Costs such as salaries, IT and premises are all becoming more expensive as medium-sized firms try to maintain their competitive position. This puts pressure on the bottom line, making it essential to get the best results from a firm’s existing resources.
Many sophisticated business models can be applied to supposedly improve performance. However, there are some basic techniques that can help improve profitability, and demonstrate how small changes in practice management can have a direct and positive impact on profits, usually within a few months. Increased profits mean increased partner drawings – an objective of all professional firms.
Although many firms may already have tools for monitoring their systems, they are rarely used to the full, and information might not always be acted on. After all, in many small- to medium-sized firms, the finance partner and his team rarely have the luxury of being able to concentrate exclusively on practice management. It is to be expected that if a client requests advice, this should take priority, so it is a good idea to periodically review a firm’s procedures and systems to maximise potential.
Consider three of the most typical areas where small changes can help to raise profitability. Much of the following centres on agreeing realistic and definable targets with staff so that they take ownership for specific tasks. These targets should then be monitored and included in monthly management accounts so that the management team knows how each area is progressing.
To illustrate, let us imagine a hypothetical firm with 30 partners, 60 fee earners, 30 support staff and a fee income of £15m per year with an overdraft of £3m.
Increasing chargeable hours
Getting each fee earner to commit to working just one extra chargeable hour each week can make a surprising difference to the bottom line. This is because the extra hour worked incurs no incremental employee costs (assuming no overtime is paid) or other overheads, so the benefit of these extra hours passes straight through to the profit of the firm. This added income should have an almost immediate impact on profits and partner drawings, as illustrated below.
The key tools that can help a firm realise these results revolve around setting and monitoring targets. Agree and set targets for billable hours for individuals and departmental heads that are challenging but achievable, ensuring that the staff are involved in setting targets and therefore take ownership.
Monitor progress to ensure that each individual and group is on course to reach their objectives by including the results in monthly management accounts, noting targets against actual results. This helps the management team to keep abreast of developments so that they know exactly how the practice is progressing and can make better informed decisions.
