Practical tips on how to improve gross margin

Finola McManus outlines the ‘magic 13’ steps that will guarantee a rapid increase in gross margin and profitability.

1. Many practitioners measure gross margin in total. Drill down by client and identify which clients you make a strong margin on and which are loss leaders. A successful and progressive firm aims to achieve 70% plus overall gross margin, however many firms achieve 80% plus.

2. All top practices now work on fixed fees with clear systems for charging for extra work. Pricing should be based on what the standard of information is going to be when you start a job. Be upfront about how you will charge extra if you need to do more than you originally quoted for.

3. Work in progress is the practitioners’ stuff of nightmares. Be brave and take a hard look at what can be billed out and recovered. Many do this and are shocked by the resultant true gross margin. Top practices have negative work in progress and healthy cash flows achieved by accurate pricing systems and fixed fee agreements.

4. Many partners in smaller practices do technical and compliance work themselves and do not record or measure time accurately. You must do this to ensure a true gross margin measurement. When the time comes to sell or plan your succession any incoming partner or buyer will look at this.

5. Production systems are key to efficiency and optimal gross margin. Money is lost with jobs being ‘picked up and put down.’ You must have systems in place to check records, budgeting, planning, timely meeting with client and finalisation. Set a monthly billing target for the year ahead.

6. No job can ever be started without a budget being documented and agreed. Avoid the pitfall of letting inexperienced staff set a budget which simply equals the annual fee charged. The total fee will no doubt include additional services. The budget should be split three ways between planning, doing and completion.

7. Even the smallest job needs to be planned. This ensures the person doing the job is clear about what’s required and how to approach the task. Refer to the previous year and see what problems arose to ensure they’re not repeated.

8. Budget and measure this training separately. If a job overruns it is only ever for two simple reasons: Lack of experience and/or wrong fee being charged. Either way you must be in control of measuring and monitoring these two key drivers.

9. Proper planning and checking in with staff about how the job is going compared to budget, allows you to call the client at the first opportunity where there is a problem. This increases the level of client service delivered by being transparent and proactive. Trying to agree extra fees after the event is usually a waste of time.

10. Mistakes happen. The key is to learn, change your systems and ensure they are not repeated.

11. Training your team is costly. However, if you are employing inexperienced people you have a duty to invest. You need to allow for lead time, cost of training and be diligent in measuring ROI. Action has to be taken promptly where there isn’t an acceptable return.

12. Work planners come in all forms from bespoke software to Excel spreadsheets. Use what is right for your firm.

13.Many practitioners find ‘time and motion’ studies as part of an employees’ career development review valuable. Agree working hours available and strip out non-chargeable time. Plot this on your planner and have a realistic picture of available production and recoverable time.

If you would like to read more, please click to download the 2016 Practice Profitability Guide which Finola was asked to contribute to.

January 2016 Copyright - Finola McManus, Practice Perfect

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