1. Concentrate on the drivers of profitability
There are a few really powerful benchmarking reports produced annually. Many highlight the profitability matrix, Gearing x Recored Hours x Hourly Rate x Realisation x Margin. It is simple and is one matrix firms can easily measure their performance against.
For example if a firm is underperforming against recorded hours is it because time recording is optional. If realisation rates are poor how may difficult conversations about fees are taking place with clients? Would formal pricing training help to scope work better and improve fee recoveries.
Whilst its important for the management team to understand the drivers of profitability its also important for fee earners to be trained and educated and understand the inter-relationship of these components.
2. Understand fee earning capacity
A useful exercise for any firm is to compare for each fee earner the potential to generate fees against the level of fees actually generated. So on a benchmark of say 1,200 chargeable hours what level of fees could be generated at each fee earners charge out rate.
It’s easy to do a rough and ready calculation of a firms total fee earning capacity using these numbers. How does that compare to actual fees generated? Perhaps RAG rate capacity compared to actual results and identify fee earners and departments where the gap is biggest to concentrate on.
3. Review matter lists regularly
Many firms now drill down regularly into not just departmental or fee earner information but also into matter lists. The only way to really understand how busy a fee earner is is to sit down and chat through a live matter list.
There are a number of things to consider. Is the list too large to run which may mean finalising matters is taking longer than it should, delaying billing and collecting. A list may be too large because the fee earner is taking on clients that aren’t remunerative enough, its easy to win work by quoting low, or there may be matters on the list that need archiving but there are small office or client balances to deal with first.
Regularly reviewing all matter lists in detail with fee earners is the best way to really ensure the criteria for taking on new clients is correct, the best way to catch potential complaints before the arise, and the best way to maximise fees by revisiting scope early where necessary during a matters life.
Look out for large WIP balances, non moving WIP and aged debt when the file is still being worked.
4. Link everything to cash
It’s an obvious one but bonuses, remuneration, drawings etc can and should all be linked to cash collection and businesses should have a clear visibility on what cash is needed when, monthly and weekly cashflow forecasts are common and a good cashier should be able to produce these.
A profit is no use until its realised as cash. Model capital and reserves requirements. What level of working capital will the business need in say 3 years time, given investment and succession plans.
5. Instill a strong financial culture
The best firms devote time to training fee earners and developing a suite of KPI’s or a fee earner dashboard that’s understandable, not delivered each month in a wheelbarrow! How many pages of information will fee earners really look at? Be transparent and clear, communicating whats expected and addressing underperformance.
John Beevers – Head of Professional Practices at Sagars Accountants Ltd