PRACTICAL TIPS ON HOW TO IMPROVE GROSS MARGIN

SUMMARY CHECKLIST-OVERVIEW

  • Start with knowing your existing gross margin and identify which clients return higher margins and which are the lower contributors
  • Pricing- is your pricing ‘right.’ • Review and clear out old and irrecoverable Work in Progress which may be ‘enhancing’ what you think your current gross margin is.
  • Where partners spend time on compliance work, ensure their time is booked and reflected in a true gross margin measurement.
  • Production systems- do you have any and how do you monitor them?
  • Budgets for all jobs-essential.
  • Planning on all jobs-essential.
  • Allow for reasonable training time.
  • Manage over-runs in real time. Talk to client at earliest opportunity where job is taking longer than budgeted and agree extra fee.
  • Learn from mistakes so they don’t recur- re; pricing/budgets/over-runs. • Invest training time and monitor results - this improves staff retention and increases efficiency and margin in the long run. • Use a work planner to drive efficient production systems.
  • Perform a ‘time and motion’ study with individual staff members to agree available chargeable time and work production rate.
  • The above ‘magic 13’ steps will guarantee a rapid increase in gross margin and profitability

DETAIL TO THE ‘MAGIC 13 STEPS’-PRACTICAL GUIDE

  1. Many practitioners measure gross margin in total. You need to drill down by client and identify which clients you make a strong margin on and which are potential loss leaders. If you had the time and resources available could you use time better to earn improved margins by delivering extra work to better clients and ‘sack’ those clients who do not contribute? A successful and progressive firm aims to achieve 70% plus overall gross margin. 65% gross margin is a reasonable ‘good average’ at present. However, many firms achieve 80% plus margin on the optimum client mix and with strong internal systems and processes.
  2. Pricing is a well-covered area. All best performing practices now work on fixed fees with clear systems for charging for extra work. Very few top performing firms still charge after the event or by quarterly/annual periodic billing. Pricing should also be clearly 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. Many clients believe their records are excellent when we all know the reality is often different! Clear pricing systems are the key to maintaining and increasing gross margin.
  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 in reality. Many practitioners do this and are shocked by the resultant true gross margin. The best performing practices have negative work in progress and healthy cash flows- achieved by accurate pricing systems and fixed fee agreements whereby clients are effectively paying in advance of work being completed. Work in progress should be kept to a minimum with all jobs having a 30 day turnaround or less.
  4. Many partners in smaller practices do a lot of technical and compliance work themselves and do not record or measure their 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 potential buyer will look at this area closely.
  5. Production systems- 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. Use a work planner production system to monitor and control production. Set a monthly billing target for the year ahead. Ensure you look at the results monthly to monitor results and take follow up action as required.
  6. Budgets- golden rule is that 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! You need to ensure the budget reflects just the account/tax/audit compliance elements. The total fee will no doubt include additional services you provide. Also, the budget should be split 3 ways between ‘planning, doing and completion/finalisation.’ Many firms fall into the trap of over runs due to little or no planning and not allowing adequate time for finalisation and shut down.
  7. Planning- even the smallest job needs to be planned. This ensures the person doing the job is clear about what is required and how to approach the task. Always refer to the previous year and see what problems arose to ensure they are not repeated again in the current year.
  8. Training time- budget and measure this KPI separately. If a job over runs it is only ever for two simple reasons- lack of experience/training on the part of the person doing the job and/or wrong fee being charged. Either way you must be in control of measuring and monitoring these two key success drivers which impact gross margin. For the purposes of this article will be put aside the issue whereby a person has adequate experience but just isn’t doing their job properly as that’s a separate issue for you to action.
  9. Managing over runs- with proper planning and up to three times a day 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 with quality of information received or amount of work involved compared with the fixed fee and original quote. This approach will give you a better chance of recovering extra time and also increases the level of client service delivered by being transparent and proactive. Trying to agree extra fees after the event is poor service and usually a waste of time.
  10. Mistakes happen. The key is to learn from them, change your systems and ensure they are not repeated. Share this with your team so they too can develop.
  11. Training your team is costly. However, if you are employing inexperienced people you have a duty to invest in them. Not only will it increase employee retention but will also increase your gross margin. You need to allow for the lead time and cost of training and be diligent in measuring returns on that investment from the start. Action has to be taken promptly where there isn’t an acceptable return on training investment.
  12. Work planners come in all forms- from bespoke software to basic excel spreadsheets. Use what is right for your firm. Work planners really are the foundation to managing all gross margin drivers.
  13. Many practitioners find ‘time and motion’ studies as part of an employees’ career development review very valuable. You agree working hours available in the year and strip out non chargeable time (holidays, training, courses, admin etc.). Plot this on your work planner and you have a realistic picture of available production and recoverable time which feeds into billing targets and margins. The team member feels involved and it easily avoids the issue of ‘work expanding to fill the time available’ scenario which eats away at gross margin.

Conclusion

You probably won’t have learnt anything you didn’t already know by reading the above. However, we often forget the basics when we are distracted with hectic daily client demands. This feature is designed to be a refresher on ensuring you have the ‘simple stuff’ in place and working well. Many practitioners are too focused on winning new business and fees and neglect the basic housekeeping. Get these basic in place and the increase in gross margin will be measurable in a very short timeframe.

26 March 2015 Copyright - Finola McManus Practice Perfect

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