More typically the range is 3 to 7 but I believe a figure of 10 to 15 is readily achievable. It takes skill to manage a team and some people are just not interested, but if you want to significantly increase your profits then getting more leveraged is a key way to do it. And having got efficient really support this.
How do you rate your firm in respect of these three drivers of profitability?