As accountants, there’s one thing you absolutely must get right and that’s being profitable.
It’s something that you probably tell your clients on a weekly basis, and yet many practice owners aren’t making anywhere near the profits that they should be.
If your net-profitability is currently less than 30% then I’m guessing:
- You aren’t taking as much money out of your business as you’d like
- You don’t have enough left over to invest in growing and improving your practice
The old rule of using the third-third-third model is exactly that – old.
The way that we…
- work with our clients
- run our practices
- produce work
- price our services
- market our practices
… has all changed.
And so must the profit expectations we set as a result.
So, here’s the new rule…
You must aim for a minimum of 40% net-profit. Absolute minimum.
Anything less and there are some quick wins that can be had to boost it up, that I’m confident of.
Ideally your net profit will be between 40%-50%. With the star-performers hitting 50%+ (which is entirely possible…)
Why should you focus on improving your profitability?
Before we get into how to do it, it’s important to look at why you should even bother in the first place.
The majority of practice owners I speak to have one (or both) of the following problems:
- they don’t take home no where near enough money for the hours they put in
- they don’t have enough cash to invest into growing, scaling and developing their practice
Improving your profitability is the solution to both of these.
Sure, it also depends on your cash flow. If your cash flow is poor, it doesn’t matter how much extra profit you make, you still won’t be able to invest it into developing your practice.
But increasing your profitability is the starting point.
So how do you do it?
How do you increase the net-profitability of your accountancy practice to 40%-50%?
In this 3-part blog series I’m going to be looking at the exact steps you can take to do just that.
Each blog will be focused on a different part of the profit equation:
- Improving the top-line
- Decreasing your cost base
- Increasing output and efficiency
So, in part 1 of this 3-part series I’m going to be looking at how to improve your top-line, but more specifically how to implement a profitable pricing strategy and sales system.
Improving the top line
One of the easiest places to start when looking to increase your practices profitability is to look at improving the top-line.
I often find that there’s some low-hanging fruit and very quick revenue/profit wins that can be had here.
So, the 2 areas that we need to look at are:
- Implementing a profitable pricing system
- Implementing a profitable sales system
1.Profitable Pricing System
It’s probably one of the most contentious and well discussed topics in the accounting world right now.
And well deservedly so!
The pricing model you choose, ultimately effects the profit that your practice will make.
Fixed fee, menu pricing, value pricing, package pricing – whatever you choose, there’s one thing I’m sure we can all agree on…
It has to be profitable.
So, what are some of the reasons why accountants pricing systems aren’t profitable?
Here are the top 3:
1. They haven’t maximised the fees they can charge
Lots of practice owners undercharge and overdeliver their services.
This is great for your clients, but not so great for your bottom-line.
If you price your services based on value, and then communicate this value to your clients in a way that they understand (i.e. relate it to their world) then there should be very little resistance to your fee increases.
In order to keep maximising fees with existing clients, a number of my clients have built into their letters of engagement that each year the fee will increase by a minimum of X%.
My good friend James Ashford suggests setting a minimum monthly fee for your practice.
This is the absolute lowest monthly fee you will allow a client to be on – which will often mean turning away those low-fee clients that are only after basic services.
2. They don’t charge for EVERYTHING
Can you honestly say that you charge your clients for everything that you do?
Most practice owners would answer no to that.
You wouldn’t ring up your mechanic and ask him to stick a new tyre on without expecting to pay for it.
So why is this any different?
Sit down with your team and figure out all of the little things that you do that you really should be charging for. And then, build them into your pricing system and charge for them!
3. They don’t review pricing/pre-empt scope creep
Scope-creep is one of the biggest profit vampire’s accountancy practices face.
And if you’re not careful, it can very quickly swoop in and bleed your profits dry with one swift bite.
So, in order to pre-empt scope creep, reviewing your fees throughout the year is required.
Now this won’t be the case for all clients, but for ones where the services are most susceptible to scope-creep e.g. bookkeeping, then it’s worth reviewing fees on a quarterly basis.
This makes sure that you’re not only providing the right value to the client but being rewarded for it equally as well.
Your pricing system needs to be flexible enough to allow you to adjust the fees throughout the year.
Using software such as Practice Ignition and GoProposal makes it very easy to do this.
2. Profitable Sales System
Having a profitable pricing system is one way to improve your top-line, and having a profitable sales system is another way.
This isn’t about trying to sell as much as possible to clients just in order to bump up your revenue.
It’s about figuring out exactly what clients need, and then giving that to them.
So how can you do this?
Here are 3 ways to implement a profitable sales system that gives your clients what they need:
1. Follow up with clients to see what else they need
Your clients’ needs will change all of the time.
So it’s important that you’re constantly speaking with them to understand what’s going on.
One way to do this as part of your client care strategy is to implement a courtesy call system.
By getting your team to check in with clients once a quarter on the phone, you’ll be able to identify additional opportunities to help them by listening to and understanding their needs as they are changing.
2. Educate your clients about what other services you have available
Unless you educate your clients about all of the services that you offer, they aren’t going to know how they can benefit from them.
Sharing client success stories is a great way of showcasing how other clients have benefited from additional services in a credible way.
Additional ways to educating your clients about what else is available are:
- Creating & sharing content
- Running workshops & events
This isn’t about trying to sell as much as possible – it’s about educating the client around all of the different ways you can help make their lives better and easier.
3. Broaden your service offering
Selling compliance services is fine, and they can be quite profitable (assuming you have the right mix of people and technology which I’ll be covering in more detail in posts 2 and 3 of this series).
But often, additional services that your clients need can be much more profitable.
These can be things like:
- R&D tax credit claims
- Financial advisory services e.g. forecasts, budgets, what-if scenarios
- Coaching and accountability calls
- Specialist tax projects
- IFA services (one of my clients does over £300K per annum through his in-house IFA department)
These services often have less of a cost involved in delivering them and therefore add more profit to your bottom line.
Grab the low-hanging fruit
Most of the points that I discussed above are low-hanging fruit for accountants to improve their practices profitability.
By implementing profitable pricing & sales systems, you’ll maximise your top-line which will in turn increase your bottom line.
Stay tuned for part 2 of this series where I’ll be looking at how some practices are dramatically cutting their costs (in some cases by up to 50%) in order to increase their profits to the magic 40%-50% range.