Armed with a new PhD in Organizational Behavior at the age of 30 Goldsmith was making very good money doing 360-degree feedback consulting when one of his mentors said “Marshall, your problem is you’re making too much money. You’re very successful running around selling days and getting paid.  But you’re becoming addicted to this success. At your current pace, all you’ll do is run around and sell your days. You’ll have a good life, but you’ll never be what you could be.”

His mentor suggested to him that his idea of “success” was limiting his vision of what he’s capable of.  Goldsmith went to to say “I’m convinced that if Paul hadn’t pointed this out, I’d still be doing today what I was doing 30 at thirty.”  It’s amazing how some brief, almost trivial, conversations can be life changing!

This is precisely the same message conveyed by Jim Collins in Good to Great – good is the enemy of great because it causes us to be reluctant to challenge the status quo.  By nature most humans do not generally like to take risks.  Making choices that could result in you moving out of our comfort zone of “good” immediately conger up thoughts of the trade-off between what you believe you must give up and what you stand to gain.

This is natural and yet in my personal experience, and in every situation I’ve been told about by other people, accomplishments I and they have been most proud of have resulted from a career change. If you are interested in this issue I strongly recommend Susan Jeffers’ book Feel the Fear and Do It Anyway.  If you’ve got children or grandchildren it’s worth reading too!

During the last 20 years I have dedicated my professional life to helping accountants experience a more fulfilling life by creating a firm that focuses on creating exceptional value for its clients, team members and owners.  But I did not start my career with that purpose in mind.  It evolved as I’m sure everyone’s has.  After all, when a 5 year old is confronted by a career choice of becoming a CPA or a Fireman the latter will win every time so when does one’s career path become evident and is it a path we really want to be on or is it the result of circumstance?

I’ve had 4 careers. First, as an economist with a government department – in many ways this was a dream job, it was interesting, challenging, for the most part I worked with exceptionally talented people, I got to travel and I enjoyed rapid promotion.  I could look forward to the security (it was tenured position) and perks (e.g. fully funded retirement benefits) that then attached to a government position.  My mojo was intact, I liked to go to work.  But during that time I started a business on the side which turned out to be a financial success but the real payoff was that I got the “business bug.”  This resulted in me feeling a shift in what gave me a positive spirit about what I was doing which led me to walk away from a secure future to pursue my next career.

I enrolled in Graduate School and discovered a mentor who piqued my interest in the role accountants could play in helping small business managers achieve their full potential.  He encouraged me to pursue a research and teaching career.  I loved it.  I’d found my mojo: for a time anyway.  With tenure and the security that offers, it would have been easy to settle into teaching.  I still believe few careers are more noble or rewarding than teaching but as was the case with Goldsmith, a friend said “you’ve got a lot more upside potential in public practice” so off I went on another career change.

Everything I had done before going into practice was a preparation for that excursion into the unknown. When I look back on that now I see what a big risk I was taking financially–a view shared by my first wife I suspect. But once again I’d found my (new) mojo.  I loved what I was doing.  I loved the challenge, I loved my colleagues and I loved our clients.  I felt I was making a difference on many levels so my life had meaning.

Then along comes another opportunity.  This time it’s a small business conference conducted by Paul Dunn in the Blue Mountains bordering Sydney, Australia. Paul said from the stage “… our goal is to change the face of small business on the planet.”  I looked around the room and saw about 130 business owners and I thought “… at this rate that will take a thousand lifetimes but what if we married his incredible energy and insights with my experience and protocols and tap into the accounting channel. That would give us the leverage needed to get somewhere near accomplishing that lofty goal and in the process it will give my colleagues in the profession an opportunity to play off our experience and most importantly, give them their mojo back.”

This is now what I do and each of those career experiences was a building block for the next one.  I have my days like everyone but my mojo is well and truly intact.  It has given me a greater sense of satisfaction than you could possibly imagine.  I’ve been privileged to work with with literally thousands of accountants around the world and many of our team members are now also consulting to the profession in some form or other.  I’m proud of this because I know Paul and I inspired them to take this path and they’re helping the profession rise to greater heights.  But my work is far from done.

When I started on this journey I thought the answer to building a successful firm was to give people a roadmap that provided them with direction together with a suite of tools and methodologies including marketing resources and sales training.  These things are incredibly important but I now consider them to be a table stake in the sense that without them the challenge of building a great firm is daunting and will be harder, take longer and cost much more than you expect.  However, they alone are not the answer for the majority of people.

I’m now certain that personal development must come before practice development.  By this I mean it’s crucial that you have a very clear understanding of WHY you are in practice.  Only then can you have that “positive spirit towards what you are now doing that starts from the inside and radiates outside.” This is a personal thing for sure but when you get to clearly understand WHY you are in practice the other things fall into place and you’ll be amazed at what can result.

Recently we conducted two webinars that were presented by Tim Fitzgerald, one of our members from St Louis, Missouri.  The webinars were about the importance of understanding why we are in practice and are based on Simon Sinek’s bestselling book Start with Why: How Great Leaders Inspire Everyone to Take Action.  Essentially Sinek’s message is that people do not buy what you do, they buy why you do it—Sinek has done a great presentation on TED that’s worth viewing.  If you would like to view Tim’s webinars click in this link.

