Nine proven ways to improve cashflow by eliminating debtors, WIP and low profits
Steve Pipe – 16 February 2010
Ultimately the primary sustainable and non repayable source of cash for any business, including your accountancy practice, is making profitable sales and getting paid for them. As a result there are two main sustainable ways to improve your cash position:
§ Make more profitable sales
§ Get paid for them more quickly
Start by getting the facts
One of the most valuable things you can do is to start by evaluating how well you are doing in these two critical areas by benchmarking your profitability, debtor days and lock up.
You may think you already know how well you are doing, but the actual results from the profession as a whole can often be a wake up call. For example, the last time I looked at the IRIS sponsored benchmark data for 209 independent small and medium sized accountancy practices, they showed:
§ The lower quartile firms (ie the bottom quarter) had profits per partner of £52,682 or less and total lock up (ie WIP plus debtors) of 147 days or more
§ While the upper quartile had profits per partner of £110,000 or more, and lock up of 76 days or less
§ And the top performing firms had profits per partner of over £320,000 and negative lock up (ie they had actually received more in cash then they had clocked up as WIP and debtors)
Since over half of the firms in the survey had turnover between £150,000 and £350,000, and none had turnover in excess of £3.2m, the chances are that when you benchmark your firm against them it will change your perception of how well you are doing, and stretch your understanding of what else might be possible.
So in the rest of this article we will look at ninereal life examples of the strategies UK practices are using to achieve the sorts of profit and lock up performance that most of the profession currently only dreams of.
Strategy 1 - Get more of the right type of clients
An “ideal client” is someone who pays you profitable fees, and pays them quickly. An “ordinary client” is someone who pays a less profitable fee and pays it slowly. And a thief is someone who steals from you by pretending to be a client, and taking from you without paying!
You need to design your marketing, pricing, payment and delivery systems to give you more ideal clients, fewer ordinary clients, and to make absolutely sure that you never find yourself working with thieves again. The ideas given below will help you in all of these ways.
Strategy 2 - Take a fresh look at pricing
It all starts with pricing. Don’t be tempted to cut prices to either keep clients or win new ones, since it is a slippery slope to a deteriorating client base, declining margins and cashflow. Instead, use value pricing wherever possible to protect or increase prices. For example, the market rate for tax planning is becoming 25% of the tax saved.
And where value pricing isn’t possible, use iterative digital pricing – ie use pricing software in front of the client to instantly calculate a fixed price that is tailored to the client’s exact circumstances and needs - and can be iteratively changed as many times as it needs to be until you find a price that is acceptable to the client (the software having already been set up so that every price it generates is automatically also acceptable to you).
Strategy 3 - Do things good clients are happy to pay good fees for
It’s stating the obvious, but the easiest and best way to make good profits is to provide services that clients are happy to pay really good fees for. Examples of the highly profitable services I have seen practices making a real success of in 2009/10 include:
§ Virtual FD service – Woods Squared on the Wirral earns an average of £25,000 from each of the 17% of its clients that buy their Virtual FD service.
§ Tax Credits – With the recession reducing the income of many households, many practices are now offering Tax Credit compliance services at £195-£395 and Tax Credit planning services at 10% of the extra Tax Credits obtained - with sole practitioner Ian Rodgers earning an extra £6,000 in his first month of offering this service.
§ Incorporation – By systematically advising every unincorporated client on incorporating, capitalising goodwill and in some cases also claiming tax credits because they draw down loan accounts rather than take an income, accountants are able to demonstrate very sizeable tax savings over many years. This in turn is allowing them to charge very sizeable value based fees linked to the size of the savings. For example, sole practitioner Nino Pucacco earned an extra £28,250 in fees from the first 4 clients he talked to about incorporating.
§ Profit extraction planning – By systematically showing every incorporated client the best combination of salary, dividend, interest on loan account and more advanced extraction options such as EFRBS, good accountants are saving clients many tens of thousands of pounds in tax, and as a result are earning extra fees of £50,000- £200,000 across their client base.
§ Advanced tax planning – By teaming up with specialist tax boutiques many firms are earning £100,000 or more a year in extra tax planning fees without personally having to do any extra tax planning work. The key to this seemingly impossible outcome is that the tax boutique does all the technical work, but shares their fee with the accountant in the form of a “payaway” as a thank you for the introduction.
