No profits no mission, as one of my partners is fond of saying.
While leadership, balanced life, outstanding client service and efficient processes are critical for success, they mean nothing if the firm is not sufficiently profitable to make investments for the future and compensate performers. I want to focus on ten ways to make your practice more profitable.
These ten areas form the basis of my Practice Operational Review.
1. Enhance revenue. There are several ways to boost the firm’s revenues. Obviously raising rates is the easiest. Rates should be adjusted for inflation at least yearly and whenever someone is promoted. Another way to increase revenue is to provide more valuable work to clients. This requires that you and your people develop new skills and perhaps move into new or different niches. For example, firms that have gotten into litigation services or business valuations have been able to augment revenues because they can charge more for these services. Finally, start doing more true value billing – i.e., throw away your timesheets and bill on what the value is to the client.
2. Control engagement cost. An important element in your profitability is engagement management – having the right people on the job, giving everyone budgets, having efficient systems to move the work through and monitoring the entire process. Write downs usually point out how well you are managing an engagement. There is nothing wrong with a planned writedown; it’s the unplanned ones that suck the profitability out of a firm.
3. Deal with unprofitable clients and services. You must know which clients and services are profitable. The last thing you want is to go after more unprofitable work. There is an old joke in the retail industry that goes like this. Salesperson: “Sir, I believe we are losing a $1 on each shirt that we sell.” Manager: “Well then, we will just have to make it up in volume.” Take each one of your clients (or client family) and determine the gross profit margin. For each client that has a gross margin of less than 65%-70%, ask yourself the following questions:
- How can we raise the margins on this client? (Higher fees or reduce cost)
- Is there another person in the firm who can service this client for efficiently?
- Is there another reason to keep this client?
4. Address under-performing partners and staff. Under-performers take time and energy away from more important activities in the firm. That’s why it’s critical to have a proper performance management and evaluation program in place. Don’t accept non conformance or mediocrity.
5. Examine your marketing efforts and marketing ROI. Is your marketing targeting the right clients? Too many firms think that anyone who breathes is a potential client. No matter what size firm you have, it’s important to know what your ideal client or clients look like. If you have a tax practice that works with high net worth individuals, than someone with an adjusted gross income of $75,000 probably is not a target for your firm. And don’t use the excuse that young professionals can learn on these clients. It’s better that they learn from you. Do you think that blue chip investment banking companies take small clients just to have their people develop skills?
6. Improve utilization. Productivity or utilization is still a key to firm profitability. One way to increase productivity is by assigning weekly goals to everyone in the firm. Utilization has a lot to do with firm management. Higher the utilization usually means that the firm is doing a better job of managing its personnel.
7. Reduce overhead expenses. Expenses always have a way of creeping up. Every two years or so, re-examine your overall expense structure. What are you getting in return for each expense? Rather than just adding an inflationary amount to your expenses, do next year’s budgeting using a zero base approach.
8. Invest in technology. While technology is a major expense item in most firms, it can also be a number one driver of profitability. The more you can move towards a digital office the more efficient your processes become and the more you will save on each engagement.
9. Focus. We have found that firms that focus on fewer goals each year are more profitable than those that have many goals. The reason is simple. Fewer goals mean that you can achieve more of them with excellence. Achieving goals – client service, profitability, systems, etc.- with excellence drives profitability.
10. Keep Score. Finally, those firms that are more profitable are those that keep score and let everyone in the firm know how they are doing. Here’s what to track – revenue and profits, number of new clients, number of employees who have developed new competencies and number of implemented client service plans.
Become disciplined about running your firm. It’s usually the basic things that you need to do, day in and day out to put more on the bottom line. Remember no profits, no mission.
This Article First Appeared in the CPA Trendlines Website
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