In the November, 2011 issue of The Harvard Business Review there’s a short article written by Peter Fuda and Richard Badham called Fire, Snowball, Mask Movie: How Leaders Spark and Sustain Change that also points to the importance of having a very clear “why” in any transformational effort.  Click on this link to view a really cool animated movie showing Fuda’s three metaphors that “explain, inspire and accelerate leadership transformation.”

With that in mind I’d like to recount a conversation I had with one of our clients that I recently shared with our members and friends in an end-of-year note. I talked about how easy it is to miss the incredibly important contribution we can all make to our clients and our community when we allow ourselves to be drawn into the “vortex of compliance.”

I was privileged to talk with one of our members from Seattle, Washington, and he mentioned in passing how tough the past few years had been for many of their business clients. But he went on to say that after using GamePlan he had saved one from bankruptcy and had helped another experience a $300,000 increase in profitability (more than double the previous year!) as a result of showing them the folly of dropping prices and the critical importance of focusing on transaction planning and monitoring.

I mention this not to sing the praises of GamePlan (hopefully it speaks for itself!) but because the conversation moved to what I consider to be the really important issue and that is accountants have the power and the position to make a difference in the lives of people.

Randy mentioned that had he not had these conversations with those two clients who knows what might have happened to them—one may have succumbed to bankruptcy and the other may have left $300,000 of profit and possibly $1million of business value on the table.

The conversations that took place were not based on rocket science.  All they took was for the CPA to shift his mindset from that of service agent to change agent.  Change agents literally change lives.  I passionately believe that this profession has people with the skills together with the opportunity and, dare I say in these tough times, also the responsibility to proactively help business clients not only survive but set themselves for long term prosperity.

I don’t know if we’re at the bottom of the business cycle, still on the way down or on the way up but I do know that we are not at the top.  If I were starting a business I would not want to be doing so at the top of the cycle so the way I see it now would be a great time.  That being the case, it’s also a great time to implement a business growth strategy.  The results that Randy helped his clients achieve that I mentioned earlier came from a conversation which, coming from a professional properly equipped with analytical tools, give business owners confidence to take action that will dramatically change their lives.  The most valuable thing we can do for our clients at this time is give them confidence and convey the sense that we care enough about them to have these conversations!

As Marshall Goldsmith notes people have a default response in life to experience inertia—in other words, change is hard for most people.  He mentions that an analysis of his database of 250,000 people “Very few people achieve positive, lasting change without ongoing follow-up.”  This is why I encourage you to engage your clients in a process on regular “accountability” meetings.  Help them create a Management Control Plan that’s built on a profit and cash flow plan and a range of non-financial KPIs.

So my challenge to everyone in our wonderful profession is let’s make 2012 a truly great year during which we do good and have a great life.  Speaking of which, I came across this quote from a book I read some time ago.  It is most appropriate for this time of year and for this point on the business cycle …

A great life would naturally bring more meaning, purpose, love, laughter, wonder and adventure to your days, and, at the end of your journey you would look back on a life of significance, rather than regret, knowing in your heart that you left the world better than you found it, knowing that you made a difference in the lives of others, knowing that you got something wonderful out of it and you gave something wonderful back.  A great life of course is not something we experience; it’s something we create.

The quality of business outcomes (which we could define in terms of return on capital employed, return on shareholders’ funds, team turnover, growth in market share, earnings per share …. whatever you care to use as your objective function) will depend on the quality of decisions.  The quality of decisions, in turn, depends on the quality of information on which they are based.  When I refer to the quality of information I’m talking about its relevance to the critical success factors of the business, timing, accuracy and accessibility.

It also seems to me that a business that has better quality information to guide decisions taken by people who understand what they are looking at will have a clear competitive advantage over businesses that are run “by the seat of their managers’ pants.”  The purpose of a KPI, in my view, is to get people to think about what’s going on. Albert Camus, a French Philosopher and Nobel Prize winner, said “life is the sum of all your choices”, I say, and so it is for business too. An understanding of how to use relevant KPIs will lead to better choices.

Net Profit is an example of a common KPI.  Subject to the measurement rules embodied in GAAP this KPI reveals the financial consequence of past management decisions and operational activities given the economic environment that prevailed.  In its simplest configuration, Net Profit is a residual being the difference between revenue, cost of sales and expenses.  On its own it doesn’t tell us much other than the fact that revenues exceeded (or perhaps fell short of) total expenses. However, if it differs from expectation then management should want to know why.

If a loss has been incurred the questions management should ask are: Is this likely to continue? Why did the business lose money and what can we do to address the situation? For example, was it gross margin decline due to poor pricing and/or poor control over variable costs? Was it a physical sales volume issue? Are customers moving to competitors? Are customers’ buying patterns changing? Was it due to poor expense control? Was it due to a one-off extraordinary expense charge?  The point I’m making here is that the measure of Net profit serves as a useful KPI but only if it is followed up by exploratory questions which require more information.

