Setting fees when starting up in practice
Accountants, of all professionals, are the ones who should be best placed to set their fees so as to cover their costs and generate a sufficient profit, writes Mark Lee.
The challenge when starting out though is that often there are only limited fixed costs to cover, no direct staff costs and only negligible variable costs. As you start to build up your practice how do you decide what to charge?
The historical approach was to focus on what you wanted to earn per hour and then to set an hourly charge-out rate. I sense that few start-up practices can afford to operate on this basis any more.
As one accountant mentioned to me recently: “The idea of quoting fixed fees and value based fees isn’t new or revolutionary any more. It’s the norm.”
This may overstate how far we have come but it does confirm my view that start-up practices need to identify fixed prices for their services rather than quote hourly rates. The only common exception is where your services are limited to bookkeeping.
Undercutting the competition
There is an understandable temptation to sound out some of the local accountants and then to set your fees lower than everyone else.
Whilst understandable it is not likely to prove a good move beyond the short-term.
Clients you win from other accountants will be likely to move on again just as soon as someone else offers a cheaper service.
And anyone choosing you as their first accountant will only ever budget for your low start-up fees - you will struggle to get them to move up to pay higher fees.
What do you want to earn?
Whilst it may take some time to build up to a full-time practice, at some point you need to consider how much you want to earn from your practice.
But as your practice grows, you need to know how to choose whether or not to take on a new client. This will partly depend on how much you can earn for doing their books and tax - or whatever other services they need.
At some point you will need to consider how much time you have to do billable work each week/month/year - note I used the phrase ‘billable work’ here.
Even if you were prepared to work eight hours a day, five days a week for 45 weeks of the year, you would still be unlikely to bill for the full 1,800 hours a year.
You need to allocate time for admin, marketing, networking, strategy, training and CPD.
Your fees will need to be sufficient to provide you with the income you would like from your practice and cover your expenses.
One mistake I have seen many times is when accountants start-up working from home and do not factor in premises costs to their calculations.
That’s fine unless they one day decide to move to new offices. Clients may resent any consequential increase in fees. Does it matter to them whether you operate from home or from an office? Will they be really be willing to start paying you more just because you have moved to more costly premises?
Basic or higher value servicing
Whether or not you undercut the competition, you need to be clear as to the style of service you will provide and whether to charge for anything beyond the absolute basics.
There are plenty of people who only want the simplest and most basic service. They can appreciate why a higher value style of service would cost more and do not want this. There is little point in offering a Rolls-Royce approach if your clients would be happy with a VW Polo.
This is important too when it comes to comparing yourself with the competition. If your service will be different, how will you make this clear so that clients are prepared to pay appropriately? You want to avoid building up resentment among clients used to a higher level of service than you are offering for your lower fee.
What are you quoting for?
Many startups take on small clients who just want their tax returns completed. Others just want their accounts produced or maybe some support with bookkeeping and payroll.
Many new clients are unaware of what they really need from an accountant and only ask for some of this. Therefore, there are huge dangers if you take on work and fail to ensure that both you and the client are agreed as to what the range of your services will be.
This is all especially important if you are quoting a fixed fee. What does it cover? What is excluded? And, most importantly, can you explain this - verbally and in writing - using client friendly language that is not a complete turnoff?
Menu driven pricing
Just as with a restaurant, dry cleaner or hairdresser you offer a range of services and clients may want different things. If you use the menu driven approach you can help ensure that the client understands four important issues:
- The range of services they really need
- How the total ‘fixed’ fee is determined
- What elements of the service they get for ‘free’
- The full range of services you can provide when need more. It also helps with them making referrals to you. You may price some of the advisory services as ‘subject to agreement’.
This approach will often mean you end up earning higher fees than you might have otherwise.
There is also the psychological impact of using menu driven pricing. When was the last time you tried to negotiate the prices being charged by reference to a menu? It’s rare.
You can have different menus for different types of clients (eg: sole traders and limited companies) and for different sizes of clients.
There is some clever software available that can help you determine your menu driven prices. I tend to think it best though to have this clearly set out in print and/or online.
I fully appreciate that there are many variables so you will need to make some broad brush assumptions to keep your menu simple and client friendly.
The bottom line is that accountants in different parts of the country charge very different fees. There are plenty of discussion threads on AccountingWEB in which members share the fees they charge and discuss whether quoted fees are too low or too high.
One conclusion I draw from such discussion threads is that most members are able to make the broad brush assumptions I suggested are necessary for menu driven pricing.
If you started up in practice recently, how did you decide what to charge initially and how has this changed?
Mark Lee is consultant practice editor of AccountingWEB. Beyond this he facilitates The Inner Circle group for accountants, is a regular speaker on professional business development related issues and is Chairman of the Tax Advice Network of independent tax specialists.
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