From time to time, I’m asked to make presentations on how to read financial statements and how to use them to increase profits. Most of what I present is extremely obvious and would hardly seem worth presenting. In short, here’s what I say.
To increase profits, you need to:
- Increase revenues – by either increasing the volume of services rendered or increasing prices.
- Increase your profit margin – work on improving the difference between what we get paid from clients and wages paid to our team.
- Keep operating expenses under control. Self explanatory.
Tell me something I don’t know right? If this is the best you can do Jean-Guy, I’m wasting my time reading this article.
True. You may be.
However, I think that not enough thought is given on ways of improving your profit margin. What are the things we need to monitor and work on to improve this profit margin. The answer: Work on finding ways of improving everyone’s utilization (percentage of time that’s chargeable) and realization (everyone’s actual effective charge-out rate).
Part of the challenge of increasing everyone’s realization is to work on avoiding write-downs on files. Getting everyone on board on developing this skill can take quite some time to master. This being said, it’s an essential skill to learn and do well.
Here are a few pointers to avoid write-downs and everyone on your team (including owners/partners) needs to do this:
Before starting on the file, ensure you have absolutely everything you need. This is best done by having a GREAT info pickup checklist and good understanding of the file. It often requires reviewing last year’s file, looking at problems we had last year, going over questions we asked the client last year, and be demanding with regards to the quality of the information provided.
Review their bookkeeping immediately. Look at ALL balance sheet accounts and ensure they all make sense and are properly supported. I suggest you do this either BEFORE meeting with the client (if they send their GL before the meeting) or while they’re sitting in your boardroom.
Do not start until ALL of the information is there. Starting and stopping is often the death of files.
If you’re not the person who quoted the fees, look at what was quoted and assess immediately if it’s right. If not, discuss with owner/manager/partner responsible for the file, or discuss directly with the client about revising quoted fees ASAP.
It’s not uncommon for problems to creep up despite our best efforts to ensure all is good and proper before starting. When such problems arise, STOP working, call the client, and advise them that they will either need to fix it (and fix it well) or be charged extra. Provide an estimate of such increased fees. Estimate high. I’d rather surprise the client of charging less than quoted for fixing what needs fixing than more.
DO NOT give anything away. It is critical that client pays you your full charge-out rate for every minute you work on the file. Nothing should be free.
Get upset when you have a write-down (but not too much). This may sound funny but for too long, I had a bit of a ho-hum attitude towards write-downs. I’d go, “oh well” and move on to the next file. You cannot do that. You must always find out and document the reason for the write-down so that it never happens again (even if we both know it will).
People working on the file should answer the following 3 questions whenever there’s a write-down on files:
- What happened?
- What did I learn?
- What will I do differently next time?
If you can do this religiously for every engagement, big or small, you will very likely see a decent improvement in your realization and profits year after year.
The above is simple, but not easy. Its worth it because the results are outstanding.