Net Profit becomes an even more useful KPI when looked at over time or in relation to other denominators or in relation to a target.  For example, the trend in net profit is a useful indicator of what the future might hold if nothing changes.  In this respect it serves as a high order key predictive indicator but potentially a dangerous one because it’s highly unlikely that “nothing” changes.

What’s far more revealing is an analysis of the factors that drive profitability.  I’m talking about the impact of revenue (sales volume x price or average transaction value), gross profit margin, and expenses.

The Annual Business Performance Review generated by GamePlan provides an analysis of the impact that each of the net profit drivers have.  This gives management some useful insights into the reasons for the change in profit from one year to the next.

Consider the analysis summarized in the above graph.  The first point I’d make is this graph is a much more effective way to communicate what’s happening in a business that a table of numbers.  But back to the discussion, there was a decrease in net profit before tax of $5,600.  This was the net result from an increase in revenue of some $260,000 that was accompanied by a decline in GP% to yield a net increase in Gross Profit of $197,000 – the sterling sales effort was diluted by a reduction in margin margin.  The decline in GP% (which means average selling prices did not keep pace with COGS) was accompanied, in this but not all cases, by a decline the average transaction value meaning that the number of transactions increased.  This probably explains why Overheads have increased dramatically, so much so that the additional GP was more than consumed by additional overhead.

The profit drivers graph graph tells the story of what’s happened in the past year and like all good stories there should be something learned from it.  It appears that the company drove sales hard due in part to aggressive pricing (reflected by a fall in GP%) and probably increased advertising expenses, perhaps higher sales commissions, more sales people etc. (there’s a need for further analysis of overheads). The net effect was virtually no change in net profit – a lot of effort for little result.

But there’s more, on yet even deeper analysis we discover that the GP% was just 1.16 percentage points below what it had been the previous year and 2.67 percentage points below the highest it had been in the past 5 years.  Now these may appear to be small numbers but on revenues of $5,195,000 this decline in GP “cost” the business $60,000 and $139,000 respectively which represented more than 25% of its final net profit.

What’s also very important is the fact that if management had been aware of the “small” decline in GP% it may have been able to manage pricing more effectively.  In fact a modest price increase of about 2% across the board would have preserved last year’s margin and added at least $60,000 to the bottom line.  To achieve the highest GP% the price increase would have needed to be about 5%.

For the vast majority of small businesses the Income Statement is not being monitored regularly and rarely, if at all, are the sort of calculations I’ve talked about above been done.  People in business for the most part do not understand either the logic or the algebra but what they do understand is:

Because you didn’t arrest the fall in your GP%, you have left $138,000 on the table.  To avoid that outcome going forward all you needed to do is raise your prices by 5%

A popular cliché is the phrase “what you can measure you can manage.”  Cliché though it is, in my experience it is a very useful idea.  Time and time again, business people respond positively when you have a conversation about such things as: (1) there are just 4 ways to grow a business, (2) great results come from small changes, (3) when you monitor your business monthly you have 11 opportunities every year to get to where you want to be, (4) it’s the set of the sail that gets you to your destination not the intensity or direction of the wind, (5) expenses are the cost of resources used to generate your revenue, what return are you getting from them? (6) the most important non-financial KPI you need to be monitoring is the number of transactions (or some other activity metric)—from this an unbelievably rich source of information and probing questions will emerge.

Now one final point, most people would probably say that the mere act of measurement does not in itself change the object of measurement.  I disagree.  I have found that when a goal is put in place and it’s subject to a monitoring process the goal is achieved or exceeded more often than not.  The key to this is not the goal, it is the regular monitoring and it comes back to the point I made earlier, if you intelligently review outcomes at least monthly then you’ll have multiple opportunities to “get it right.”  If you give the goal attention, the activities you need to achieve the goal will be given attention.  Simply having a target and casually comparing actuals with the target (if done at all) without giving attention to the causes and consequences is a waste of time.

His goal was to understand what experience the “average” fan had when attending the game so that he could identify what needed to be improved to enhance the value they got for their ticket price. Cuban’s business philosophy is simply to create the best possible experience for his customers in all of his businesses.

I read about this in the November 2011 (page 40) edition of Success Magazine which I devour every month.  It’s by far my favorite source of business building ideas.  I even rank it ahead of Accounting Today for inspiration and content.  This is how the magazine article described how Cuban created an additional $153 million in value:

… rather than hanging out in the owners box, he tried to catch games in a variety of locations within the arena. He sat in the nosebleed seats to get a feel for what the view was like, if there were any obstructions, if the scoreboard was visible. He sat courtside to see if the seats were comfortable, the leg room sufficient, the noise level good. And he sat just about everywhere in between, counting how many times vendors passed by and and how convenient the various amenities were. He also stood in line for concessions, timing each wait and evaluating the quality of each product when he received it. He used the public restrooms to make sure they were kept clean and were sufficient to meet demand.

He then acted on what he found. For example, new scoreboards were installed so that the view was blocked from any seats in the stadium and new practices were put in place to improved the efficiency of concessions.  Getting into the detail and seeing the world through the eyes of customers is his mantra.  He makes the point that “… if you aren’t a customer of your own business, you are fooling yourself if you think you fully understand the customer’s needs.”

