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Hello and Happy Tax Season!
I was in a meeting with a firm yesterday and a business consultant. The topic of A/R came up and the business consultant was talking about “benchmarking” receivables (what percentage it should be 0-30, 60-90 etc.) I thought to myself for a moment, “What an old way of thinking!”. Benchmarking receivables would be like benchmarking write-offs. No good!
What systems do you have in place to make sure you are getting paid before the returns/financials are filed, sent or picked up?
As a reminder, a service that is in demand has a lot higher value than a service delivered!
If we set proper expectations, price upfront and have good systems we can eradicate A/R entirely from our firms.
Now is the time!
Firms are focused on assessing how they are ending the year financially and how next year is going to look. One key variable in the assessment to help determine where your firm is (and where you are going) is to perform a Pareto Analysis. I’m surprised at how many firms DO NOT perform the analysis.
Let’s start out with a few definitions:
Underperforming clients: Clients that are below your target average hourly charge rate ($175 is a good number to target) or Gross Profit Percentage (75%). Please note that high realization doesn’t mean profitable. It means high realization. Put another way, if your charge rates are low relative to the cost of your labor you could still have high realization and generate very little profit. Many firms utilize much of their capacity servicing clients with high fees but low profitability (as measured by Average Hourly Charge Rate or Gross Profit).
Best clients: Clients where you are achieving your target average hourly charge rate/Gross Profit or higher. The clients provide you and your team with challenging work, value what you do, they are growing and refer more business (like them) to you.
Our suggestion is you perform a Pareto Analysis (smart guy check him out on Wikipedia) to see where you are generating above average profit and where you are “just busy.” Please don’t confuse busy with profitable (many firms do).
Here’s how you do it:
Export your client list with respective Revenue, Profit, Cost and Average Hourly Charge Rate and sort away.
The premise is simple, 20% of your clients generate 80% of your profits. Sometimes the numbers are astonishing. Two recent cases come to mind – 2% of revenue coming from 49% of clients. And, another way of looking at things in a separate firm, 2% of revenue generated by 270 clients! The problem is, the true cost of servicing those lower priced clients is almost always higher than you think. In most firms we find it’s around 30/70. Nonetheless, still a sizeable number that has all kinds of business model implications. Business model implications meaning clients drive costs (including driving qualified team members out of the profession).
You will find it very enlightening to view your firm in this way. It’s always eye opening to see that some clients are generating $300 per hour and others $100. The question is why and what can you do about it?
The next step is to start looking at ways to upgrade your clients. We personally aren’t big advocates of firing clients straight away. We believe you should give them a chance to stay with the firm on your terms. As an aside, we find far too many firms let their clients dictate the terms of the relationship.
Further, Partners should only be handling A and B class clients. In most cases if A class clients are being properly serviced they will realize at least $25K in fees each year. So you should limit to around 20 A class clients per partner.
Incidentally, when you are talking with potential A class clients (who may be either existing B class clients or brand new clients to the firm) partners have found it very helpful to position themselves well by indicating that ‘I only work with a small number of clients in this intensive way at any point in time and I am very particular about who I take on.’
Pareto in Action
Here are the key numbers of a Partner in a firm we work with:
500 # of Clients
118 # of Clients with a Gross Profit of greater than 70%
The result of having a number of underperforming clients is you have made a choice to have increased overhead (team members to support the clients) and working increased hours for less profit. The opportunity cost is less time to pursue better clients, spend time with A clients or spend time on leisure activities.
As explained, the Pareto is a very powerful exercise to perform and action with your team. The worst thing that can happen is you find out where you are making money? Isn’t that what you should be doing as an accountant after all?
Hello. I presented a webinar to a group of firms last week which included a polling question asking them to respond to the question about which Profit Driver they need to focus on the most.
Interestingly, 60% (Wow!)of the firms responded we need to work on Making our Firm the #1 Client, which leads me to a question for you and your firm as you think about and prepare for next tax season:
- What practices are you employing that are Making the Firm the #1 Client?
- What practices are you employing that are NOT Making the Firm the #1 Client?
As a reminder, the best people to ask are your team members!Related article: Stop the madness! How NOT to repeat last tax season!
You may have heard me quote Ron Baker, “Do not let your bad customers drive out your good customers”. That statement is still relevant today.
We now need to be extremely mindful and action oriented that we do not allow bad customers to drive out good team members.
Let me explain.
The past 4 business days I have been contacted by 4 firms where the Partner asked me for advice regarding a team member who came to them after 9/16 (word on the street is it was very painful) and said, “Mr. or Mrs. Partner. I can’t work the hours anymore.”
Here are key variables: Read More…
This is what I often hear at this time of year:
“I can’t get it all done.”
“I can’t get anything done.”
“The day seems to slip away.”
The issue is NOT time management. The issue is priority management. You don’t want to get more done. You want to get more of the right things done. Priority management trumps time management. We all have 24 hours in the day. We choose to do different things with the time.
What does it mean? We need to focus on the right things. Read More…
Many practitioners and partners experience a seminal moment as they move towards 50 or shortly thereafter where four major shirts occur
- You realize your time on earth is finite! That is, you have had many successes, made many mistakes and for someone who ‘feels’ their time is finite you know there are some things that have to change! The sense of urgency you have been waiting for (or avoiding) has finally arrived.
- You have not made enough money. For the hours, stress and risk have endured you think you would be making more money. You have held onto that underperforming team member too long, held on to too many small clients, a good client went bankrupt or it always seemed like this year was going to be your breakthrough year. Did not happen. Read More…
Tax season is hard! Since you are busy (hopefully productive) making it all happen it’s important that someone in your firm is minding the shop!
What do I mean by Minding the Shop?
- Following up on all of your engagement letters/organizers with all of the clients you have not heard from.
- Making sure you are sticking to your minimum prices along with upfront pricing including pricing/budgeting all new jobs at your target charge rates!
- WIP. Following your WIP system.
- A/R. Following your A/R system.
Common sense? Perhaps yet not that common because firm leaders (both administrative and technical) are busy!
Please use this as a reminder to make sure that someone is Minding the Shop this season!
- To succeed in the future we need to start to re-think the sacred cows (the old way to profitability is more hours and face time).
- If one of our biggest issues is time why do we continue to work on unprofitable clients (the ones where we don’t achieve our target Average Hourly Charge Rates or Gross Profit Margins).
- Your ideal firm will be easier to run than the one you are running today.
- The difference between where you are today and where you can be in the future is discipline.
- We are our own worst negotiator.
- The fish stinks from the head down.
- Real Value is in the form of communication (goals, objectives, emotions not financials or tax returns).
- Do not take what you know for granted (i.e. it isn’t basic and do not under-sell it).
- Working remotely is not diluted work. It is working. Drop the word remote.
- Team members do things for their reasons not ours.
- Perspective is hard to obtain in the office.
- The traditional ownership model is becoming obsolete.
- Partners need to stop owning the relationship.
- Need to stop viewing confrontation as negative.
- We need to evaluate where we are inconveniencing our clients.
- Clients pay dearly for what they value dearly.