Tuesday, June 2, 2009

Consider Firing Some Of Your Clients (Yes - Seriously)

I’ve lightly touched this topic in the past, but considering the general trajectory of the economy this is a good time to revisit it in more detail.

You are uniquely equipped by both knowledge and experience to examine a set of numbers or data points and then organize them into a spread sheet that can be analyzed with the goal of acquiring a “real” understanding of the situation.

I encourage you to analyze your own practice with the goal of determining the relative profitability of the individual accounts populating your client base .

To explain: You would advise a client who is a retailer to look at turnover and margins and thereby gain an understanding about which of the products they sell are the most profitable. Then (with some obvious caveats) you would tell them to give more shelf space to those items, or ones like them, and less to the items that have low margins and/or slow turnover.

The same thing applies to your accounting practice. Do you know which of your clients are the most profitable? There are a number of things that can contribute to a client’s low (or no) profitability, but typical causes can include:

— no pay/partial pay/slow pay/billing write offs
— a client requiring significant hand-holding; excessive phone calls, etc.
— a “legacy” hourly or job rate that has not been raised in a long time
— clients whose work was suitable at the time but really no longer fit with the workflow or subsequent direction of your practice
— work taken on for cash flow that never has been especially profitable
— client work that is just too small and/or inefficient for your practice (a classic example are the smaller 1040 clients from when your practice began)

Profitability, as a stand alone criteria, is often insufficient to make a decision about the value of an individual client. Many accountants have clients who are relatively small and unprofitable but are centers of influence and for that reason are valuable as sources of referrals, social conduits, etc. Also, you may take on a small client because you believe they have an upside – it just may take a few years before their organization grows to the point where they are a major contributor to your revenue base.

At the bottom line, every practice has a spectrum of clients that range from the least desirable accounts at one end to the premier clients at the other end. The idea – at the risk of stating the painfully obvious – is to have more of the good clients and fewer of the bad.

So, how do you do this? The accountants I’ve had who have undertaken the process of optimizing their client mix have taken steps to ensure the clients who they jettison have a soft landing. The first thing is to consider how you might place them with a suitable alternative service. One way is to prepare in advance a list of accountants, tax services or EAs who can do their work. Or, you could do a hand off to, e.g. a relatively new accountant in town. If you do so, you might consider discussing a quid pro quo, where the recipient accountant would in turn refer any larger and/or more complex opportunities to you they don’t feel comfortable taking on yet.

When you “fire” the clients it is always preferable to let them down easily. You can tell them the nature of your practice has changed, e.g. “Tom, my practice has evolved so that almost all my clients are non-profit organizations and the underlying procedures and due dates are very different from what’s needed to process regular 1040s like yours. I think you will get better service from an outfit that does lots of 1040s. They will be less expensive, have their internal systems optimized for your type of work and be absolutely up to the minute on any new developments that touch your situation. Here’s a list of suitable alternatives you can contact.”

Or, you’ve grown too big, e.g. “Tom, we’ve evolved into a business-only practice and just don’t do individual tax work anymore. I’m concerned your work will not get the attention it deserves with all the demands related to the complexity of our business client’s work. I’d like to refer you to an accountant whose work I think is good and whose practice is really aligned with your needs. Please understand this has nothing to do with the size or fees for the work I do for you. It’s just that in accounting everything tends to become specialized and our organization is focused in another area.”

After completing the analysis of your book of business, you will typically find that approximately a fifth of your clients will fall into the could-be-or-should-be-fired group.

What will happen to your practice if you actually get rid of these clients? Your gross income will go down, but remember we are talking about profit. Their revenue has helped absorb overhead, but you’ve already factored that in your Excel spread sheet analysis. Various costs will go down and some of your hours can reallocated to clients that will pay for additive services such as advice, consulting and planning. When you net it all out, the reality is that you are going to have some more free time but only a slight (if any) loss of pretax income.

Which means you now have the time to undertake a campaign to find more of the good clients. With a focused and sophisticated business development effort you will be able to accomplish that. And that’s what this blog is all about.

I hope you will begin your analysis immediately. Make goals to, e.g. cull the client list by the end of June; have one new “major” client by the end of August, and two more before the end of the year. Optimize your practice one client at a time.

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