This article reminds me of the critical importance of regularly doing Customer Advisory Boards for your firm and your clients.  This, together with “blind shopping” is a a fantastic way to gather invaluable information and ideas that can dramatically change the fortunes of a business.  Customers generally don’t complain about little sources of annoyance, they just don’t feel much loyalty.  Loyalty is reflected by an improvement in the frequency with which customers deal with you, in the customer defection rate and in your customers acquisition rate.  A single metric that will keep you appraised of how your business is performing on the loyalty front is Fred Reichheld’s Net Promoter Score.

If you want to quickly and easily help your clients run a better business.  Help them see it through the eyes of their customers (do likewise for your own firm), conduct a CAB for them, read Reichheld’s book and then introduce the idea of implementing a NPS monitoring process in their business as part of a Management Control Process that you introduce them to.

The refurbished album will come in 5 versions. You can buy the original CD for $14, or you might choose a double CD that has lots of extras for $30; or for just $120 you will get a 4-disc vinyl box set.  But it doesn’t stop there, $168 will buy you 4 CDs, 16 art prints and a hardbound book; and if you are a real fan you’ll want to invest $470 to get everything plus other bonuses including vinyl singles and …. wait for it … Bono’s signature “The Fly” sunglasses!

Now, what were you saying that tax return you just did was priced at?  How about bundling in an Annual Business Performance Review complemented with a  review meeting, plus a How to Improve the Profitability of Your Business booklet, a free seat at your next Practical Financial Management Program and a pair of sunglasses so your client can see the forest for the trees.

Sure, other accounting firms may be interested in winning your clients but that’s only one source of competition and, quite frankly, the least important in my view.  I say it’s the least important simply because there is such a low level of client movement between accounting firms that either your “competitors” must be very poor at the competitive game or, probably more to the point, they do not offer any good reason for people to incur the cost of switching which is significant in both time and money.

The main reason clients switch is not due to the “pull” of the strategic marketing genius of other firms, nor is it because they are phenomenal salespeople; it’s because of the “push” of service failure from their current firm.

If you want to grow your practice you need to master four things: (1) improve the service experience you give to your clients, (2) develop an intimate relationship with clients who meet your stringent selection criteria i.e. clients in respect of whom you are able to add significant value, (3) empower all of your people to embrace a client-centric service philosophy and, (4) implement a marketing process centered on a structured referral system.  Oh, and by the way, when you take special care of the first three things the fourth one takes care of itself.   A great reference to follow up on this is Jeanne Bliss’ 2009 book I love You More than My Dog.

The traditional work output of accounting firms is well known –I’m talking about compliance-based services of the A&A type and tax planning and return preparation mixed in with a smattering of business advice usually financial in nature.  These work outputs are very difficult to differentiate because the buyer is not expert enough to make a judgment of quality.

But the buyer is very good at making a judgment of the service experience.  If you can’t differentiate what you do you must differentiate how you create and deliver those work outputs.  Differentiation in accounting firms is essentially about the experience you offer to your clients. I’m not just talking about the WOW factor –how ever that may be created—I’m talking about getting the job done, I’m taking about being fast and on budget; I’m talking about rapid response to inquiries, and I’m talking about proactive initiatives that are in the interest of the client rather than being blatantly driven by the interest of the firm e.g. constant marketing emails about your financial planning or other services!

The key drivers of profitability are price, variable costs (that is, those costs that vary in direct proportion to sales revenue and which typically are represented by the cost of sales), the physical volume of sales (that is, the number of transactions) and finally, fixed costs or enterprise overheads.

To illustrate this consider a business that has the following financial performance characteristics:

A 1% improvement in each of the four profit drivers for this hypothetical business will yield a 40% improvement in net profit!  An increase in profit of $40,000.  This is shown in the  graph below that is produced by a module in GamePlan called Profit Sensitivity Analysis.

What’s important to notice is the fact that for this business, the 1% improvement in price has more than 3 times the impact of a 1% increase in sales volume and nearly 4 times the impact of a 1% reduction in fixed costs.  This is shown in the screen shot below.

While the relative impact of price compared to variable costs, volume and fixed costs will depend on the financial characteristics of the business, it will always have a greater impact than any of the other drivers and usually that impact will be in the order of more that two to three times that of the other drivers.

The reason for this is quite straight forward.  An increase in price for a given volume of transactions means that not only will total revenue increase but so too will the margin (price minus variable cost) on each transaction.  A reduction in variable cost will change the margin but not the level of revenue.  An increase in volume will increase revenue but will not change the gross profit margin and a reduction in fixed costs will have no impact on gross profit at all.  Interestingly, reducing fixed costs will always have the smallest impact.

For example, in this hypothetical business, fixed costs would have to reduce to $625,000 to achieve the same result as a 1% increase in price.

If you look at a larger change such as a 10% improvement which will take your GP% to 38.18%, the differences are even more dramatic.  With this scenario, a 10% price increase will increase net profit to $350,000 whereas a reduction in fixed costs of $350,000 (43% reduction) would be needed to yield the same profit.

