Improving Job Margin – Part 5

My thanks to everyone who emailed me after my last article. Seems like this series is of great interest and relevance. To all those who have signed up for Margin Mastery, I trust you are finding the full programme of value and interest. Thanks, Neil, for sharing your insights and your commitment to introducing variance analysis and stopping people talking about Write Downs (yes, very 20th century!)

Last time we looked at Part 4 of Improving Job Margin. Here we looked at the importance of pricing transparency – all with an eye on the future. We also explored an approach to getting paid for Client Caused Extras. Again, my inbox was full of your comments including one or two who described that last blog as an ‘Aha Moment.’ The Pricing Handbook was of interest to James in Australia and Jenny in the UK. One accountant told me that these articles are leading him on a journey that he describes as life changing. A BIG thanks to those of you who took the trouble to email and also to respond follow up with my responses.

One accountant contacted me to ask me what I do when not writing these articles. The answer is straightforward – I meet most of my clients online every month and then this year I am resuming travel to see clients in Africa and Europe. The USA is scheduled for Fall 2022.

Client work covers all aspects of Practice Management – profitability, reducing lock up, improving job profitability, client service, business development and holding Firm Retreats. Client size – from 2 to 52 partners.

So, back to the last blog. This continued with a final look at the MASSIVE importance of reducing lock up (debtors and WIP) – fail to do this and your future will be restricted. This blog can be found here.

Improving Job Margin – Part 5

I understand that this is stating the obvious but to improve margin you either need to increase the price or reduce the cost of the job – or both. We have invested time looking at pricing on a number of occasions, here we have been delving into reducing job costs.

BACK FOR ONE MOMENT TO WRITE DOWNS

You may recall that one of the central themes is that this term is arguably THE most useless term used in the accountancy profession. This is explained in earlier articles in this series. But for the purpose of exploring my point I will, for a moment, go back to using this term.

SETTING THE SCENE

Let’s take a job with a budget of 10,000, a price of 9,000 but a job delivery cost of 11,000. Thus, in doing the math there is a wite down of 2,000.

That job cost is made up as follows:

  1. Time on the job before it commences – 1,000
  2. Manager and staff time ‘doing the job’ – 9,000
  3. Partner time Reviewing, Meeting with client and Signing off (RMS)  – 1,000

Firstly typical structure of job costs–agree?

WRITE DOWNS REVISITED

I have previously ‘banned’ the word write down and replaced this with variances – pricing variance and productivity variance. But, for the purposes of exploring this strategy for cost reduction we have a write down of 2,000. Agree? I hope so.

Here is my question – who is responsible for the write down? Answer. Can’t tell – inadequate information. Agree? I think so!

So, we need to explore and analyse this further.

TIME ON BEFORE THE JOB STARTS – 1,000

It is not unusual to have time ‘on the clock’ before the job starts. Having said that this does not always apply as many firms bill 20-35% of the price up front.

KEY POINT: If you do bill an upfront cost, I assume that you ensure that this is paid before the work commences. Otherwise, this is, arguably, only an administrative exercise which possible increases lock up (when VAT/ sales tax is taken into account). Besides, so far as the client is concerned this is an invoice that was presumably set out in the Letter of Engagement or the Pricing Letter.

KEY POINT: A good proportion of this unbilled WIP represents work, advice, meetings etc that have taken place since the last invoice was submitted. This is surely high quality, high visible, top-level time. Here is what needs to happen:

We ought not cover up the cost of this work with an invoice on account of the job. This MUST be billed before the “fog of the job” descends. That is before you forget the high-value work that this represents and before the client forgets what great advice they have received.

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KEY ACTION: Bill time on the job before it starts and let the client have a detailed invoice setting out your great work. That way the job [potentially] starts with a nil cost – or maybe just the job planning time.

KEY POINT: That time-on before the job starts. You must ensure there is not time on the job that should have been written off when the client was last billed. On too many occasions I have come across situations where partners have chosen to carry forward time in the slight possibility that it may be recovered in the future. But that never happens, does it? Better to write time off so that it you do bill and create a write up you can then celebrate.

KEY RESULT: On our journey to discover which 2,000 was written off we now know it is not the opening WIP.

RMS TIME

Let’s take a look at the third component of your time. That is the final time charged by the partner. Be assured that as a former partner I do have strong views on what I am about to discuss.

I have in previous articles made the case for a well-managed firm realising 85% of time on. This has been a benchmark that has stood the test of time for way more than 40 years. 

However, there is a consequence which I used to find somewhat frustrating and maybe even, on occasions, demotivating. That means that when the job comes through to the partner all the budgeted time has been fully absorbed. “So, nothing I do is going to be paid for?” I used to think. OK, that is a fairly simplistic thought process, but it is one I was guilty of many years ago. 

So, here is what needs to happen. Managers MUST ringfence the partner RMS time – that stands for Review, Meetings and Sign off time. I want to ensure that all that high quality partner time is fully invoiced. 

KEY POINT: The manager prepared job budget MUST fully provide for all partner time. This needs to be fully factored in. Partner rates are usually high, and it is important that partners don’t fall into the “charity trap’ – that is doing the work for free and not accounting for time because ‘the job cannot stand it’.  

I recently heard from Daniel in Auckland, New Zealand who tells me that he shares these articles with his managers and discusses points arising. For Daniel’s team I am going to leave probably the most important aspect of this article to be completed in the next issue.

SUMMARY

  1. Look carefully at your time on before the job starts. This is the time that many partners wish to clear with the first bill for the current year. But, in reality it doesn’t, it only masks the WIP records and, in the end, is likely to be a core component of the write down.
  1. Make sure that all time that has not been written off after the last time the job was billed is written off. This maybe should include time charged in the 30 days immediately after the last bill unless, for example it is tax time that will be billed separately.
  1. The RMS partner time needs to be fully included in the budget.

NEXT TIME

There are two major areas I wish to discuss in my next article. So, there may be one article or two to come. They are not yet written so I cannot be sure. But I am clear on the topics:

  1. I wish to complete this above article by coming up with a completely new way of managing the job time you will know is the second {and major} component of time looked at above in ‘Setting the Scene.’
  1. Then I am going to look in detail at an area that is definitely responsible for a major component of time and that is Review Time. 

These two articles will, without any question, provide you with some processes that will enable you to be more efficient and effective with your time.

KEY POINT: I have always believed that in management you must Fix Processes Not People. That is what we are exploring together. Do join the many firms who report to me that they use these articles to promote healthy debate within their team meetings.

Honoured to be of service, Mark

Contact – mark@marklloydbottom.com