In Practice
The Keys to Improving Your Practice Profitability
By Mark Lloydbottom
Mar 31, 2015 - 11:59:38 AM

Mark Lloydbottom is delivering the Upgrade - 2 Days to Drive Practice Growth seminar on the 28th and 29th May 2015 in Dublin.  For further details click here.

Accountants primarily engage in four management activities: productivity, pricing, cost management and client management. From these we can derive five keys that enable us to focus on improving profitability: Leverage, Utilisation, Billing rate, Realisation and Margin. This is known as the LUBRM model.

Let’s look an example:

1	Partners					4
2	Total personnel					28
3	Leverage			2/3	L	7
4	Chargeable hours				x	29,400
5	Utilisation			4/2	U	1,050
6	Standard fees				x	14,700,000
7	Billing rate per hour			6/4	B	500
8	Net fees				x	13,083,000
9	Realisation			8/%6	R	89%
10	Net income				x	4,709,880
11	Margin			10/%8	M	36%
12	Net income per owner					€ 1,177,470

If we eliminate the specific firm values we can see the model more clearly:

1	Partners
2	Total personnel
3	Leverage			2/3	L	7
4	Chargeable hours				x	X
5	Utilisation			4/2	U	1050
6	Standard fees				x	X
7	Billing rate per hour			6/4	B	500
8	Net fees				x	X
9	Realisation			8/%6	R	89%
10	Net income				x	X
11	Margin			10/%8	M	36%
12	Net income per owner					€1,177,470

This model helps us understand how a professional service firm’s management can change the bottom line.

Of the five keys, three in particular - utilisation, billing rate and realisation - lend themselves to short-term change. The others - leverage and margin - do not so readily respond to change. It takes time to change the ratio of staff to owners, and a cost cutting programme is not easy to implement without making sacrifices. If - and I make no assumptions here- we can increase any or all of our utilisation, billing rate or realisation, the improvement will be reflected in the net profit of the business.

Small improvements in performance yield big results
Let’s suppose we can increase the average chargeable hours from 1050 to 1100 and at the same time increase the billing rate achieved per hour to R525. This will result in an increase in net profit as follows:

1	Partners										4
2	Total personnel									28
3	Leverage					2/3				7
4	Chargeable hours									30,800
5	Utilisation					4/2				1,100
6	Standard fees									16,170,000
7	Billing rate per hour					6/4				525
8	Net fees									14,391,300
9	Realisation					8/%6				89%
10	Net income									5,180,868
11	Margin					10/%8				36%
12	Net income per owner									€ 1,295,217
	Increase in net income per owner									€ 117,801

In addition to the ideas I outlined last month, in my series of articles next year I will be looking at a wide range of strategies for nudging up your utilisation, billing rate and realisation.

Increasing your commitment to your clients, the quality of your client service and investing in your own expertise are all key components of enjoying greater rewards from your business. I cannot recall working with any firm where a strong work ethic did not exist, but within some of those firms there were owners who were under performing and not contributing as significantly as others. Granted, we are all different and performance will vary from one firm to another and from one owner to another, but where there is room for improvement it is important to acknowledge it.

What will you do differently in 2015?
Where do you need to improve your performance in 2015? How can you improve your firm contribution? How can you increase your value to clients?
Although focusing on some of these numbers is important for monitoring and managing your business, the fact is that clients do not buy hours. No one  buys time!. If you were to survey clients who leave one firm for another they will never say, “I left because I didn’t like their hours.” So, if clients are not buying hours what are they buying? My answer is that they are buying solutions to problems.

Initially this might simply be a need to comply; or there might be other business or personal reasons for their availing themselves of your expertise. How we perform and deliver that service will, to a large extent, determine the client’s perception of our service and value - and their willingness to return for service next time around. In considering how best to deliver a service it is helpful to note the advice of Peter Drucker, regarded by many as the father of management, who stressed the importance of knowledge workers striving to do the right things rather than do things right.

Drucker goes on to say, “Nothing else, perhaps, distinguishes effective executives as much as their tender loving care of time.” Time is a resource that once expired can never be recovered. Yesterday is gone, but we still have tomorrow and next year. What would it mean to you to plan for 2013 to be your best ever year? Imagine what it would feel like at the end of 2013 to look back on a successful year in which you actually achieved your goals and fulfilled your ambitions!

So take up those inner challenges and record what you wish to do differently next year. Then set out a plan for accomplishing this. You might, for example, enlist the support of a trusted accountability partner who can encourage you and keep you focused on your plans and your execution of them.

Enhancing your skill base
Earlier I expressed my belief that our role as professionals is to provide solutions to problems. Your professional qualifications entitle you to deliver your compliance services, but it is your appetite and capability for developing your own knowledge that determine your ability to occupy a larger space in your clients’ lives.

Last month I suggested embarking on a programme of self-development. This month I would like to recommend a couple of books from my current studies. A friend recently recommended The 100 Best Business Books of All Time by Jack Covert and Todd Sattersten, which  provides brief overviews of books by authors such as David Packard, Richard Branson, Peter Drucker, W. Edwards Deming, Taiichi Ohno and many others. It’s a great place to start if increasing your understanding of management is on your agenda.

Another book well worth reading is The Reinventors by Jason Jennings. He takes the view that,

“Every business must be constantly and quickly changing...or they’ll eventually find themselves in a downward spiral that will ultimately result in their demise. If a business isn’t growing, the people who want to have more responsibility won’t get what they want when they want it, and they’ll find a reason to leave and pursue better opportunities elsewhere.

Unless a business is constantly undergoing radical change, it will never be able to stay ahead of its customers’ constantly changing wants and needs, and its growth will first falter and then completely stop.”

Responding to change arising from technology or regulation is simply reacting to external drivers, but taking charge of your own firm’s success and destiny is more than staying on top of these drivers – it is also advancing your position by reengineering, or ‘imagineering’ as Walt Disney called it, and planning a future that is exciting and meaningful to you, your team and the community you serve.

To conclude, I would like to extend an invitation that you should also be offering to your own clients, for you to provide me with feedback. If, during the coming months there are topics that of particular interest or importance to you I invite you to email me at mark@marklloydbottom.com and I will do my best either to respond personally or to incorporate my responses in future articles.

Mark Lloydbottom
Mark Lloydbottom is an author and consultant to accounting firms. His practice management training products include Defining Edge Practice Management Strategies and Power Up Your Gross Margin.
www.marklloydbottom.com

Venues & Dates:

Dublin

28/05/15 - 29/05/15

Crowne Plaza Hotel, Northwood

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Full 'Upgrade - 2 Days to Drive Practice Growth' seminar details.