You might be thinking “that’s all well and good in theory, but if I put my prices up by 10%, how much business would I lose?”  That’s a good question but a far better one is, “how many customers could I afford to lose without being any worse off?”  For this business, the answer is 24%.  This would result is a reduction in total revenue of about 16% given a current GP% of 32%.

In other words, you could lose 24 out of every 100 of your “average” customers and be no worse off.  And if that were to happen, which 24 customers do you think you might lose—we suspect it will be the 24 people who are price sensitive and who keep reminding you and your team of that.  You might also want to remember that a 24% reduction in the number of people you service will take the pressure off you and your team members and will, in all likelihood, enable you to cut back on some of your fixed costs.

The strategic implications of this type of analysis are very important.  Most business people are pre-occupied with getting more revenue—often from new customers.  They pay very little regard to the customers they already have and usually adopt the view that price is something over which they have very little control because of competitive pressure.  They also  believe that seeking ways to reduce costs is the most effective way to build a profitable business.

This is absolutely the wrong way to run a business even though it may seem to make intuitive sense that the more revenue you generate the bigger, and therefore the better, your business will be.  It also makes intuitive sense that cost reduction leads to improved profitability.

Let’s first address the cost reduction strategy.  We have no argument with the proposition that reducing costs (whether they are fixed or variable) will improve profit.  But there is a big qualifier to this.  If a cost is necessary for you to do business, then reducing it may also reduce your capacity to do business.

Furthermore, the costs that can be reduced are generally those of a “discretionary” nature and these tend to be the ones incurred today to build the future of your business (for example, marketing, team training, research and development.)  A more useful strategy to pursue is to constantly review your costs and ask yourself the question “what are we getting for what we’re investing here?”, and related to that, “is there a way for us to get greater productivity from the resources that are driving these costs?”

Chasing new revenue and the activity that involves is a major cost driver in itself.  While we tend to describe enterprise overheads as being fixed costs, they in fact aren’t in the long run.  They tend to be driven by the volume of transactions.  If that was not the case every business would find that its net profit margin (that is, net profit divided by revenue) would increase over time.  That is rarely the case in practice.

By far and away the most profitable strategy is to aggressively price your products or services, elect to deal only with those customers who see and accept the value you deliver to them, do not allow customers (or competitors) who are price sensitive to dictate the pricing strategy that you adopt across the board and do not see “big” as being the definition of success and monitor the productivity of the resources that are provided by your fixed costs.  At the end of the day, profit is the only measure of success.  Revenue does not pay the bills or give you the resources you need to grow—that comes from profit.

Somerset Maugham wrote a short story called “The Verger”. It was about a middle-aged a man named Albert Foreman who had been a verger for most of his adult life at St. Peter’s Church, Neville Square in London.  The church council discovered that he could not read or write so he was fired.  On his way home, disenchanted with life and uncertain of what he was going to do, he craved a cigarette but to his dismay he couldn’t find a shop to buy a pack.  Thinking that he was probably not the only person in London looking for a shop to buy a packet of cigarettes he decided to establish a newsagency and tobacconist store.  It was an immediate success so he opened and other, then another until ten years later he had 10 stores and was very wealthy.

One day his banker needed him to sign some papers and when he told the bank manager he could not read or write the manager was shocked. The banker said “do you mean to tell me that you have made your fortune without being able to read or write; what would you be now if you had been able to?”  ”I’d be the verger at St. Peter’s, Neville Square” he replied.

There’s a lesson here.

Several years ago one of our members in Sydney lost 30 percent of his fees when the firm’s largest client was acquired by another company.  This experience reminds us of the danger of having an unbalanced portfolio of clients but that is not the reason I’m relating this story. When this happened our client’s initial response was one of disbelief.  He told me his felt totally depressed and even contemplated leaving the profession because, in his words  he’d “worked so hard to develop the relationship with the client that [I] could not face having to do this again.”

However, in keeping with Thoreau’s advice that “all misfortune is but a stepping stone to fortune”, he re-grouped and within 18 months not only had the lost business been replaced but the firm’s bottom line had increased by 25 percent because the previous client had so much leverage over the firm, the margin earned on the work (which included a significant audit component) had been cut to the bone.  Not only that, the client didn’t treat the firm’s team members very well so there was a big improvement in morale.

Let’s take a closer look at this.

What he accomplished in 18 months was a 43% growth in fee revenue which is equivalent to 27% per year!  This was for a firm that for the past 10 years had averaged about 10% per year.  Of the 43% revenue growth, about half came from additional services and pricing adjustments for existing clients and the remainder came from new clients.

No less important was the fact that the team members were happy to see the last of the client despite being concerned for their jobs in the first instance.  Further, because the fee loss had been replaced with a number of new clients the firm’s risk exposure from client loss was dramatically reduced (although having had this experience, the loss of the big client turned out to be the best thing that could have happened—remember, good is the enemy of great) and its pool of potential referrals significantly deepened.

But what is truly amazing is what can be achieved when adversity looks you in the eye. Annual revenue growth of 30% is extraordinary but, as proven by this firm, it’s possible any time you’re willing to give it a shot.

