How to increase capacity and leverage – the holy grail for accounting firms!
It’s easy to understand why capacity and leverage are so important, but more difficult to appreciate why accounting firms sometimes struggle to get real success in these areas. Administration is one of the keys to effective leverage in accounting firms; by taking on some responsibility for workflow and client communications, the administrative team can help the firm improve efficiency and profitability.
Let’s start with some definitions, straight from Business Fitness’s Good Bad Ugly (GBU) National Benchmark reports:
Capacity: The ability to generate fees, measured as chargeable hours (Fte x average COR x 37.5hr / week x 45 weeks / year)
Leverage: The number of staff per principal or partner. Also the proportion of chargeable to non-chargeable staff.
A recent Good Bad Ugly benchmark analysis reported an average firm leverage of 5.2 and a chargeable/nonchargeable ratio of 4.0.
What’s your firm’s capacity and leverage? How does this compare to industry benchmarks?
A recent GBU report had some interesting things to say on the matter of leverage:
Your team members are your firm’s most valuable asset (although they are also its largest expense) and your firm’s ability to successfully leverage team members will have a large impact on partner profitability. A firm with a high number of team members per partner is in a position to generate more revenue and achieve greater net profit per partner. Of course, this is not a foregone conclusion – the overall efficiency of the team members is a crucial factor for success. In addition, firms with higher leverage must always be aware of salary expense, and manage this accordingly. If your firm has a comparatively low leverage result, you might like to ask whether your firm has too many partners (the flipside of assessing the need for more team members).
The debate around the optimum number of support staff is ongoing. A recent strategy for firms has been to shift administrative tasks away from chargeable staff towards support staff, the intention of which is to free up chargeable team members so that they are able to focus exclusively on completing chargeable work as efficiently as possible. Followers of this strategy advocate a higher number of support staff, suggesting it will lead to greater revenue.
What can the firm’s administrative team do to increase capacity and leverage?
Obviously, some of the answers lie in taking control of non-technical responsibilities and tasks within the firm. This means identifying the systems and processes that don’t need to be handled by technical staff. It also means documenting those systems and setting up clear guidelines for how they will be managed within the firm. In relation to client and workflow management, specific tasks may include:
1. Client induction and engagement
2. Scheduling and calling in of work
3. All non-technical client queries and contact
4. All debtor management and client follow-up
How much control do you have over these processes? What is preventing the administrative team from taking over these processes?
Take a look at our eLearning course CLIENT SERVICE ADMINISTRATION for more advice on how you can use your admin team to improve firm capacity and leverage