It’s tough to run a successful accounting firm, and it’s getting more difficult with the war for talent and the commoditization of accounting firm services. Having worked with hundreds of firms since 1996, here are five matters to consider within your firm as you head into busy season.
Many firms operate with a scarcity mentality and confuse revenue with profitability. You must come from a place of abundance to run a successful firm. Otherwise, you chase revenue (not profits) and you try to be all things to all people which is never a winning strategy. Furthermore, many firms put their clients ahead of the health of their firm. Firms and the people inside of the firms undersell themselves and their services and let their good clients subsidize their underperforming clients. You must put on your own oxygen mask first. That is, in order to do well for others, you have to do well to yourself first. Running a successful firm is about making the firm the No. 1 client and serving the right clients.
One exercise you can perform with your team is to have a discussion with them about all of the areas you are making the firm the No. 1 client and all the places you aren’t.
Firm Leadership Must Walk Its Talk
You let returns and financials sit in your office. You don’t make an investment you said you were going to. Email piles up. You have many initiatives that were false starts. You tell your team they can have a good quality of life, but you never take time off and are always connected. What to do? Quit making commitments you can’t keep. It creates cynicism in your culture.
One exercise you can perform with your team is to ask them what it takes to be successful in your firm. You might be surprised by the feedback you receive.
Your Pareto is a Moment of Truth
Perform a Pareto Analysis (smart guy—check him out on Wikipedia) annually to see where you are generating above average profit and where you are “just busy.” Please don’t confuse busy with profitability (many firms do).
Here’s how you do it:
1. Export your client list with respective revenue, profit, cost and average hourly charge.
2. Rate and sort away.
The premise is simple: 20 percent of your clients generate 80 percent of your profits. In most firms we find it’s around 30/70. Nonetheless, that’s still a sizable number that has all kinds of business model implications. “Business model implications,” meaning serving the wrong clients, drives costs (including opportunity costs). You need to know what type of client you can scale, i.e. marketing, sell, price and drive value.
Here are a few calculations (with respective targets) you must perform in your profitability analysis:
• Gross profit by client (75 percent)
• Gross profit by team member (75 percent)
• Average hourly charge rate ($175)—this varies by type of service and geography
• Overhead per client before labor (we usually suggest straight lining—hence smaller clients cost relatively more to service than larger ones)
Price Your Services Upfront
Upfront price your services along with providing pricing options.
Engage clients with an upfront price and do not start until the price is agreed upon and an internal hourly budget is in the system. As a very important aside, we all want to know whether we are doing a good job or not. How does your team know if they don’t have a budget?
Price based on outcomes and value, and manage costs by targeting an average hourly rate. One of the first things you need to be doing is looking at your average hourly charge rate by client. Why is it that you can get $70 an hour on some jobs and $300 an hour on others?
Most firms look to fill an open position when they have lost a person or are at maximum capacity. This is similar to creating a marketing plan when your largest client was just purchased and they will no longer be your client. It’s too late! Be sure you know who your next two hires are and that your entire ecosystem is aware of your needs and open positions. Most successful firms make recruiting a priority year-round and are in constant conversations with candidates, even if they aren’t hiring at that moment.
In summary, if you block out three hours per week to work on the above, you’ll be pleased with your return on investment.