And that brings me to the title of this post, what might you be able to do if you decided to rid yourself of all of your low level tax work?  Perhaps you’d be able to achieve 30% revenue growth and 25% profit growth.

Why haven’t you talked to me about this before?

We’ve been doing this sort of work for some of our clients for a long time but just recently we decided to put more focus on it. To do that we have implemented new systems and have invested in new resources to improve our advisory services protocols.

We have taken a very hard and long look at our business model as well as the clients who we believe have the potential to take their business to the next level. You are one of those clients.  In fact as I mentioned earlier we have run some numbers on your business and we’ve discovered that there’s at least $100,000 <you refer to the profit improvement you have estimated> of additional profit that we think you could tap into and to the extent that is sustainable over the long haul the impact on the value of your business is staggering.

Instead of waiting for you to come to us with a request for help with your business development process we decided that it would be appropriate for us to take the initiative hence the reason for this meeting.

How would you know anything about my business, you’re an accountant not a business person?

This practice is a business and we experience precisely the same challenges that you face. The product we offer is different to yours but in all other respects we confront the same issues on a daily basis.  For example, we need a strategic and operations plan, we need to market ourselves, we need to design and implement a customer service strategy, we need to hire, develop and retain team members, we have to monitor our profitability and cash flow … in fact all of the things every business needs to address we must also attend to.

But uniquely and perhaps more importantly, we work with hundreds of entrepreneurs and business managers just like you. We see some extremely successful ones and we see some abysmal failures. From this vantage point we are able to take an objective look at our clients’ businesses. We see systems that work and we see those that don’t. To the extent that much of the unexploited potential in any business will come from focus and process systematization it’s logical that we can help you because we are ‘systems’ people.

It’s also important to note that we are not suggesting we will run your business. That’s your role. Our role will be to act as your external non-executive Chief Financial Officer. Every business, large or small, needs a CFO but small businesses don’t need that person 5 days a week, 52 weeks a year.

When we took the decision to allocate time and resources to this area of our practice we realized the critical importance of having access to a network of other people who specialize in business advisory services. For this reason we are a member of the Principa Alliance. This is an international network of accounting firms that offer business advisory services to small and mid-sized businesses just like yours. We not only have access to the people in that network but to an enormous array of business enhancement tools and resources that we can draw on to support you.

I can’t afford this service

Probably the greatest cost incurred by most businesses is the cost of the lost opportunity. It’s an invisible, but real, cost. It is invisible because, unlike other business expenses, it is not reflected by a transaction but it is real and it shows up time and time again in under-performance. It is the sale that was never made because of a customer service failure, it’s the action plan that was not implemented because there was no-one holding you accountable.

From the Profit Improvement Analysis we have just done with you you’ve seen the potential benefit is a substantial increase in your disposable income and a corresponding increase in the value of your business – probably you’re most valuable asset. The cost, of course, is substantial but there are few “cheap” investment opportunities – in the final analysis you get what pay for.

In a sense, what we’re talking about here is no different to the decision process you must have gone through when you started the business. You invested in the belief that you would achieve a return that exceeded the time and money you invested in the business. You have achieved that. Now it’s time to take the business to the next level or to put that another way, to make another investment.

How can I be sure this will work?

The simple answer to this is you can’t and nor can we. But there is one thing that we can take as a certainty and that is the certainty of change. The competitive landscape faced by all businesses in this country is changing and in some cases rapidly. What worked for you in the past probably will not in the future. Customers are demanding more for less and employees are expecting better conditions and higher levels of compensation.

Most importantly though, at no stage in process will we be suggesting that you bet the business on an idea. In fact our approach is built on a simple philosophy of testing and giving attention to detail. The key, we believe, is not to take the negative position and contemplate whether this will work but to take the positive view and make it work. If you do not take that position we can’t work effectively with you. We all must believe in a positive outcome.

Why can’t I do this myself and save the fee you’ve talked about?

You may be able to re-engineer your business and I hope that our brief meeting has at least made you realize that it is both possible and necessary. However, the sad reality is that most people in business know that there is scope for improvement but they are so bogged down with day-to-day operating problems that they can’t see the forest for the trees.

Business owners are generally the worst self-disciplinarians. It is too easy to put off doing those tasks you set for yourself. When you are not accountable to anyone but yourself you forgive yourself easily. However, when you have made a commitment to another person you are much more likely to honor it.

This is precisely the reason elite athletes need a coach who is vitally interested in their performance and who can help them keep focused on the results they want to achieve and the work they need to get done to. This is the role we are proposing to play for you.

In that role we will help you map out the game plan and set specific objectives with time frames and benchmarks. We will assist in prioritizing the activities that need to be performed so that you can keep focused on the main goal. We will also contribute our specialist expertise in financial management, planning and control. In short our job will be to help you take care of the money side of your business so you can concentrate on all of the other important areas.

I’m writing this piece for three reasons. First, Don King’s life was a life to be acknowledged and celebrated. Secondly, his passing is a sober reminder of how important it is for us to use our time and talent to best effect. And thirdly, I want to share a couple of important life lessons from my relationship with him.

