Erosion of gross profit in a recession

Practitioners are reporting increasing pressure on how to maintain or improve their gross profit margin in challenging times when clients are demanding higher levels of services and often are reluctant to pay their bills.
 
How often have you asked yourself 'Why am I working so many hours but have so little cash and am not making enough money?'

The more successful accountancy firms adopt the following strategies which have proved to work in increasing gross profits and of course make a direct impact on their bottom line and cashflow. Most of these strategies are basic housekeeping and best practice - all of which are very easy to implement and are what I call 'quick wins.'
 
All too often practitioners focus on 'winning new business' and the top line without realising that all their hard work is being wasted by not focusing on gross profit margins being made firm wide. This is commonly referred to as either the 'loser trap' or being a busy fool! There is little reward in winning new clients when you are making say 10-20% below par on your gross margin. Currently, the more successful practices make a minimum 65% gross margin across the board on all work. The best performing practice I have seen makes a gross margin of 85% consistently. Under-performing firms make as little as 40% gross margin. On a turnover of say £500,000 this equates to £125,000 gross profit and cash being lost (based on making a margin of 40% instead of 65%). Do the maths for your own business and see how it measures up!

• Know your client base - which 20% of your clients are contributing to 80% of your overall profits? List your clients and grade them not just by fee charged but by 'quality' of client and gross profit you are making on them
• What is your ideal client? Is your client base made up of clients you don't really want and don't make a good recovery on? What is your plan to weed these out and market to your ideal client profile?
• Can you measure your gross margin accurately or is it often down to an ‘educated guess’?  Face up to the pain of reviewing your work in progress, perform a spring clean and look at the real gross margin you are making by client. It takes a brave practitioner to do this! Many 'hide' behind a seemingly good gross margin on paper knowing that the work in progress figure is really an unknown quantity and contains time that will never be billed and is never recoverable
• Are all your clients now on a fixed fee with agreed payment terms - preferably by standing order or direct debit? This is now common practice and has a huge impact on both cashflow and profit margin. Clients are much happier to pay when it is transparent what they are actually paying for and when they are going to pay for it

Continued...