§ One Page Planning – Accrington based Mayes Business Partnership banked £149,400 in extra fees from this service in the seven months to December 2009 (see Strategies 8 and 9 for details).
These services were all very profitable for the accountants because they were all hugely valuable to the client. And that is the way it works: the more valuable you are to clients, the more handsomely they will pay you.
How can your firm focus on these and other ways of being hugely valuable to clients?
Strategy 4 - Get paid in advance
Traditionally accountants bill after the work has been done, often based on the time costs incurred. But this approach is bad for the accountant, since it means huge amounts locked up in WIP and debtors, and it is bad for the client since research by Sage shows that the thing clients hate most about working with an accountant is surprise bills (ie bills that can’t be accurately determined until after the work has done).
So the simplest way to make things better for both clients and the practice is to agree the fee in advance, and then make it a condition of business that most or all of it is also actually paid in advance. The keys to really making this work are:
§ Using a watertight Fixed Price Agreement that specifies exactly what is and isn’t included within the fixed fee
§ Using Extra Work orders to price any additional work that is beyond the scope of the Fixed Price Agreement
§ Making your payment terms a central part of the way you do business – and insisting at the outset that you are not a bank, so if a prospective client is not willing to be fair by agreeing to pay what they owe, when they owe it, then you will not work with them
Strategy 5 - Use standing orders or, better still, direct debits
In the “olden times” clients paid by cash and cheque. Then many practices started making it a term of business that clients paid for their core ongoing services by monthly standing order – which good clients are happy to do since it helps them budget and spread the cost. Switched on practices also made sure that these standing order payments were timed so that most or all of the money had been received before the work actually started.
The problem with standing orders, however, is that they are inflexible, and have to be changed every time the fee (or VAT rate!) changes. So the last few years have seen many really switched on practices starting to use direct debits. In fact, for many of them the introduction of direct debits has been in two stages:
§ Initially they have helped their clients to set up direct debit arrangements to collect the money they are owed by their customers. In many instances they have also set up an arrangement whereby the direct debit companies pay the accountant a % of their clients’ turnover as a commission. And over time this passive income, appropriately disclosed etc, can add up to a very profitable additional income stream for the practice.
§ Once the client “gets it”, the accountant then explains that “out of fairness” they would like to use direct debits to collect cash from them as their client.
Because they trust their accountant, and the direct debit guarantee takes away all the risk anyway, good clients are more than happy to pay this way, since it simply and fairly means that they are paying what they owe, on the day they owe it – which no reasonable client can object to.
Thieves, on the other hand, do object! So insisting on a direct debit is also a great way of identifying and weeding out the wrong type of clients!
Strategy 6 - Make yourself an attractive alternative to a bank
Many accountants moan that their clients treat them like a bank, in that by paying slowly clients are in effect borrowing from the accountant. But a five director practice in Berkshire has turned this on its head by recognising that banks take deposits as well as making loans. So in February 2010 they started approaching their clients saying “Now that you can only get 1% when you deposit money at the bank, we will give you 2%, in the form of a 2% early payment discount, if you pay our bill in advance.”
The MD told me she was very sceptical that any clients would be interested at such a small discount level, but by contrasting it to the even smaller interest rate clients can earn on their money elsewhere, she has been amazed that over half the clients they have approached so far have accepted.
If you are still sceptical that a small settlement discount can have such a big effect, read on to see how an even smaller settlement discount has already transformed the lock up at another practice...
Strategy 7 - Offer no cost settlement discounts
A few years ago a four partner Yorkshire practice wrote to all its clients telling them that it was increasing all of its prices by one ninth (ie 11.11%). But in the same letter it also explained that customers paying within 14 days of the invoice date would be able to deduct 10% from the invoice value. Nobody complained, and most of its customers now pay within 14 days. What’s more, and here’s the amazing part, clients actually started to come in to say “thank you” for being allowed to pay less by paying early!
Of course, when you look at the maths you see how clever this particular strategy is. Initially a £100 bill goes up to £111.11. So those who pay after 14 days pay the full £111.11. While those who pay within 14 days pay £111.11 less the £11.11 prompt payment discount – which comes back to the £100 they used to pay before the price rise. So either the practice gets paid more or it gets paid more quickly – and either way they are happy!
