When you are starting up in practice it is important that you are aware of the options to consider. Often the first steps are the most difficult ones. Our Setting up in practice pages will help by pointing you in the direction of answers to some key questions.
Your clients: expectations and management
First, manage expectations. For instance, make sure that the client doesn’t expect you to do something for free when you expect it will be chargeable. If you have quoted a fee make sure it is very clear that it is not all-inclusive (unless you are happy to offer that as your USP).
Second, manage your client. Ensure that your clients are aware, from the outset, that your expectation is that they will bring in their records when asked to and to a pre-agreed set of standards. In that way there is no misunderstanding that the fee quoted can be met.
But client management is wider than this. It extends to clients paying fees on a timely basis, listening to the advice you give and taking it. Well-managed clients are more likely to return for more advice, particularly in the higher chargeable consultancy areas than the more basic compliance services.
If you are starting with no clients purchasing a block of fees can be a useful way to kick-start your practice. You will typically find that blocks are advertised in the back pages of the accountancy press by merger consultants.
This is a complex subject and there are many things to consider.
An important point to make at the outset is not to be embarrassed about the level of your fees or raising a fee note. Your clients should have a good idea of your likely fee and if you manage relations with a client well, tell them when you first meet them that you expect your fees to be paid swiftly (as you are sure they expect their customers to do).
Commercially, you should expect to be paid for the work as soon as possible after you have done it in order to ensure you are not funding ‘lock-up’ (debtors and work-in-progress) at an unacceptable level.
From the client’s perspective, one large bill tends to be something which they do not look forward to. Therefore, some of the methods below will ensure smoothing the payment or reducing it to smaller chunks. In that way, you may help the client regard your fee as less burdensome.
End of service
End-of-service billing is, as its name implies, a bill raised after completion of the professional service. Therefore, a fee will be raised for the accounts, the corporation tax, and the personal tax as discreet bills. The attraction can be that the billing separates the amount payable into less chunky amounts and is identifiable by the client with the service you have provided.
Sometimes the fee ledger is cleared annually. While this may appear at first sight to be the same as end-of-service billing, it is different because all of the above services will be billed at one time. This is not an uncommon process but does delay your recovery of fees to the end of the larger, more tangible service – and therefore does not help your cash flow.
Some firms will raise the fee note on a monthly basis. They will bill whatever is on the time ledger at the end of the month. This is the same process as solicitors tend to use but is uncommon in accountancy practices but, if clients are happy, it works. The disadvantage is that sometimes they will be billed for something they do not perceive to have led to a tangible output. It will also create a lot of different bills and therefore, administratively, could be onerous.
Here, a direct debit is set up for an agreed monthly amount. Often, but not always, this links with fixed fee. Sometimes firms will charge, say, £100 per month on direct debit and then bill the difference at the end of the service (say another £200).
The real advantage of direct debit is that it tends to be very positively regarded by clients because the annual ‘lump’ of the accountancy fee is smoothed, as is the rates bill, for example. It also provides good cash flow for the accountant.
Another reason to advocate direct debit billing is that if it is started at the right point (say eight months prior to commencement of the professional service) you will receive income to cover your costs before undertaking the work. Should the direct debit be cancelled you will have lost only profit.
If the direct debit ceases before the service is undertaken clearly you will return the money and not do any work. So bad debts should be nil and cash flow improved for you and cash-flow benefits for the client.
A fixed-fee arrangement is an agreed fee for the provision of agreed services. It is simple in principle. The services should be clearly laid out in the engagement letter to ensure that any additional services are separable and billed on the basis of a separate engagement letter. The fee for additional services should be clearly agreed before the work is done to ensure there are no surprises.
Often this billing arrangement is collected by monthly payments.
Stage payments are less typical but sometimes an element, for example, 50% of the final bill, is raised for payment before the work commences with the balance due on completion of, say, the audit report. This ensures professional costs are covered before completion of the work and can be effective.
When to bill
When should you bill your client? The commercial answer is that for low fees, end of service is probably easier and gives you better cash flow than annual (as with the latter, you will wait to bill until all the services have been completed).
Make sure that you bill immediately you have completed your work, as at that point the client will be happier with the service they have been provided (even if it is notification of an unexpected tax bill) than at any later point. Do not defer raising the fee note as the longer you leave it, the less important paying it will appear to your client.
