By Rob Nixon
I am convinced that the inventor of the current profit model of an accounting practice was NOT very good at strategy or business development.
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I am certain that the creators of this model had charity in mind. I am also convinced that the current model will bring in a decent income – and maybe a reasonable lifestyle if you are frugal – but it will not make you wealthy.
Now that I have your attention, let me share with you what is right and wrong with the traditional model.
The Bizarre Habits
The current model just does not add up – it’s flawed from the start. Take a look at how the vast majority of accounting practices around the world make a profit.
Most partners of most accounting practices earn $200,000 to $400,000 per year. However, that’s before taxation and working capital. You can build a reasonable lifestyle but it won’t make you wealthy!
This model truly is bizarre. The success of the revenue model is predicated on…
- A volume of people to do the work – who always seem to be in short supply
- Squeezing maximum chargeable hours out of the accounting team (In a Scottish accent the partners rant, “We want more billable hours out of you, laddy.”)
- Increasing charge rates; however, they are typically linked to salary levels so you get marginal profit improvement
- Reducing write-offs, which is discounting before billing; while you price in arrears you will never ethically reduce write-offs
- Reducing labor costs – since when has that strategy worked?
- Reducing overheads and being extremely frugal – see point above!
What wrong with all that, you say?
The entire model is based on labor for hire and that is not what you sell. You sell what you know; you sell intellectual capital turned into intellectual property, which is disguised as letters, reports, statements of advice, meetings and recommendations.
You DO NOT sell labor – yet that is what your business model says you sell.
Around the world at various partner retreats (why they are called retreats is beyond me – I thought you were supposed to be advancing at these things, not retreating) I am sure at pontification time the following discussions have taken place…
Partner A: “If we could only find another five qualified accountants and get 1,250 hours out of each of them at an average charge rate of $200 net of 10 percent write-offs then we could grow our revenue by $1.25 million.”
Partner B: “Or another way to do this is to try to squeeze more productivity out of our current 15 accountants, from 1,200 hours to 1,400 hours, and increase their charge rates from an average of $150 to $165. That would increase our profit by $45,000.”
Partner C: “I think we need to reduce our write-offs from 15 percent down to 5 percent. We have been targeting 15 percent for years – why don’t we target 5 percent write-offs? We have been writing off $300,000 and the new target would only be $100,000.”
Partner D: “But what about our labor and overhead costs? We were planning to give the team a 5 percent pay increase this year – one of them even asked me for 20 percent for goodness sake – why don’t we just give them a 3 percent increase? Our IT costs are out of control; I think if we spend some time renegotiating our contract we could save at least $15,000 per year.”
What is wrong with the discussion?
- Increasing the head count – labor costs and general overhead just went up as well
- Squeezing chargeable time – just go slower and make more mistakes, that will increase chargeable time
- Increasing charge rates – the team will expect to be paid more
- Still budgeting for write-offs – what a strategy that is
- Paying people less than they are worth – well, that’s going to work
- Spending an inordinate amount of time scrutinizing reducing expenses for little return
Another bizarre habit that accountants get involved in is writing off. Write-offs (discounting before billing) occur in three distinct areas:
- At the time of setting the annual budget. Line 1 on the budget says, "Expected fees charged to WIP (work in progress)." Line 2 says, "Expected write-offs." How bizarre, expecting to fail before you start.
I visited a six-partner firm in Melbourne once. They had fees charged to WIP of $9.7 million and write-offs of $2.6 million. Net fees billed of $7.1 million. They wrote off nearly 27 percent, or another way to look at it they set fire to a luxury home every year – and that would have been more enjoyable. Anyway, I asked the six partners if they budgeted for write-offs. Yes we do, they said. What’s your budgeted number? 25 percent, they proudly stated. I said, "Well, you nearly hit it."
Bizarre behavior – budgeting for write-offs. What would happen if you budgeted for write-ons? You might hit it.
- The other time write-offs occur is at the time of doing the work. In workshops, I ask accountants to honestly answer how much time they put on the clock while doing the work. The accountants in question all use an archaic method of time-based billing in arrears, in which what goes on the clock multiplied by the charge rate should be billed to clients. How much time hits the clock? The average is 85 percent. A staggering 15 percent of the time taken does not hit the clock in the first place. The gutless partners do not even have a chance to write it off.
- The most obvious area where write-offs occur is at the time of billing. With all the pride in the world, the accountant who did the work presents it to the (typically) partner for review and to determine the size of the bill that the client will receive. The partner looks at the work and says, "The client will never pay that," and promptly wipes off 5,10,15 or 20 percent of the value of the project.
So if you budget for write-offs, expect to get them.
If you use time and rate as your billing method expect to get them, and if you have gutless partners at the time of billing expect to get them. You get what you expect.
A client comes to you for business advice. The client specifically wants some ideas on how much they should charge their customers for a new product. With as much sage advice as you can muster you say,
“What you should do is work out how much time it will take to make the product. Then work out a charge rate for each person who is making the product. You work out the charge rate by taking the annual salary and dividing by the time they are at work for the year – say 1,687 hours – then multiply that number by four times and you have a charge rate. Multiply the time taken by the charge rate and you have the price for the product. That’s what we do here and it has worked for decades.”
