The Six Steps to Follow That Will Boost Your Margins

You would think that an accounting firm would have a strong grasp on the concept of margins. Yet I see so many firms that could do so much more to boost theirs.

A company’s profit margin is one of the main indicators of its health.

That’s accounting 101. It’s so obvious that a healthy margin means a healthy business.

And yet, I see so many accounting firms failing to raise their margins. Sure, they’re great at helping other businesses understand their numbers. But when it comes to dealing with their own margins, so many firms struggle.

There are all sorts of reasons why this might happen.

Maybe you’re trying to scale and the cost of growth cuts into your profits.

Perhaps you’re paying your people so much that you’re not seeing great returns from the business that you do.

And here’s the most common one…

You’re just not charging enough for the value that you offer.

That’s the situation that I’m looking to help you change with this article. By the time you’ve finished reading, you’ll know what to do to boost those all-important margins.

The end result?

You’ll have a business that’s making thousands more dollars every month. 

But to get there, you’re going to have to make some changes. Your firm has to change how it charges and it needs to follow some steps to boost its margins.

Let’s start with the biggest change of all.

The Move to Value-Based Pricing

Most accounting firms complete a service and then charge for the hours that they’ve worked.

It’s a transactional relationship.

You deliver something that the client wants and get paid in return.

There are a couple of problems with this model. For one, your clients see you as just another service provider. That means they can be on the lookout for someone who can provide the same services for less.

The second relates more directly to your profit margins.

This traditional model rarely reflects the true value that you’re bringing to the client’s business.

Maybe you’re working more hours than you’re charging for. Maybe something that you’ve done has saved the client hundreds of thousands of dollars.

With the traditional model, none of that matters. You have a set price per hour that doesn’t change.

It’s time to make a change.

And that change starts with the shift towards value-based pricing.

With this model, you tell the client what they’ll pay up front. You may even accept the payment for your services at the beginning of the relationship.

To do that, you have to show the client the true value of what you’re doing for them. Help them to see the huge changes that working with you will create for their business.

That’s the key to getting your average hourly rate (AHR) up. And of course, a higher AHR means stronger profit margins.

Of course, making that big change alone isn’t enough to give your firm a big boost. There are six more steps that I want you to follow that will improve your profit margins.

Step #1 – Increase Your Charge Rates

Let’s start with what you’re probably doing right now.

Most firms have a pretty good grasp of what their AHR is. They’re also pricing in arrears. This means you’re setting the price after completing the work based on how many hours you do. And of course, the client’s paying that price after the completion of the work and receipt of the invoice.

That probably sounds familiar to you because it’s the traditional model in a nutshell.

And I’m willing to bet that your AHR isn’t where you want it to be right now.

That brings us to your first step – raise your charge rates.

Raise them by 15% - 25% across the board right now.

Yes, it sounds a little scary and you may think that your clients will question it. But the truth is that many of them won’t even notice. And if you’re confident in the value that you offer, you don’t have to worry about any blowback.

Here’s the real effect of this change.

Let’s say that your current AHR stands at $200 and you’re doing 8,000 hours client hours.

At a new AHR of $230, that 15% increase to your charge rate just netted you a cool $240,000 profit. And you haven’t had to change a thing to the business yet.

Step #2 – Introduce Some New Services

That simple change hasn’t altered your pricing structure just yet.

You’re still pricing in arrears. But now, you have an AHR of $230, which means your margin’s looking a lot higher.

Now, set a new target for your AHR. In this scenario, a target of $275 isn’t outside of the realm of possibility.

You’re not going to get to that with a charge rate increase alone. You have to start adding some valuable services to your business that your clients can take advantage of.

For example, you may be able to offer business consultancy or some other services that you don’t currently provide.

The great thing about this step is that your AHR target scales as you add more services. Once you hit the $275 mark, you can look higher if there are other services that you haven’t added yet.

But I also have a cautionary note to add.

Focusing on the AHR target alone won’t help you to transition to value-based pricing. But I’ll get to that in the next step…

Step #3 – Test Upfront Pricing

You’re still struggling with your margins, even though you have new services and a higher charge rate.

Now, it’s time to start experimenting with upfront value-based pricing.

This is going to represent a big transition for you and your clients. That means you don’t have to make the full switch straight away.

Try pricing upfront for a couple of your best clients. Explain the change to them and what it represents in terms of the additional value that they get from you.

Once they accept, you focus on one thing – delivering the value.

That means you end up with happy clients and you may even get a few write-ups.

Plus, you’ve given your margin a good boost.

Of course, you can’t half-commit to this pricing model. Once you see that it works, you need to focus on getting every client to pay upfront.

Step #4 – Move to 100% Upfront Pricing

This is not as big a step as you might think.

You’re going to completely change how your firm charges each and every one of your clients.

Make the full switch to upfront pricing. Commit to it and don’t let any clients try to convince you otherwise.

Here’s what happens in this step.

First, your margins go up again. Charging upfront (and collecting up front) means you have access to more immediate cash flow. Plus, it means you’re getting paid for the value that you offer rather than the hours that you work.

Better yet, you become more efficient. You’re not reacting to clients’ needs anymore. You’ve told them up front what they’re going to get and you can put processes in place to deliver that value faster.

You might even find yourself with time to spare that you can fill with more clients.

Your margins now look a lot healthier. But there are still some things that you can do to boost them up further.

Step #5 – Get Rid of Charge Rates

Increasing charge rates worked well for you in the beginning. But these metrics aren’t suited to the value-pricing model.

At this stage, you’re ready to get rid of them.

Move to charging $1 per hour per person.

Doing that means you’re less likely to charge based on the amount of time that a project’s likely to take. Instead, you’ll set your price based on the value that the project creates.

The key here is that your team no longer links the price a client pays with the amount of time it takes to complete a project.

Of course, you still have to focus on making delivery more efficient. Keep driving the time down and you’ll see the true benefits of this new model.

Step #6 – Move all clients to a Monthly Fixed Fee

How scared are you right now?

You might think that going to a monthly fixed fee is like an all you can eat salad bar. The monthly fixed fee is for the known work and then known entities. 

To add value you also add to the monthly (annual) fee. Include all communication for free (phoen, email, meetings), mandatory tax planning and an annual general meeting. 

You’ve already put the groundwork in place. You’re charging based on value now it’s time to package it all up into a monthly fee. It’s better for you and better for your clients. 

Increase Your Margins

I’ve spoken about a few scary steps here.

It’s okay to feel scared. By following these steps, you’re moving away from the things that you’ve done for years.

Just remember this one thing.

The way you’ve always done it isn’t giving you the margins that you really want.

These steps will create the change that your firm needs.

>>>>

PS. Whenever you're ready here are 3 ways I can help you achieve the results you deserve.

1. Download my latest ebook - The Naked Truth - and learn about the real financial performance of 32 Accounting firms. What they used to look like and what they now look like. Also a lot of detail on how they are achieving their results. Go to www.robnixon.com to download. 

2. While you're on my website go to the BLOG and feast on dozens of articles and other content. https://robnixon.com/blog/

3. If you want me to work with you privately and coach you and your firm to success then let's start a dialogue. Send me a private message here on LinkedIn, tell me a bit about your firm and what you're looking to achieve. Ideally you're between $500K and $5M in revenue now. Message when you're ready