The case for fixed-fee billing

Kashflow logo
Share this content

The internet has changed consumers’ expectations. So accountants should consider leaving behind their devotion to time-based fees, argues practice consultant Mark Lloydbottom.

When did you last buy anything without having first agreed the price? Do you know any website that does not make a supply without requiring payment in advance?

Now, let me ask you to recall every creditor schedule you have ever prepared or reviewed and ask yourself, “Who was the last creditor to be paid?”

There’s something wrong about the way most accountants manage their finances

When you recognise that the last creditor to be paid is the accountant alarm bells should start to ring. Clients expect to pay for costs incurred in the year’s trading during the year, give or take 30-60 days. So, why do accountants think it is appropriate to be the exception to standard practice?

Do you really wish to prepare cash flow projections with a spreadsheet formula that allows for lock-up of 30% (debtors and work in progress)? Your funding costs will just keep on rising and you become banker to your clients.

Mark Lloydbottom specialises in management planning and strategy for accounting firms. His latest programme, ‘Deeper - Advanced practice management strategies’ is based on developed over the past 25 years as a practitioner and consultant. This article is an extract from AccountingWEB’s 2013 Strart-up in practice guide.

Please Login or Register to read the full article

The full article is available to registered AccountingWEB.co.uk members only. To read the rest of this article you’ll need to login or register. Registration is FREE and allows you to view all content, ask questions, comment and much more.

About mark lloydbottom

Replies

Please login or register to join the discussion.

25th Feb 2014 09:39

What year is it?

All relevant stuff but the article is very outdated.

If you did a straw poll of members on here, especially sole practitioners on here you'd find that most already have fixed fee arrangements with monthly invoicing.

I started in 2011 and implemented fixed fees and monthly invoicing/payment straight away.

Direct debit is possible for small businesses now with providers such as Go Cardless and Fastpay, but failing that its not too much trouble to get clients to sign a new standing order mandate and submit it to the bank yourself.

This topic has also been covered numerous times in the any Answers section.

Thanks (6)
avatar
25th Feb 2014 11:16

Key points

@Mark - thanks.

For me the key points where defining the scope e.g. incomplete records and the 70:30 split before/after the year-end with 10-month payments. This would mean that most new clients have an initial catching up payment in their first year!

Malcolm

Sackmans Accountants

Thanks (0)
avatar
25th Feb 2014 11:39

Fixed fee billing

I began accounting in 1979 and the Company that I worked for then had standing orders for virtually every client of theirs and I have now implemented this into my own practice.  It works well for me because once a standing order is missed work ceases on that client until their account is brought up to date, in addition to the cash flow benefits to me and them, I find with most clients that to request a large fee is much harder than 12 small(er) ones.  I also don't agree with the yearly standing order mandate thing, some of my clients have been on the same standing order for 4-5 years, maybe they're just lucky that I rarely (if ever) implement increases in fees, unless someone has managed to completely annoy me :)

Thanks (0)
25th Feb 2014 11:57

What Kent Accountant said...

About 15 years too late...

Thanks (2)
avatar
By enanen
25th Feb 2014 12:01

FIXED FEES-DO NOT USE DIRECT DEBIT SYSTEM

Direct debits can be claimed as not due by any debtor to their bank and the money refunded to the payer by the bank without question under indemnity. So if you fall out with a client, even if you have done the work, they can effectively get their money back, where they understand the workings of the direct debit indemnity. I would stick to standing orders.

Thanks (0)
avatar
25th Feb 2014 12:46

Fixed fees
In 1992 when we first raised this, people resisted it. Now, as some of you say, it is (thank God) common practice. And I can't think of a single firm using great tools like Xero who'd even consider doing anything other than fixed fees. You cannot be customer-focused and do anything else.

All we need to do now is to stop managing our firms based on time (meaning burn the damn time sheets) and the cycle will be perfectly complete.

There's now a stack of evidence that time sheets are a major (as in major) cause of depression amongst professionals. And if that was the only reason they should be banned. But there are so many more fantastic reasons.

And if you doubt that even a little, just invest 18 minutes watching this owner of a major legal firm absolutely demolish time sheets: https://vimeo.com/78121980#!

It's invigorating and inspiring stuff. Everything that time sheets aren't!

Thanks (0)
25th Feb 2014 13:03

.

I cant remember the last time I took on a client from another firm that DIDNT have fixed fees or something close to it. 

Mine have been fixed for 11 or 12 years since I started, and I sure as hell was not a pioneer in the field, it just applied basic business logic. 

I am not so big on monthly fees, the max we do is quarterly but for our type of clients this is more appropriate. 

Thanks (0)
25th Feb 2014 21:43

Arriving at the fixed price
I offer all clients a fixed price and in general and overall I make a nice profit. My main issue and concern is how do I know if my pricing on a client by client basis is right, without measuring time?

Time based billing is a definite no-no. But should fixed prices be revised up and down based on time records?

Or do we assess jobs on a set of standards, such as bank rec vs no bank rec, then take into account transaction numbers, to arrive at fixed prices which properly assess "value"?

Problem I see with this method is "value" being assessed is not the customers value. Indeed, customers/clients see little value in compliance work anyway.

Any thoughts folks?

Thanks (0)
26th Feb 2014 07:20

My opinion of 'Value' pricing is ....

.. can you get enough clients paying inflated prices for some work that is 'highly valued', so that they subsidise the other work perceived as 'low value'.

I know I couldn't.

Maybe value pricing is more relevant to artificial avoidance schemes, which seem to be charged on a % of the income, and therefore rake in huge fees which are offset by the tax avoided.