Strategy 8 – Using Train To Gain to eliminate lock up
In a December 2009 article for www.accountingweb.co.uk I explained how Accrington based Mayes Business Partnership received £149,400 in upfront fees in just 7 months in 2009. The keys to their success were:
§ The £3,000 a year quarterly One Page Planning service they offered was highly valued by clients
§ By tweaking it so that their clients would qualify for Train To Gain funding when they used the service, they were able to also benefit from the fact that under the terms of Train To Gain clients have to pay in advance in order to get the funding
In how may different ways can you tweak what you do to enjoy the double whammy benefit of funding so that more people can afford your services, and payment up front to eliminate WIP and debtors?
Strategy 9 – Use a one Page Plan to make better decisions
The One Page Plan offered to clients in Strategy 8 above is also an invaluable tool for accountants to use to help run their practices more effectively.
The power of a One Page Plan is that it does exactly what it says on the tin - ie it distils all the numbers that matter for the practice down into a single A4 sheet of paper that can be understood by everybody. In fact, the most enlightened practices do actually share it with their entire team.
The key features of a One Page Plan are:
§ It starts at the bottom of the page and works upwards, starting with the business’s mission/vision/goals.
§ Those goals, in turn, determine the key areas in which the business will have to excel in order to achieve its goals (ie the “Underlying success drivers”).
§ Next come the key factors that directly drive the business’s sales, costs and cashflow (which are so important that they are given their own section of the plan).
§ And finally there are the key results that have been generated by all the underlying drivers (these key results are deliberately positioned at the top of the page because they are the consequence of everything below them on the page).
In this way a One Page Plan describes all the key factors behind the business’s success, and maps them out in a logical way that mirrors the causal links between goals, success drivers and eventual results.
Not only does this give your business an early warning system (by systematically measuring and monitoring everything that is really important in the business), but it also acts as a catalyst for identifying the action that needs to be taken, and for recording and monitoring the constantly updated action plans that the business plan contains.
Conclusion
Use any one of the nine proven strategies described above and you will improve your cashflow. Use several of them and you will greatly improve your cashflow.
But use all of them and your cashflow and profitability will be transformed for ever.
Next steps
If you are an AVN member… All the case study firms referred to in this Briefing, and all the software and tools they used to achieve their results are part of the AVN members toolkit. And if you are in any doubt which tools to use please talk to your usual AVN contact.
And regardless of whether you are an AVN member…
You are invited to attend Steve Pipe’s “Proactivity 2010” seminar as his guest
Tickets are normally £200, but as a thank you for your support the author of this Research Briefing, Steve Pipe FCA, would like to invite you and your senior colleagues to attend for free as his guests.
The seminar will reveal how you can improve your service levels, profits and cashflow, easily and quickly, by becoming more proactive. In particular it will reveal the keys to:
§ Creating the precise systems you need to (a) make proactivity an integral and automatic part of your core services, (b) improve the standard and consistency of service your clients receive, and (c) give you the option of working far fewer hours a week and taking many extra weeks holiday a year.
§ Making your core accounts service more proactive by using brilliantly simple profit and cashflow improving templates that give clients new insights that help them make better decisions for driving their businesses forward.
§ Strengthening clients’ cashflow through proactive tax planning such as IHT planning that puts cash in their bank accounts during their lifetime, LLP based planning that makes 5-10 year of expansion profits free of tax, and trust based planning that reduces the tax on extracted profits to less than 2%.
§ Not only resisting downward fee pressures, but also to emulate other small independent practices who, in the jaws of the recession, have discovered how by being more proactive they can earn £500-£2000 extra per accounts job, £300-£750 per personal tax return, £2,000-£10,000 per incorporation and £10,000-£50,000 per piece of advanced tax planning.
§ Using the fact that you do all of this to systematically generate more referrals and new clients than ever before.
§ Earning even bigger profits by doing no additional work at all.
§ And at the seminar you will also meet real partners from real UK practices just like yours who have already used the discoveries revealed on the seminar to transform their profits, cashflow, service levels and working lives – and get their tips on how you can do the same.
As a result the seminar will ensure that, instead of missing out, your firm is fully prepared to make the very most of the opportunities that are already presenting themselves as the economy emerges from recession into recovery.
Dates and venues:
§ Central London - 23 March or 8 July
§ Manchester airport - 22 April
§ Birmingham NEC area - 12 May
Please email me on stevepipefca@avn.co.uk to let me know which date you and/or your senior colleagues would like to attend as my guest.