David, the sole practitioner of a legal firm, found that his business had stagnated with revenue around $600,000, profit of just under $100,000 and consistently facing cash flow problems. David was jolted into action by a frank conversation with his accountant. The accountant asked him how many hours he worked in his firm each year. The lawyer estimated approximately 2,000. The accountant then asked the lawyer to divide his profit ($100K) by the hours worked and demonstrated that he was earning about $50 per hour for his effort, on top of all the hassle of running his own firm and dealing with employees.
“You’d be better off shutting the doors and finding a job with someone else” the accountant said with a view to provoking his client to taking some action to change the performance of his business.
It worked. With a deep breath, David asked his accountant if he had any ideas to help him improve his business. Together they set about implementing the following project plan:-
- Major clear out of work in progress (WIP – work done by David’s team but for a variety of reasons not billed to clients). They went through the WIP line by line and found that there was a large amount of unrecoverable time that had to be written off but also a significant amount that could be billed. This provided the team with a much clearer picture of what was in WIP. They now have a focus on closing jobs and reducing the number of open jobs and as a result, faster job turnaround has been achieved.
- The accountant observed that there was paper everywhere and suggested that this may be causing inefficiencies. They invested in some software and have moved to a predominantly paperless office environment. David estimates this has freed up 10 hours a week for him personally and more for his team.
- They implemented a receivables system, including emails, phone scripts and pre-determined follow up periods for all clients. This combined with project 1 above reduced lock up (amount of cash tied up in WIP and receivables) by 70% and freed up a huge amount of cash flow.
David’s cash flow problems are now a thing of the past and with the extra time freed up, he and his team have been able to bring on new clients and sell additional projects to existing clients. The result – a 30% increase in revenue, much of which dropped to the bottom line, with profitability tripling in the business.
Many businesses face the same issue, irrespective of the industry in which they operate. If you think you have potential to increase your sales, profit or cash contact us for advice.