Erosion of Gross Profit in a recession

Practitioners are reporting increasing pressure on how to maintain or improve their gross profit margin in challenging times when clients are demanding higher levels of services and often are reluctant to pay their bills.

How often have you asked yourself 'Why am I working so many hours but have so little cash and am not making enough money?'

The more successful accountancy firms adopt the following strategies which have proved to work in increasing gross profits and of course make a direct impact on their bottom line and cashflow. Most of these strategies are basic housekeeping and best practice - all of which are very easy to implement and are what I call 'quick wins.'

All too often practitioners focus on 'winning new business' and the top line without realising that all their hard work is being wasted by not focusing on gross profit margins being made firm wide. This is commonly referred to as either the 'loser trap' or being a busy fool ! There is little reward in winning new clients when you are making say 10-20% below par on your gross margin. Currently, the more successful practices make a minimum 65% gross margin across the board on all work. The best performing practice I have seen makes a gross margin of 85% consistently. Under- performing firms make as little as 40% gross margin. On a turnover of say £500,000 this equates to £125,000 gross profit and cash being lost (based on making a margin of 40% instead of 65%). Do the maths for your own business and see how it measures up !

  • Know your client base- which 20% of your clients are contributing to 80% of your overall profits ? List your clients and grade them not just by fee charged but by 'quality' of client and gross profit you are making on them.
  • What is your ideal client ? Is your client base made up of clients you don't really want and don't make a good recovery on ? What is your plan to weed these out and market to your ideal client profile ? Can you measure your gross margin accurately or is it often down to an 'educated guess ?'. Face up to the pain of reviewing your work in progress, perform a spring clean and look at the real gross margin you are making by client. It takes a brace practitioner to do this ! Many 'hide' behind a seemingly good gross margin on paper knowing that the work in progress figure is really and unknown quantity and contains time that will never be billed and is never recoverable.
  • Are all your clients now on a fixed fee with agreed payment terms- preferably by standing order or direct debit ?. This is now common practice and has a huge impact on both cashflow and profit margin. Clients are much happier to pay when it is transparent what they are actually paying for and when they are going to pay for it.
  • Do you have a 52 week workplanner in place scheduling all your jobs for the year ahead against your available labour resources ? This is key to driving efficiency in your firm.it also helps you manage your recruitment needs.
  • The key to improving your gross margin is in the planning and swift completion of work. We all know how money and fees are lost when work is 'picked up and put down' over a period of time. Client service levels also fall when it takes a long time to complete a job. A robust and continually updated workplanner will allow you to take control of this.
  • Put simple systems in place for how you price for work,review quality of records,plan a job, never start before you have all information to hand, book review, client meetings and finalisation time in diaries etc. All these procedures will allow you to manage both your and your teams time and build an efficient practice without the need for constant firefighting and poor client service.
  • Do all your clients know the extent of help and support you can give them as a firm ? Is your 'Menu of Services' up to date and have you used it with each existing and prospective client to ensure you are capturing every 'Window of Opportunity.'
  • Prepare a 'Windows of Opportunity' template and use it every quarter as a 'client care' system to get feedback from clients and ensure they know you can help.Using this system consistently has proved to add 20% additional fees to a practices' top line. This is a very easy 'win' compared with putting all your energy into marketing for new clients as the sole means of growing your business.
  • Implement a culture in your firm where everyone knows the system for talking to clients up front and agreeing extra fees for work that is not included in the fixed fee. As owner, you need to monitor your work in progress movement by client each month to ensure this system is working as it should.Many practitioners lose out on fees because they fail to agree a charge up front with a client for extra work.
  • Have systems in place- especially for new clients- to ensure you are transparent in what your first year fee will be. It is all too common for a first year fee to be 'absorbed' before the first set of accounts are prepared ! This need not be the case .
  • Always, measure the recovery on each job once it is completed. Empower your team through training to perform this function on all their clients.Team members like the responsibilty and it frees up your time in the practice.
  • Time management- do you manage your diary and show your team how to do the same ? A very simple way to plan ahead,improve communication and efficiency. The result is happier clients and improved gross margin and cashflow.

Conclusion

The above is a very brief and easy to implement overview of 'top tips'.It gives you enough detail to now go and do a 'Healthcheck' on your own firm. Remember, everthing you do with success on your own business can also be used with clients- for an additional fee of course! Clients now deserve the type of service where their accountant will be able to offer this kind of support.Being a mere complaince 'beancounter' is no longer enough- even for the smalles client. Competition is too hard and you have to ensure you work on keeping the good clients you have.

I am happy to answer individual questions by e-mail on this topic.Please send any questions you have to This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

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