Otherwise, the best cash-flow position is with direct debit and additional fees billable for ad hoc services. Be careful that your direct debit commences sufficiently early so that ideally you have the full payment in your bank account by the time you have completed the work.
As you are starting out in practice you have a tremendous advantage in agreeing the basis of the fee with clients to optimise cash flow.
And don’t forget that you need to set the good practice to your clients by being commercial and doing things on time.
Additional billing from ad hoc services and client inefficiencies
Clearly if the client asks you to provide a cash flow for the bank, that is easily identifiable as an ad hoc service. But what about when the books and records you contracted to translate into a set of accounts appears, not as you had expected and been led to believe, as a neat computerised package with pre-numbered invoices, but as a brown paper bag job, no cash book and incomplete records?
Ad hoc services are fairly easy to identify. Client inefficiencies can be more difficult especially where staff or subcontractors are involved. If they don’t say quickly and certainly before they’ve done the work what is wrong, you cannot contact the client to ask for an additional fee.
How to bill for additional services
Tell staff and subcontractors to contact you immediately so you can contact the client and ask for an additional fee to undertake the additional work. When the client has agreed, send them an email detailing the agreement the additional fee for the additional work, for the record.
Some firms will take the view that, as a matter of goodwill, they will not bill the first year this happens. That is clearly your decision but make sure the client is aware of the amount of the fee you’ve written off. And next year make sure you reiterate to the client what you expect, when you expect it, that the previous year you wrote off time as a matter of goodwill and that this year you will be unable to do so.
How to convince clients they are valuable services
Communication is key. Many clients won’t understand the complexities of the professional work you are doing and may assume it’s all a lot simpler than it is, particularly in a computerised age. They may assume they’re doing a lot of the work you are actually relying on. To some extent they may be. But it then becomes more important to explain what you’re doing, what added value you are providing and how they are benefiting from it.
Systemise your process
The more you can systemise your processes, to simplify and replicate what is being done more easily, you will find your profitability increases, especially where you provide a niche service.
For this and other reasons, using IT solutions may improve your efficiency and enable you to better systemise your process. Equally, moving into a niche service is very profitable.
Annual increase to cover inflation
Adopt a clear policy of increasing your fees in line with inflation. Make this clear to clients. And make it clear to them that the bulk of your costs are staff costs (including your own costs) and that you need to increase fees by inflation to cover the increases you (and the client) face when covering normal living expenses. Other costs you incur will also rise by inflation so it is reasonable for your fees to do so, too.
A key message here is not to undervalue your time or the value of the work you provide to clients.
What is a niche market?
The traditional niche was regarded as being the doctors and dentists sector. Clearly there are specialisms in areas supported by ICAEW’s Communities (farming, entertainment, solicitors etc) but some firms have carved out niches in fairly esoteric specialist areas.
You may have experience or an interest in a particular business. If you make this a niche you can very easily become the ‘go to’ firm not only in your specialist area but, if you are creative and market well, across the country.
If your business plan focuses on a true niche make sure it is flexible and provides for expansion in the short term. You need to have sufficient resources to provide the service, manage the process and undertake the ‘back-office’ work.
A niche is a marketing dream. It can simplify procedures and make sure you take advantage of efficiencies. However, it does bring with it a possible risk of being subject to a market shift for regulatory, political or other reasons. This was most apparent years ago when firms used to specialise in dealing with subcontractors in the building market. Changes in the tax laws had a significant effect.
However, a niche firm has a significant advantage. It could even be located in a distant part of the country (taking advantage of working in a rural idyll, where possibly staff costs are cheaper) if IT is a solution which can be relied on to deliver the work and output to clients.
Marketing is key, particularly to a new firm. It may appear daunting but the reality is that there are businesses which can help you market, for a fee, and you could approach them for help. You may know another accountant who will provide you with a recommendation of a marketing agency, website designer, etc. who they have used successfully.
Our website has more suggestions on how to make a difference with your marketing.Website and SEO
And if you have a specialism, make it clear. Other ways to increase your website traffic can be found here: How to increase website traffic.Measure access to your site with a search engine optimisation tool (SEO). Google outlines some analysis techniques for Google Organic Search and SEO.