TFYW#080: The Revenue Metric You Shouldn’t Miss

Mar 22, 2024

Understanding Revenue

I am just finishing up a Firm Systems Audit for a CFO firm.

The audit includes getting into each of the nine key systems of the firm.

We started with the Firm’s Strategic Trajectory and moved down to the client-facing systems.

The firm owner’s gut was telling him that changes were needed.

And that’s where my team came in.

One of the first metrics we calculate is revenue per full-time equivalent (FTE).

It’s calculated by dividing total annual gross revenue by full-time employees.

A healthy Rev per FTE is between $150k to $200k.

For most firms, Rev per FTE is lower than that.

Figuring out how to improve that metric is a big part of optimizing the firm’s ROI, the happiness of your team, and minimizing your role in service delivery.

Deconstruction

As a way to help deconstruct the metric, let’s categorize the service delivery work we do into three main levels:

    • Administration
    • Preparation
    • Review

How the tasks for these three roles are identified and assigned is the key to getting to a better Rev per FTE.

Deconstructing the metric will help us determine if the firm is:

    1. Over Staffed
    2. Over Titled
    3. Under Priced

 

Over Staffed

This is a common issue, but many firms would disagree.

Firms will argue that everyone is 100% utilized without any redundancy.

In many firms, Over Staffed is less about idle bodies and more about broken service delivery systems.

Firms get caught doing way more administration than they should.

Even though your team might consist of preparers and reviewers, they’re probably doing a fair amount of admin.

If firms over-diversify their services (i.e., they do all things for all clients), constant retooling occurs to deliver services. This is quite common for generalist firms.

Retooling is the administration of understanding the client’s systems, structure, and processes and then creating templates and workflows for only them.

Most small businesses don’t have efficient systems, and allowing them to influence how your team operates drives down Rev per FTE.

The only solution to non standardized client systems is by adding more agile humans.

Teams are utilized to address client nuances instead of completing high-value work.

Unfortunately, clients perceive no value in you completing their unique administrative demands, so getting them to pay more is nearly impossible.

The more you can standardize how you work with clients, the less administrative retooling your team will do.

Over Titled

Having team members doing work beyond their skill level is a misunderstood issue.

If they’re doing work beyond their capabilities, they’ll be 20 to 30% less efficient and more likely to quit.

Essentially, the problem here is that admins are doing the preparer’s work, or preparers are doing the reviewer’s work.

The work is still getting done, but capacity is artificially constrained.

I recently worked with a firm that was offering controller services.

They had a few controllers. They charged controller prices, paid controller salaries, but, in a few instances, got senior accountants’ outputs.

Some people were over-titled. They had the title of controller, but their skills didn’t match.

They’re not covering their revenue responsibility (more on this below).

This happens if hiring is rushed or the roles aren’t crystal clear.

However, this can also occur when existing team members are promoted. Instead of hiring externally, the easier route is just to advance someone already in the firm.

We sometimes get caught not checking the skills against the title and role because we just need a warm body or underestimate the expertise needed to complete the work.

Filling a role successfully is one part candidate quality and one part role clarity.

Under Priced

This is the biggest culprit for a dire Rev per FTE metric.

It’s like sticking to the best workout routine but eating garbage in between.

You can’t outwork a bad diet.

You can’t out-automate/offshore a bad offer price.

Most of the time, we start with the price and work backwards to how we’ll complete the engagement.

But this is hard, and that’s why hourly billing hasn’t died its deserved death.

Knowing each team member’s tasks and corresponding revenue responsibility is the first step in getting the right profit margins and, ultimately, a better Rev per FTE.

For an administrative role, their revenue responsibility is 1.4 – 1.8X their salary.

Wait, administrative roles are revenue-generating? Yep.

If they’re answering phones, tabulating hours or getting coffee, you’re missing an opportunity.

For a preparer, their revenue responsibility is 1.7 to 2.4X their salary.

For a review, their revenue responsibility is 2.2 to 2.8X their salary.

Download this quick model here.

Play around with what you should expect from each role in terms of revenue generation.

Disclaimer:

    • Revenue responsibility does not mean hours worked – Expertise is measured by executing their responsibility and leadership, not by hours worked.
    • This model assumes that you have standardized engagements to a certain degree – models don’t work without fixed variables.
    • You have identified the cost of each component of the engagement – you can’t understand the value of the whole without knowing the value of the parts.

 

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

 

All firms will improve Rev per FTE faster with a well-structured team and offering, than with better tech and automation.

 

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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