TFYW#041 Calculations For Firm Growth

Jun 23, 2023

Growth in accountings firm is hard. This week, I’m going to get into the systemic approach to firm growth.

But first –


Today’s Tactic

The best soft skills advice I received as a new manager was to drop the would ‘why’ when discussing a less-than-ideal outcome with employees.

To be clear, I’m not referring to the Five Why Method for root cause discovery – I love this methodology.

But when there is an unbalanced power dynamic (ie manager and junior team member), leading with ‘why’ will put the other person on their heels.

‘Why’ assumes that the person is the reason for the result. It pits you versus them. They will try to deflect the blame, putting them on the defensive.

I like to lead with

  •  “What was the reason the balance sheet didn’t show the long-term debt amount?”
  •  “What caused the delay in completing the summary for the client?”
  •  “What do you think happened with the client information I sent you?”

These questions remove the person as the cause and put you on the same team to find a solution.

It shows you want to find a solution and not just pin the blame.

Employees are easy targets when something when goes wrong. It is harder to find where the process is broken, inefficient, or redundant.

Grind the process, not the person.


Firm Growth Strategies

Low prices should never be used to attract clients when creating your firm’s strategy.

In accounting, there is NO strategic advantage to being the cheaper provider.

You may win more work upfront, but the cost of the service delivery will squash you.

I mostly see new firm owners and side-hustling accountants undercutting their services to get new clients.

However, some seasoned CPAs and Firm owners undervalue themselves as they adopt new tech and decrease the cost of service delivery. They feel greedy about maintaining their prices if they put in fewer hours.

And the idea of raising their prices is completely out of the question.

The cost of everything is going up. If you want to grow your firm without working 70 hours a week, you have to increase your pricing.

Pricing Strategy for Growth

Pricing directly impacts profit.

Profit impacts your capacity.

Capacity issues restrict your firm’s growth.

If you’re experiencing growing pains, your current pricing model is broken.

Alleviating growing pains is rooted in a pricing strategy informed by your capacity constraints.

I see firms that use revenue and profit as enablers to grow. However, they neglect the more significant success indicator:

To grow sustainably, your firm needs capital and capacity.

Capital to

  • Make the new hire
  • Purchase the new tech, or
  • Investment in the new advisory service offering.

Capacity to:

  • Train and support the new hires
  • Learn and implement the new tech, and
  • Staff and train for the new service

Your pricing is the key for both.

Scenarios

100% Utilization + Baseline Pricing:

Many firms run at a utilization rate as close as possible to 100%. This eliminates any capacity within the firm.

It is great for optimization.

Terrible for growth.

Let’s say the revenue is $110 for the year.

This is the baseline.

Cost Structure Includes:

  • $70 in Human Capital cost (including partner income);
  • $10 in Variable Costs (hardware, software etc.);
  • $20 in Fixed Costs.

The average cost to add an employee is $10 Wages + $1.4 Variable costs = $11.40.

Revenue / Utilization will be $110, meaning that maximum revenue can only $110.

When the new hire is added, with current profits of only $10, there will be a net operating loss until the firm generates more revenue.

Many firms juggle adding capacity while rushing to find new clients and stay profitable. If utilization drops, revenues decrease and cash flow gets tight.

With attention focused on bringing in new clients, firms can’t properly train and get their new team members up to speed fast enough.

Instead of reducing stress, new team members only increase it.

85% Utilization + Baseline Pricing:

By reducing capacity by 15%, your firm will have the resources to bring on and train new hires.

Note that a 15% capacity reduction is the average for the firm. Managers may need more capacity to train new hires, while other team members may need less to complete their ongoing training.

Using the baseline revenue per employee of $15.7, the reduced utilization of 85% will only result in a $13.4 rev per employee. They’re working less, so revenue has decreased. Net operating loss is $7.

Revenue / Utilization is maintained at $110, as the pricing hasn’t changed, just the amount of work that is being done.

85% Utilization + Increased Pricing:

Increased pricing is the only way to achieve the capital and capacity to grow your firm.

If revenue is maintained at $110 (rev per employee stays at 15.7), but capacity or output decreases by 15%, the pricing increase has to be at least 17.2%

Notice that the revenue/ utilization jumps up to $129, meaning if 100% utilization is reached, revenue will hit $129.

To be in a position to reach sustainable growth most firms will need to increase prices by at least 20% for their current clients. Increasing the cost of only new clients will not be enough for viable growth.

 

If you don’t remember anything else from this week’s newsletter, remember this:

 

Firm growth is fueled by your current clients. Not your future clients.

 

Your pricing has to cover your current and future costs.


Today’s Tech

While many are pushing AI to summarize and distill long pieces of information, we still need to consume and understand some information. For some content, our profession (and liability insurance) keeps us from just skimming.

The information is coming at us via emails, pdfs and articles, and online reading is not good for the eyes or retention.

While I won’t comment on how to protect your eyes, I know that retention increases when we listen to what we read.

I discovered Speechify last year and love it. It will read anything aloud on your browser page.

Speechify.com

Add it as a Chrome extension or on your phone (iOS or Android). I like to listen to most things at 1.2 to 1.7X speed.

Speechify offers a free trial, but you can also take a similar tech for a spin using textmagic.com, where you can copy and paste text and have it read to you.

Build The Firm You Want.

Mark

P.S. Email Mark@FirmNexus.com with something that you want me to talk about. I’ll add it to the list. 

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