Don will be remembered not for his skill as an accountant (which was considerable) but for the positive impact he had on the people he came in contact with. The thing I admired most about Don was the fact that he had a very tough background as a child and had good reason to carry a chip on his shoulder. But he rose above that and through determination and hard work carved out a very successful professional career. He had a wicked sense of humor but always took life, work, family and friendships seriously.

At Principa we talk about the need for professional offices to have serious fun – he totally understood and was a master practitioner of that concept. I doubt that there were many days when he didn’t look forward to coming to work, when I was at the firm anyway, and not for that reason! And I doubt if there were ever any people in the office who did not enjoy having him around.

I first met him as a student in one of my classes at the College I was teaching at in the latter part of the 70’s. He was quietly competent. Quite, because he was not someone who felt the need to talk unless he had something useful to contribute. Competent, because he took his work seriously and he consistently got top grades.

After I left teaching and went into public practice he approached me about working with my firm. Unfortunately we had just made an offer to another person otherwise I would have hired him in a heartbeat.

Right after Don called I got call from Jim McKerlie who was one of the partners in our biggest competitor at the time—Rutherfords. I had supervised Jim’s research thesis for his post grad degree when I was at the University of New England so I knew him well, I had a very high regard for his ability and I liked him a lot. He asked if we had any good candidates for the position we’d advertised who would be worth hiring. Big dilemma: Don is looking for a job and is extremely competent as well as deserving of the opportunity; Jim is a friend looking for a good team member—but he is also a competitor so do I really want to give him another competitive weapon? Why can’t life decisions always be easy?

The first life lesson I learned from this experience is simple. My father always said when confronted with tough decisions do what your heart says is the right thing and everything will work out. The right thing was to put Don and Jim together so I did. Don joined Rutherfords, he and the firm were a great fit and he eventually became the Managing Partner who guided the firm through a massive period of transition and expansion as part of the WHK Group – a public company and one of the few successful listed accounting firms in the world.

My father was right. When you do the right thing, good things come back to you. After Don joined Rutherfords our two firms became closer, largely because Jim and I shared a common vision about the emerging “modern” practice. Within two years (I can’t remember precisely) I joined Rutherfords and Don took over responsibility for the accounting and tax work of the clients I brought to the firm.

It was through Rutherfords that I met Paul Dunn and it was with Paul Dunn that I started Results Accountants’ Systems and have been privileged to work with thousands of wonderful people for that past 20 years. It’s interesting to contemplate whether any of this would have happened had I chosen not to put Jim and Don together. He may have joined Rutherfords, our firms may have merged, I may have met Paul Dunn but who knows?

Don remained my right hand man throughout my time at Rutherfords and did all of my work after I retired from practice. The practice lesson I learned here is that if you have a good guy on the ground YOU do not need to be the person who “does the work.” Delegation is crucial for practice growth. If you’re having difficulty delegating it’s because you don’t have the right people, you don’t do enough training, your ego is too big, or you’re concept of practice contribution is misdirected.

And now to the second life lesson. For as long as I can remember I have been talking to anyone willing to listen about the idea that those of us who are fortunate enough to be in public practice have considerable scope to choose what we do, with whom we do it and for whom we do it. Don’s passing reminds me how important it is to follow your passion and make life choices that allow you to make the contribution you were put on this earth to accomplish and to enjoy life while you do that.

If you really don’t like what you’re doing stop doing it or make a choice to fix it! There will always come a time in your life when you will ask yourself the question: have I made the best use of my time and talent? Given that you are going to ask yourself this question at some time, it’s a good idea to ask it when you can actually do something about it not when it’s too late. I think Don asked and responded to that question early in his life.

So here’s some advice that I’m sure Don would agree with: live life fully, do work you enjoy doing, work with clients and team members you respect and like. Love your family, be a nice person and have fun.

My research clearly shows that in many (I suspect ‘most’) firms close to 50% or more of their clients are unprofitable to service. I published a detailed discussion of this last year in a blog post called Are all your clients profitable to service? The “solution” to this issue is simple: deploy the right people, on the right tasks for the right clients at the right price and everything will take care of itself. I doubt that many people would disagree with what I’ve prescribed here but what is “right” in each case is the hard part in practice.

However, if I was allowed to keep just one thing I have learned about practice profitability it is this: CLIENT SELECTION is paramount.  When you get that right and stick to it, most other things will fall into place.  The clients you choose will determine what services you can provide, that will determine what prices you can charge and who your “competitors” are, that will determine where you sit on the industry value curve, that will determine what type of people you need and can attract, and that will determine what you strategic options are.

Unprofitable firms are all over the industry value curve, profitable firms know exactly how to add value to the customer franchise they have choose to work with (that’s the effectiveness aspect of their execution) and they deploy the right people and systems to deliver that value in a way that they are able to capture their fair share (that’s the efficiency aspect of their execution.)

My thoughts on the importance of customer selection are neither new nor original and it surprises me why so many people ignore it.  I think the main reason for this is the pursuit of “money” in the short term rather than being willing to have a clear strategic plan and sticking to it.  I have urged our clients to rid themselves of unprofitable and difficult customers and without exception, those who have followed my advice have been surprised by the positive outcomes they experienced.