Your client says, “I haven’t made the product yet.” It doesn’t matter, you say: “Follow the magic formula and it will lead you to the correct price.”
Or what about this way to set a price:
Let’s say (gentlemen) you want to buy a suit. You go to your favorite tailor on Savile Row in London. You enter the shop and the following dialogue takes place:
You: “How much for a suit?”
Tailor: “That depends.”
You: “Depends on what?”
Tailor: “It depends on the type of fabric I use to make the suit.”
You: “Okay, I’ll select that one there – how much for the suit?”
Tailor: “That depends.”
You: “Depends on what?”
Tailor: “It depends on how much of the fabric we use for your suit (under breath – fatso).”
You: “Okay, measure me up – I’m a 42-inch chest and a 30-inch waist (yeah right).”
You: “Now how much for the suit?”
Tailor: “That depends.”
You: (Getting frustrated) “Depends on what?”
Tailor: “It depends on the quality of the thread, volume of buttons and patches that we use.”
You: “Okay, I’ll go with these ones. Right then, now how much for the suit?”
Tailor: “That depends.”
You: (Getting mad now) “Depends on what?”
Tailor: “Well, it depends on how much time it takes me to make it for you.”
You: “You mean to tell me that the longer you take the more I will have to pay?”
Tailor: “Precisely, Sir.”
And that is how accounting practices work out the price: Time X Rate + Disbursements. That is no way to price a product.
Bizarre behavior. The only way to set a price is to have the marketplace (clients) set the price. You just test different packaging and price every project up front. The price for intellectual property is based on just two factors:
- Your personal value belief
- Your client's value perception
You will know that the price is wrong when your client says yes, without hesitation. If your clients keep saying YES then the price is WRONG.
Since May 1994 I have been working exclusively with accounting firms and I am constantly bemused at what the owners (partners) of the firms do with their time. If I visit a four-partner firm, I will ask their roles:
The first partner says, “I am the marketing partner.”
The second one says, “I am the IT partner.”
The third one says, “I am the HR partner.”
And the fourth one so proudly says, “And I am the operations partner.”
Yet not one of them knows diddly-squat (technical term for very little) about these four important topics.
Have a look at how partners (you) spend their time. Keep a time log of everything you do. When the time log starts to repeat itself, stop keeping the log. Go back over the list and work out the highest dollar productive activity that you do and highlight that one. Then work out the second and third highest dollar productive activity. Get rid of the rest. They’ll mainly be administration tasks. Delegate them, don’t do them and get focused on three only.
Partners should only be doing three key things:
- High-end chargeable work (advisory, cash flow, profit improvement, structuring type work) for the percentage of time that keeps you interested. No charge rates with this sort of work – all value-based fees.
- Building relationships with existing clients. Visiting them, phoning them up and getting to know them – finding out what they need and then selling additional services to them.
- Leadership. Driving performance of the business, searching for new ideas. New products to sell, new clients.
Everything else is administration. Hire a business manager to do it – not you.
Partner meetings can be interesting and bizarre things to watch. As well as looking over the previous month’s numbers and chastising whatever underperformance needs chastising they get into discussions on costs and petty details. I have seen partners debate (kid you not) what color the receptionist’s chair needs to be and which model to select for him/her: “I saw a chair that would be perfect at the wholesale office store for $99. It was $23 cheaper than where we normally buy chairs.”
Majoring on the minors and management by committee. Bizarre. Can someone (not the committee) please make a decision? Empower people and trust them.
Also at partner meetings, the topic of marketing may come up (by the marketing partner no less) and there may be a seminar to invite clients to. “None of my clients will be interested,” says one of the partners. “I think I have five or six only that may want to go,” says another.
I have even met partners who debate whether they should send the electronic newsletter to some clients: “They’ll never read it.”
How bizarre. Pre-judging what clients will buy, how they will act, what they will respond to and what they are interested in. I think pre-judging has to be one of the most arrogant activities around. For the sake of your clients, stop pre-judging. Let your clients know about everything you do and see who responds. Simple.
I remember a three-partner firm joined one of my coachingclub programs (group coaching method that creates outstanding results – when the clients follow the advice) and their lockup (WIP and debtors combined) was running at around $900,000. For a $2 million firm this was out of control. There was around $750,000 in WIP and $150,000 in debtors. By the time we met again, the WIP balance was down $50,000 and debtors were around $125,000. Good result I said – how did you do it? Answer – one of the partners decided to write off $650,000! I hit the roof. Before even giving it a chance to be collected it was written off. I hasten to say, that partnership no longer exists. Bizarre behaviour.
By the time we met again, the WIP balance was down $50,000 and debtors were around $125,000. Good result, I said – how did you do it? Answer – one of the partners decided to write off $650,000! I hit the roof. Before even giving it a chance to be collected it was written off. I hasten to say, that partnership no longer exists. Bizarre behavior.