Thanks (0)
avatar
26th Feb 2014 07:57

What about un scopeable jobs
Fine for jobs where scope can be measured at outset. No problem.

How do you deal with unscopeable jobs? Example, assisting a company in difficulty or HMRC compliance check or ongoing advisory job.

One assisting a company in difficulty job we have on at minute has been very quiet for weeks and exploded yesterday with 9 telephone calls in from client seeking help. At outset nobody knows where it is going, including bank, hmrc him or us.

How do you fixed price that?

Thanks (0)
avatar
26th Feb 2014 08:20

As a sole practitioner, I've l always had fixed fees. If you can't judge a fair fee for job, you shouldn't be doing it. I make healthy profits and by keeping internal admin to a minimum, can concentrate on the nitty gritty of the job. I've never been into monthly billing and email them an invoice when their tax returns have been filed. I've not had a bad debt yet. When I was a trainee chartered accountant, time based billing was probably the biggest cause of lost clients. Many were afraid to pick up the phone for advice because it would start the clock ticking.

Thanks (0)
26th Feb 2014 13:54

Fixed fees vs value pricing

Comments above demonstrate that fixed fees are, of course, not the same as value pricing. Leaving aside the notion of charging a percentage of tax saving and calling that 'value pricing' (sounds to me more like contingency fees), Sparkey999 has hit the nail on the head: 'Value' needs to be as seen by the client. We have  role to play in educating clients about what we do and how, to underline the value he are getting, but if we take this too far we end up justifying the fee on the basis of the time the job is going to take - and apparently time-based billing is a no-no!

We use fixed fees for most work, but they are quoted after negotiation with the client with a view to reflecting what they want and are prepared to pay. As a result the same basic work will be priced differently for different clients. We don't convert a lot of prospects because we fall out over the price vs value issue, which is sometimes a frustration but I am happy to set a bottom line and walk way if the prospect doesn't want to buy from me. Yes, I could charge less for a cheaper, more basic service, but I choose not to. I wonder if ShirleyM is being totally realistic - do she and her clients never buy coffee in over-priced coffee shop chains? Her criticism of value pricing sounds a bit like a criticism of supermarket pricing and loss leaders. Fans of value-pricing guru Ron Baker will be familiar with his comparison of value pricing with airline ticket prices, where you have a plane full of passengers each of whom has paid a different price for the same produce, and each of whom has bought on the basis of their perception of the value of that service. Could we do that? Yes we can - for example, we have a sliding scale of tax return fees based on the time of year the information is received, s this enales us to manage peaks and troughs in our workflow.

On the other hand, for some routine compliance work we use fixed fees from a 'menu' of pre-determined prices - e.g annual returns, company secretarial, payroll, simple tax returns, bookkeeping. In those cases we reckon that the 'value' of such services is the same for most clients, so we can fix it across the board.

 

Thanks (1)
to Wanderer
26th Feb 2014 14:31

Time billing and menu pricing
@Nigel
Out of curiosity, do you agree that time based billing should be avoided? I subscribe to the theory that this method passes all price risk to the customer and the price is delivered at the end of the task/service, both matters being poor form in the 21st century.

Also, do you have similar prices from your menu for similar clients for accounts prep work regardless of client type/size/records?

EDIT: just re-read your post and see that different prices are given to similar clients after negotiation and review of the work involved.

Thanks (0)
02nd Mar 2014 20:37

Unscopeable?

@NE Accountant mentions "unscopeable" work, which is a point often raised when discussing fixed fees. I think just asking the question means you're probably missing Mark Lloydbottom's point, and more importantly revealing that perhaps you're not really ready to give up time-based billing. 

The trouble is, most of us have been brought up on time-based billing, so when faced with open-ended engagements we immediately try to work out how many hours they are likely to take so we can fix a fee based on hourly charge rates. 

The point of fixed fees is that they need to be exactly that, no ifs or buts. You have to take a punt, see what the client is prepared to pay, and decide whether you're prepared to take on the work at that price. No under- or over-recoveries. You either make your fee target for the month/year or you don't. If you don't, blame the partner who quoted for the work, not the accounts junior who took "too long" on the job.

The only time you will be really exposed is when you take on a brand new area of work for the first time - which raises a whole load of other professional issues well beyond the issue of pricing. Otherwise, you will know how much work is required in any typical job, and how much you would expect to be paid for it. If you use a tax investigation insurance such as Abbey Tax you will know that tax enquiry fees have to be agreed up front with the insurer - yes, the work may well be uncertain, but you use your professional experience to estimate the fee in advance, and if you can do that with tax investigations I can't see that it should be impossible to fix fees for any other type of work too.

 

Thanks (0)
avatar
05th Mar 2014 12:22

Enquiry work

A lot of my work (other than the usual bread and butter stuff) is enquiries, investigations and voluntary declarations, which don't lend themselves to fixing fees, especially as they tend to be new clients where the full scope of the work might not be immediately apparent.

What clients want to know is how much it is going to cost in fees, almost immediately followed by how much the tax bill might be.  So I give them a ballpark figure, and then ask for a downpayment towards that figure before I commence work.  The key is to make the ballpark figure a good approximation based on previous experience as many clients will consider this a fixed cost.  So a typical quote might be £3-5,000plus VAT.

I don't keep time sheets, never have since I set up on my own.

For most work, however, it's monthly payments by standing order, with no upfront charge if it happens that their accounts are now due or due in twelve months time, as I generally retain clients for the life of their business.

The key as always is communication with the client about any additional items and exactly what is included in the fee.

Thanks (0)