This is further evidenced by a case study David Maister describes in his excellent book Practice What You Preach. Mortimer Ransford is a 200 person professional service firm that doubled its revenues and margins in 18 months.  Although it is not an accounting firm, what Colin Ransford, the CEO, says in relation to client selection is very relevant—I have added emphasis.

We really believe that chasing money is not what makes money. We believe that if you have the right client base, the right people with the right attitudes and the right systems, the money will follow.

We made a big decision two years ago, turning down (for the first time) a potentially lucrative opportunity, because it was really boring work.  We asked, “Is this what our life has come to, pitching for this kind of work?”  On the same grounds we resigned [fired!] one of our largest accounts, one we had worked with for four years, and one that had consistently earned us strong revenues.  When we first started on the account, it was exactly the type of work we wanted.  However, over time we became the ‘bottom of the food chain’ for this client.

We didn’t like working that way, we deserved a lot better.  The work was neither intellectually challenging nor strategically satisfying, and we knew that at some point the client would spot our boredom, because we could not cover it up for so long.

So we decided to walk away.  It’s easy firing a small client, but this was huge.  We stopped being nervous about two weeks after we dropped this client, because we realized that resigning the business was the best thing we’d ever done.  In fact it was so obvious we asked ourselves why we hadn’t done it earlier.

Ransford reports that the benefits from doing this were tangible and immediate:

1. A strong message was sent to the team to the effect that the top guys were willing to make tough decisions and put their money were their mouth is –  not just talk about “doing great work for great clients”, and we “care about our people and we give them interesting work to do” etc.
2. The action signaled to the team that management was in touch with the quality of the firms clients and it was okay to alert management if necessary to situations where particular work is not challenging and the best use of one’s time.
3. It gave a sense of renewal to the team.  The boring work that some of them were required to do prevented “our really good people from being able to develop much more interesting client opportunities, ones that they would get a much bigger kick from, and ones that would dramatically improve the firm’s performance.”
4. Whenever they turned down an opportunity (which happened 70% of the time) they “nearly always discover an upside.”  They found that turning down work results in you becoming “sought after.”  He continues, “Our reputation has grown and our revenues have gone through the roof.”

In my own experience, when you turn away work or fire clients in respect of whom you know you can’t add much value, you free up resources, and that gives you a reason to look for opportunities to deploy those resources more effectively and by effectively I mean in a way that really does create value either by getting out and bringing in the “right” clients or finding value creating opportunities within your existing client base.

Most firms that are failing to achieve their full potential have clients who are silently crying out for help.  When I do presentations to groups of accountants I ask the question: “how many of you routinely do end-of-year business performance reviews with your clients?  Rarely, do more than 30% of hands go up!  Interestingly, or perhaps I should say, frighteningly, I have also seen studies that report 70+% of business clients say “they would like their accountants to do more to help them run a better business.”  There is a clear supply-demand gap that is not being filled by our profession.

Now, given that a review meeting of that type — if done properly, as in forward looking, is an opportunity for you to:

1. Create a greater perception (and reality) of value by going beyond a review, compilation and tax return followed by a “see you next year” departure greeting.
2. Uncover opportunities for advising your clients on how to improve the profitability of their business.  What’s really important here is the fact that you can only do this by adopting a forward looking perspective rather than the backward-looking view that most accountants are associated with; i.e. the idea that we report on history rather than play a role in creating it.
3. Manifestly position yourself as more than a bean-counter.  This is a major differentiation key and a strong cause for quality referrals.  In fact, the review meeting is itself an opportunity for you to ask for a referral in a totally professional and inoffensive way.
4. Show the client that you actually care about his/her business and financial well being.  Remember, at a 40% marginal tax rate, helping a client improve the profitability of a business by $1 will add $0.60 to his/her bottom line, and increase the value for the business by $3 to $10.  On the other hand, reducing the client’s taxable income by $1 puts an additional 40 cents in the bank. I’m not suggesting you should not help the client reduce taxes; I’m suggesting that you can and should do both—at least give your client the opportunity to make that choice and if the client rejects your offer to help then maybe this is not the client you’ll be growing the firm with.  More importantly, you don’t what this client referring more people of his/her ilk.  Remember also the poignant saying “clients don’t care how much you know until they know how much you care.”  One of the best ways to exhibit this is to engage in a conversation about the client’s financial wellbeing.

So let me conclude with a thought … 1–2 hours spent on an annual business performance review with a business client who you believe has at least $100k of profit improvement potential that you’ve been able to identify with 1–click in GamePlan will be the most effective marketing initiative you could employ in the next 12 months and all it will cost is 2 hours of your time — my goodness did I really say two hours?  Ron Baker would tell me to wash my mouth out.

Here’s what one of of our members, Tom Vermeulen, thinks about the process:

Presenting the Annual Business Performance Review and Game Plan as part of the tax return exit interview is the best thing I have ever done.  Clients are open and receptive at this time of year like none other.  I have sold several long-term business plans and Management Control Plans to be implemented after tax season.