Home Advice Improving Your Profit Margin: Part 2

Improving Your Profit Margin: Part 2

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Strategies for Improving Job Margin:

In the first part of our article (March ASA), we looked at the pressures on an accounting firm’s profitability. Now we will explore strategies to improve the gross margin of an accountancy business as we look further at some aspects of reducing write-downs.

Take three steps to receiving client records complete and on time

Key objective: To have your clients deliver their records complete and on time.

1. Write to clients eight weeks before their financial year-end detailing the records required to enable you to perform your work. This should be client-specific and not a generic list – although this will undoubtedly be the starting point.

Key point: In this letter you should state the date you expect the records to be ready.

2.  Two to five days before the records are due in, send the client a text message reminding them to let you have their records. That is no different from the practice of the dentist, the optician or even the doctor – they are all seeking to minimise the risk of ‘non-attendance’.

How to do this? Go to your preferred search engine and enter the search term ‘text software’.

3.  When the records are received, make sure someone checks the records in to ensure the job records are as complete as can be so that it is ‘good to go’ for the accounts/audit team to start work.

While you have a client who needs serving, your client has a customer who needs excellent customer service – that is you!

Key point: Do everything to ensure you know when you can plan to start a job and for staff to have as good a chance as possible of having what they require to do the job.

Job budgeting: you need to have a robust process

Key objective: To have managers create a budget on which they deliver.

Questions: Does everyone in your firm budget consistently? Is best practice understood and applied?

The reality is that many managers are optimistic budgeters. They assume the job will go according to plan. But, that is not always the reality. Problems arise. But how to minimise them?

Here are three important budgeting lessons:

Make sure managers create budgets that enable them to get the job done on budget. Recognise that jobs don’t always go to plan by including a (modest) budget to accommodate those extra tasks that are maybe not envisaged at the outset.

Partners – when you do your budget review make sure you do not instruct the staff to go and do the job for less than budget just because, in your opinion, the client will not agree to that level of fee. The problem with that approach is that it takes away the ownership of the budget from the manager.

Imagine that having completed the job you were asked to redo the same job. Would you be quicker the second time around? Most people in response to this question say ‘of course’. So, let’s capture that knowledge in a ‘job postscript’. This is a form that asks the individual doing the work to record for next year’s staff, ‘These are the three things you need to do differently.’

Negotiate fees early. Never leave agreeing the fee until just before the job is due to start – or worse after the job is finished. In both instances you massively diminish your negotiating power and increase the under-recovery.

The above table highlights the three primary components of time accumulation on a job. The chargeable time amounts to 40 000 but the fee is 36 000. ‘Which 4 000 has been written off?’ The fact is we cannot tell – there is inadequate information. So, what we will now do is to examine and address each of the three core time components.

Time before the job starts: 4 000

Again, imagine how the manager and partner conversations might sound.

Manager: ‘Oh my word, look how much time has been dumped on the job before it even starts.’

Partner: ‘Time dumped! They have absolutely no idea about how valuable that time was and the interactions with the client during the past six months …’

So, here is what needs to happen here. Before the ‘fog of the job’ descends and you and the client have dimmed memories regarding the value delivered/received please bill this time out. Waiting until the job starts and then billing means that, yes, you might have reduced the work in progress, but this is really only masking embedded time that may not be recoverable.

Key action: Bill the time out before the job starts.

Partner review time: 4 000

Now, as a former partner I can recall picking up jobs and finishing the job off with no time left. But your time is very important. This is not just you signing off on the job, it is your time face to face with the client. This is time that needs to be invested – not squeezed because of any time-cost pressure.

Key action: Make sure that this time is ring fenced with in the budget.

I am therefore going to conclude that this is not the time responsible for the write-down. Which leave us with…

The time on the job: 32 000

I am going to assume that the budget was 28 000.

Time management systems accumulate time. But the accumulation of time does not seem to have much impact on job management. It’s as if the attitude is ‘jobs overrun and that’s the way it is’.

Consider though if the budget were to be depreciated instead of accumulated. Here is an example:

Job budget

28 000

Time on: week 1

8 000

20 000

Time on: week 2

7 000

13 000

Time on: week 3

9 000

4 000

Time on: week 4

8 000

Job overrun – really?

4 000

The effect: Perhaps a sharper focus to finish job in week 3?

What might the factors be that result in job overruns?

1. Not having the information you need to start the job.

I think we have dealt with that.

2  Bad budgeting.

But you are employing good managers – they must learn how to budget and then deliver on budget.

3  Client-caused problems.

Yes, let’s look at that in a little more detail.

Learn the lesson from the service reception

The day has arrived when you are due to take the car in for a service. You set off perhaps a little earlier than usual and at 8:00 you arrive at the service reception desk. You are warmly greeted and asked for your car registration number. After handing over the keys, you head off in the pre-arranged courtesy car.

Now, you are well into your morning and at 9:25 you receive a call from the dealership. It’s one you hoped you would not have to take. Of course, it was service reception advising you they had a report from the service engineer. Yes, you are probably familiar with such a call. First they list the car’s faults and then, after you have digested the news, you brace yourself for the rectification price for each fault. It’s just the way the service system works. We all accept this as ‘good practice’.

Contrast that with the way many accountants work. Oft times it is ‘let’s sort out the client-caused problems and then discuss the cost with the client when the job is finished’. But, by then it is too late to agree anything other than a contribution to the cost. After all, we do not wish to upset the client – they might go elsewhere.

Compile a schedule of your largest write-downs

Key action: Compile a schedule that accounts for 80% of the client-caused problems that arise in your office. Then establish a minimum and maximum price for fixing and have your managers call clients and quote the price when these client-caused problems arise.

With regard to the productivity write-downs – was this a one-off or recurring write-down?

  1. What was the cause?

• Client-caused problems?

• Client not responding to request for further information?

• Staff issues?

• Has the client’s business increased in size creating more work?

• Other reasons?

2. Questions to consider:

• Do we need to ask the client to improve the records?

• Respond to our requests on a more timely basis?

• Change the staff levels in future?

• Do we need to meet with the client and discuss adjusting the fee? (Note, using the word increase tends to put clients on the defensive.)

3.  Subject to the above there are two further points to consider:

• Do we accept that this client will only ever recover x% of standard time (sales variance)?

• Do we move the client on and use the hours freed up for more profitable work?

AUTHOR l Mark Lloydbottom is the founder of a number of leading-edge publishing companies serving the UK accountancy firm marketplace. He is a leading consultant to accounting firms. Mark lectures for SAICA and has consulted with many South African firms. He is the author of Double Your Income available from SAICA