How Your Accounting Firm Can Increase Profits by Pricing Upfront

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May 30, 2017
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WARNING

This article will probably challenge your current thinking - you might get upset and send me hate mail. Here goes anyway…

When you price in arrears, you are directly rewarded for being inefficient. You are charging time with this model and, the more time you charge, the more money you make. You are directly incentivized for taking your time.

This model drives the ‘billable hours’ and ‘chargeable time’ behavior. It drives the wrong behavior. If you say to your team members that you want more chargeable hours out of them then they think, “Easy, I’ll just go slower, I’ll make mistakes, work longer hours and pad the timesheet out.”

And then you say crazy things to the team member like, “You’ve got $5,000 worth of time to do this project.” Miraculously, the job comes in at around $5,000. How do they do that? Do they go slow, not put all the time down and then fast to get to the budget? Hmmm.

You also have these crazy things called ‘units of time’ – mainly 6-minute units. What happens when you have a project that takes 57 minutes? Do you call it 9 units or 10? Most will pick 12. Did you just rip the client off?

It seems that your team members are rendered useless unless they charge 1,800 hours per year. And Partners, you better be charging at least 1,300 hours per year. C’mon people. This focus on billable hours is just crazy.




Also under this model you will always get ‘write downs’. Discounting before billing. It’s just wastage of profit. As you give ‘dollars budgets’ to your team members they speed up and slow down as appropriate. They don’t put all the time on the clock as they are working and they are effectively ‘writing down’ as they go. They are writing down work before you get a chance to write it down!

Some firms even budget for write downs. In the annual budget, the first line is typically ‘Fees charged to WIP’ and the second line is ‘Expected write downs’. Why would you expect to fail before you start? You get what you expect. If you expect to get 10% write downs (90% realization) then you’ll probably get around that number. Our best firms we work with have write ups – anything from 5% - 65%.

Under a time-based billing model in arrears, you are not incentivized for being super-efficient. Your clients want fast turnaround of their product. They want the job done in the least amount of time, yet when you price in arrears, you do not want to produce the product in the least amount of time. I am going to say that time-based billing in arrears is a highly unethical way to work!




And not only that, time-based billing says you’re only worth your charge rate. It’s like charge rates are a status symbol. The theory is that the more experience you have, the higher the charge rate. However, the charge rate is attached to the salary and it’s the more you get paid, the higher the charge rate. Charge rates and time-based billing assumes the time to do the job was correct and the charge rate was correct. Nothing could be further from the truth.

Are you challenged yet? Do you want to send me hate mail? Or do you agree with this? I check all my own mail every day BTW so go for it.

Okay, assuming you agree with me that time-based billing in arrears is wrong, do you want to know how to fix this?

The right way to price a project is to price it upfront (ideally based on the value you contribute to the client) and notify the client in advance of the price and the scope of projects. Now, you are directly incentivized to be as efficient as possible.

Let me tell you about a large firm that nailed this. I’m going to use a large firm as an example because the larger the firm, often it’s harder to implement. If you’re a one-to-five-partner firm, it’s easy to implement. Make a decision and just do it.




This large firm had 14 partners and they were super successful, writing down work and pricing in arrears. They had 5,000 clients and for years they were pricing in arrears. They were also writing down $1.6M per year. They were champions at write downs. They budgeted for 10% write downs each year and they expected to fail before they started. They nearly hit their goal as they were achieving 8% write downs each year. There average hourly rate charged was $120 and their profit before partner salaries was 25%.

They were a big example of a typical small firm.

So this is what I did to fix it. I realized that if we wanted to change the behavior, then we must first change the system. The first thing I did (after the partners bought into the program) was get the team members on side. We ran a seminar to educate the team on all the new changes. That event is now called ‘The Perfect Firm’. I then drafted a one-page letter to send to their clients to announce the change in the system. They sent the letter to 3,500 of their 5,000 clients. The team and the partners were now accountable to the change. We drafted a series of standard ‘price up front’ engagement letters and, as the client work came in, they sent a letter with the scope and had the client sign off on it. Now, they were directly incentivized to be as efficient as possible.

Within six weeks they eliminated $1.6M of write downs and started writing up work. Within 12 months, they had $500,000 in write ups ($2.1M profit improvement) and an average hourly rate of $176 – a 46% increase in margin.




When you price upfront, you are now incentivized to ‘drive the time down’ not drive the time up! Less billable hours not more billable hours. You get more capacity and you get more margin. Your clients love it (you have to trust me on that one) because they have certainty on price before the project starts.

It’s not that hard when you have the structure, the systems and the tools to do it. Wouldn’t you like to do the same?


My team and I can help. Let's start by assessing your firm's current productivity level versus it's full potential.


SHOW ME HOW


Rob Nixon

CEO & Co-founder at PANALITIX

About the Author

Rob Nixon is the world’s foremost authority on how accounting firms can achieve peak performance. Since 1994, he has been running businesses that specialize in helping Accountants run better, more profitable businesses. His speaking work has taken him around the world where he has spoken to in excess of 170,000 Accountants. Currently, his landmark strategies and products are used by Accountants in over 30 countries.

On average, clients increase profit by 75.5%, enhance capacity by 30.6% and achieve sustainable revenue growth of 52.1% - in just 12 months.

Rob is the author of two best-selling books “Accounting Practices Don’t Add Up – why they don’t and what to do about it” – and “Remaining Relevant – the future of the accounting profession”. Both have received rave reviews from Accountants and industry professionals from around the world.

Rob’s latest book “The Perfect Firm: Your Playbook for Building a Perfect Accounting Business” aims to help Accountants build their perfect accounting firm.

In 2005, he created the revolutionary coaching model called coachingclub. The coachingclub model enabled firms to be accountable, to consistently learn and to share ideas amongst their peers. So far, over 800 accounting firms have graduated from his coachingclub program. The vast majority of firms have doubled or tripled profits because of the program.

Rob is a keen golfer (single figures) and adventurer (he is ticket holder 293 on Virgin Galactic to go into space). He lives in sunny Brisbane, Australia with his lovely wife Natalie and three children.

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