Understanding the Business of Accounting Building Better Business Ric Payne Principa .

Understanding the Business of AccountingUnderstanding the Business of Accounting

Building Better Business

Ric Payne

Principa

www.principa.net

© 2008-2009 Principa. All rights reserved.© 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net

Today’s Agenda

• Business model defined• The 5 elements of a business model• The unique characteristics of the PSF model• How to design a business model that fits your

market• Does your current model need to change?• Six initiatives to re-jig your current model


Create Customer Value by

meeting a need or want

What is the purpose of a business?

The purpose of a business is to create (and keep) a customer which means an enterprise really has only two basic functions: innovation and marketing ~ Peter Drucker


Create Customer Value by meeting a need or

want

What is the purpose of a business?

The purpose of a business is to create (and keep) a customer which means an enterprise really has only two basic functions: innovation and marketing ~ Peter Drucker

Product innovation

Process innovation

Business model innovation


Examples of BMI


What is a business model?

A business model describes the rationale of how an organization creates, delivers, and captures value.

A business model = “The Theory of The Business” – Peter Drucker (1994)


Value

Create

Capture

Deliver

What is a business model?


The 5 elements of a business model?C

ustomers

Relationship

Channel

Costs Revenue

Leadership & Management1

Customer Value Proposition

2

Resources3

Processes4

Profit Model5


The 5 elements of a business model?


An offering that solves a customer problem more effectively, reliably, conveniently or affordably at a given price

The job to be done

How important is this to the customer?

How satisfied are customers with the current solution?

How well does the new offering get the job done relative to other options?

Source: Seizing the White Space: Business Model Innovation for Growth and Renewal, Mark W. Johnson




It’s not just what is sold but also how it is sold

Gone

At risk

At risk

Searching

Searching

Loyal

At risk AdvocateLoyal

Dissatisfied Satisfied Delighted

Process

Outcome Met

Not Met

Exceeded




Before you can develop a CVP you need to know who you want your customer to be




To find out what your customers want i.e. the job they are trying to get done … observe them and ask them

“The customer rarely buys what the business thinks it is selling.” ~ Peter Drucker


Resources & Processes

Resources

PeopleTechnologyFacilitiesEquipmentInformationAlliancesFinanceBrand

Processes Operational and managerial systemsService definition & designMarketing & salesTraining & development

Processes are the source of value creation


Profit & Funding Model

Revenue Price x Volume

Costs Cost structure – fixed & variable

Capital Requirements

Scale

Resource utilization

Profit target


Traditional CPA Business Model

Revenue Rate x Hours

Costs LaborScalability



WIPARInfrastructure

All things to all comers


Same peopleSame systemsSame business rulesSame performance metrics


An Alternative CPA Business Model

Revenue Value priced

Costs LaborScalability



WIPARInfrastructure

Targeted


Same peopleDifferent systemsDifferent business rulesDifferent performance metrics


My own experience

1947 1987 1991

$3.3m

$1m

Clearly articulated business vision 10 in 10Targeted business clientsSmall client practiceFocused marketing & salesBundled CFO services Fixed price agreementTraining investment to develop saleable skills & capacity to delegateSystemized processes

40+% margin

<30% margin


Examine your own competitive landscape

Pricing

Client selection

Service offering

Process design - systemization

Relationship management

Organization structure - CSMs

Your assumptions about your environment, your mission and your core competencies must fit reality.

Core competencies


When do you need to think about changing your current model

When your revenue growth has stalled

When your margin is shrinking

When you lose clients you want to keep

When you are attracting clients you don’t particularly want

When you are losing talented people

When you are losing interest in your business


Source: Bob Kaplan and published in the Balanced Scorecard Report (August 2005) called “Add a Customer Profitability Metric to Your Balanced Scorecard"

100%

Most CPA firms have a flawed business model


Most CPA firms have a flawed business model

54:140


Six keys for re-jigging your business model

Key 1: New client growth of the type you want

Target your market

Design a referral system

Conduct CABs with non-clients

Conduct CABs with clients

Design services that “get the job done” for the type of clients you want

Firm visits – the 20% rule

Public profile

Reject unsuited clients



Key 2: Improve team member productivity

Undertake a client profitability analysis – re-price or replace loss contributors

Put the right person on the job

Is the job valuable to the client & can the value be captured

Is there sufficient work in the pipeline

Has the job been properly scoped and time budgets put in place

Is all information required to complete the job available before it is started

Is a lower cost team member being used for all admin and highly systemized tasks

Is an After Action Review undertaken at the end of the job

Is the right performance metric in place – revenue generated not hours charged



Key 3: Increase Average Realization rate

Price the job up front based on value to the client as well as the time required to complete the task – most firms are pricing 10-20% below the value of their services

Effective Hourly Yield From a Price Increase and/or an Efficiency Gain

Price Increase

Efficiency Improvement0% 5% 10% 15% 20% 25%

0% 100.00 105.00 110.00 115.00 120.00 125.00

5% 105.26 110.53 115.79 121.05 126.32 131.58

10% 111.11 116.67 122.22 127.78 133.33 138.89

15% 117.65 123.53 129.41 135.29 141.18 147.06

20% 125.00 131.25 137.50 143.75 150.00 156.25

25% 133.33 140.00 146.67 153.33 160.00 166.67



Key 4: Reduce Write offs

In addition to the initiatives relating to productivity …

Ban write-offs unless they are due to your errors or they are strategically justified

Price up front and implement Change Orders to accommodate scope creep

Do not pass efficiency gains on to the client unless this is a key element of your strategy

Do not allow partners to price the job or do the billing



Key 5: Reduce WIP

In addition to the initiatives relating to productivity will result in faster work flow …

Bill the job immediately it is completed and interim bill monthly

Key 6: Reduce AR

Require payment before starting the job (full or part)

Get monthly payment schedule in place

Bill jobs immediately after completion

Payment terms to be ‘payment on receipt’

Do not send statements out with ageing analysis shown

Implement a firm debt collection process


“It’s not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change” ~ Charles Darwin

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Understanding the Business of Accounting Building Better Business Ric Payne Principa .

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