Most practitioners fall victim to concentrating too much on increasing revenues rather than profits. Yes, greater revenues will often result in greater profits but that is far from always being true. It is not uncommon to see practices, or any business for that matter, have continuous increases in revenues with very little, and sometimes almost nothing to the increase falling to the bottom.
To me, this is a sign that something is quite wrong with the enterprise or model used. Most times, this is a result of concentrating more on increasing the volume rather than price.
Here’s the problem with increasing revenues by increasing the number of clients:
- Increased clients require more staff. More staff usually increases management stress, conflict, training, possibilities of bad apples, possibilities of them not all getting along, erosion of culture and the list goes on. Bigger is not always better.
- Increased number of clients also increases risk of errors. The more work you push out, the more errors will be committed. Errors increases odds of lawsuits, damage to reputation, stress, loss of clients (potentially your best clients) and yes, loss of employees due to stress brought on by the errors done.
- More importantly, more clients make it far more difficult to really provide extremely impressive service and personal attention to each client as there’s just too many of them.
- Increased clients make managing numbers more difficult. More people to monitor utilization and realization.
- More difficult to really stay on top of whether what you’re charging each and every client is good and fair.
- Increased likelihood of a client being angry and s#!tt!ng on your good reputation (and many times, justifiably so)
- And the list goes on and on.
Rather than increasing revenues via more clients, I would look at increasing revenues via prices.
I’d MUCH, MUCH, rather have business A with sales of $600,000 and profits of $300,000 than business B with sales of 1,000,000 and profit of $300,000. Not even close. I’d pay considerably more for business A than business B despite both having the same profits.
I keep suggesting that practitioners should be achieving a realization of 3.5 times the employee’s wages. This may not be possible for certain services or sectors. Maybe. But before you accept this as true, be sure you’re not simply saying this to justify your current inability to get more than a multiple of 2.5 or 3.0 of employee’s wages. I cannot tell you how many times I’ve convinced myself of falsehoods simply because I did not want to face the hard true facts. But odds are good that if you were to take a closer look at your client mixture, there may be some (possibly many) where you’re barely getting 2.0 times employee wages. I say this based on many practices that I’ve seen.
If this is the case, rather than work on getting more clients, I’d be very tempted to become far more selective of whom I service and do a major house cleaning.
Okay. So where do I start?
The first thing I would do is perform an honest and true analysis of the numbers. Put feelings aside about how I FEEL about any of my clients, and really look at the profits consistently truly generated with each client and rank them. Assuming you have everyone’s charge-out rate to be 3.5 x wages, separate them into 3 groups:
- Those where you’re actually getting your charge-out rate thus 3.5 times wages or more
- Those where you’re getting 75% – 99% of charge-out rate
- Those where you’re not getting 75% of charge-out rate
Looking at the third tier, I would either fire them or see if it’s possible to bring them up to be equal to group 1.
I would then look at the group 2 and decide what other benefits they bring to the firm and based on that, decide whether I simply increase fees or do as I’ve done with group 3.
This could/would result in:
- A huge reduction in number of clients you service
- Greatly reduce the problems discussed above about having lots of clients
- Make room for better clients
- Allow you to better service your good clients which in turn drives referrals and fees up
- In very short order, would likely result in substantial increased profits
- Increase the value of your practice
- Make life better and less stressful
Is it time to clean house?