Revenue is vanity, but profit is sanity.
As accountants we advise our clients about improving their profit every day.
And yet many of the practice owners I speak to haven’t got a good enough handle on the profit of their own business, never mind their clients.
If you’re not hitting an absolute minimum of 40% net-profit in your small to mid-sized practice, then you’re leaving money on the table.
The leading practices are hitting 50%+.
So how do you do it?
In part 1 of this profitability improvement series I looked at how you can improve your top-line by implementing a profitable pricing & sales system in your practice.
In part 2, I’m going to be looking at how you can decrease your cost-base in a way that doesn’t impact the quality of your service or the output of your team.
Decreasing your cost base?
As you’re growing your practice through the start-up and survival stages, your focus is simply on winning new clients and increasing your turnover.
And it’s fair to assume that during this time you may not have been all that focused on keeping costs to an absolute minimum.
What this means is that there is more than likely some quick wins to be had in terms of reducing costs.
A simple cost reduction process will highlight things such as:
- Are you on the best rates with providers?
- Do you have unused equipment taking up space/costing you?
- Are you paying for tech that isn’t being used?
Running a process like this can make some marginal improvements to your cost base and hopefully to your profitability.
But these improvements aren’t likely to be major…
The biggest improvements will come from:
- Implementing an outsourcing/offshoring strategy
- Dealing with unprofitable clients
1. Implementing an outsourcing/offshoring strategy
Outsourcing & offshoring always seems to be a contentious subject with UK accountants.
Whereas our counterparts in Australia and the USA seem to be much more comfortable with the idea.
I think this ultimately comes down to a few misconceptions about what it is and how it works, and possibly some previous experience where outsourcing has been tried but perhaps didn’t work out.
So, let’s clear some of those misconceptions and look at what it is, how exactly it works and why it can make such an improvement to your bottom line.
What exactly is outsourcing and offshoring?
Outsourcing and offshoring are two completely different things, and it’s important to know the difference.
Outsourcing is where you outsource work to a company external to your own (often in India although there are several UK based as well) and they complete the work using their own systems and processes. This is like a tap that you can turn on and off where you usually pay them per hour.
Offshoring is where you have somebody working for your practice (and only your practice) who is based in another country (often in the Phillipines). They are your member of staff so you are responsible for training them and looking after them like any other UK based team member.
How does it work and why is it so good for profitability?
To give you an idea of how both of these work, I will use real examples from my own accountancy practice in North West London.
As I mentioned above when outsourcing it’s normally done by the hour. I like to do things differently though. I have a fully-qualified team member in India who we outsource year end work and tax returns to for approximately £16K per year.
Initially there was a puppy training period (learning curve) where we identified a few areas for improvement but after approximately 6 months it was working like a dream.
I also have another full-time team member in the Philippines. She is offshored so is essentially an employee in my practice. I pay her roughly £13K per year and she is responsible for mainly bookkeeping and VAT work. She’s a complete superstar and for the first few weeks my team couldn’t find enough work to send to her!
If you want some recommendations for outsourcing and offshoring companies in India and the Philippines, then just let me know.
2. Dealing with unprofitable clients
I can hear you thinking…
What do unprofitable clients have to do with bringing my costs down.
Here’s the truth, unprofitable clients are one of the biggest costs to any business.
They cost you and your team time, energy and you guessed it, profit.
But often, practices go on without realising that they even have unprofitable clients in the first place.
Which is why the first place to start here is to do a full analysis of your client portfolio.
Start by listing all of your clients out, and how much their fees have been for the last couple of years.
Then, identify different groups of clients by things such as what sector they’re in, and what services they use.
Finally, add each client’s profitability onto the spreadsheet.
Note – if you don’t know the profitability of your clients then one of the easiest ways to measure this is to introduce timesheets. Not for billing purposes, but purely for tracking which clients take up more time than others, and then seeing if their fee reflects the level of service that they’re receiving.
And now, it’s time to notice what you notice.
- Who are the most unprofitable clients?
- Do they all belong to a specific sector?
- Have they all come from a specific lead source?
Once you’ve done your analysis, now comes the tricky part, dealing with those unprofitable clients.
You really have 2 choices here:
- Increase their fees so that they become profitable (see article 1 and specifically the profitable pricing section)
- Move them on
Moving clients on is never easy, but it’s important if you want to free up time for you and your team to work with more profitable clients.
Draw a line in the sand, and make it happen.
You won’t regret it, I promise.
What’s the next step?
Utilising outsourcing/offshoring and moving on your unprofitable clients will make a real impact to your bottom line.
Once you’ve done this, the next step is to look at how you can increase the output and efficiency of your operation to maximise any profitability gains that are there for the taking.
Stay tuned for part 3 of this series where I’ll be sharing with you the exact tech stack that maximises your efficiency, the 10-minute meeting that can 3x your teams output and how to use KPI’s to hold your team accountable to getting more done.