There are a number of straightforward techniques to boost profitability. These small changes in business management can usually show results within a few months, but they depend on the agreement of realistic and definable targets with staff. Targets should be monitored and included in monthly management accounts or reports so that the management team knows how each area is progressing.
The following examples are based on a hypothetical firm with 20 staff (of whom 15 are professional), a fee income of £1m a year and an overdraft of £50 000.
Increase billable time
Getting each person to work just one extra billable hour a week can make a surprising difference to profitability, because this extra hour incurs no additional employee costs (assuming no overtime is paid) or other overheads. If 15 professional staff on an hourly rate of £50 work one extra hour a week, this amounts to £36 000 extra income for the company over 48 weeks. To achieve this, employers should:
- Agree and set targets for billable hours for individuals and departmental heads that are challenging but achievable. They should also ensure that staff are involved in setting targets.
- Monitor progress to ensure that each individual and group is on target. Include the results in monthly management accounts, noting objectives against actual results.
Manage work in progress better
Try to cut the amount of cash locked up in work in progress, that is, work completed but not yet billed. By invoicing more promptly, cash flow can be eased, and this can help reduce overdraft borrowings and produce cash savings.
A firm that has £250 000 worth of work in progress can save £5000 in overdraft interest if it invoices its clients 30 days earlier.
Again, this depends on the following steps:
- Agree and assign targets to individuals and departments for the amount of money locked in work in progress and monthly billing.
- Work out billing targets and schedules so fees are received more quickly, thereby reducing reliance on costly overdrafts.
By including details of all the information in monthly management accounts, funding requirements are highlighted in advance, so requests to lenders can be made in good time, supported by relevant information. This approach demonstrates good management and may ease negotiations.
Improve cash collection
Many proprietors complain that certain clients delay settlement, which can strain the firm's resources and hike up overdraft and bad debt risk. If a company improves cash collection by, say, 30 days, it could save a further £80 000 a year, which represents additional interest earned of £3000 a year.
Prompt cash collection also reduces bad debt provision. For example, if a company with an annual fee income of £1m reduces its bad debt provision by 1% because it is collecting money more quickly, it will save £10 000 a year.
To achieve this, work out targets for the maximum amount of cash locked in outstanding invoices. Make sure you set targets for cash collection and apply credit terms strictly. It is also worth considering if you need to invest more in credit control because of its effect on profitability.
The key to improving financial performance is not just the implementation of targets, but also strict monitoring and a culture that follows the procedures, offering rewards for achievers. Many businesses find the change in culture hard to achieve, but the benefits to be gained make it worth striving for.
Besides improved financial performance, less tangible benefits such as improvements in staff morale and professionalism are often reported by businesses that review management systems.
When staff and employers are proud of their firm, this comes across in dealings with clients, who naturally like to feel that the organisations they employ are run efficiently. In this way, client/adviser relations can be enhanced.
A further benefit is improved banking relationships; if the bank feels that it can rely on a company's management, it may be more relaxed about agreeing loans, making it potentially quicker and cheaper to arrange funding.
The open forum
Implementing these ideas depends on, and should support, the particular culture of the business. However, the first step is to set up performance monitoring tools. Each business should decide the appropriate ratio of stick to carrot to encourage and reward.
Typically, the best way to review financial and management procedures is through an open forum involving all relevant people.
Only by ensuring communication throughout the business and by getting everyone to buy into the new procedures can benefits be fully realised.