The conventional theory for running an accounting practice says that you should split revenue by three. A third for wages, a third for overheads, and a third for partner profit.
The ratio may fluctuate slightly. Overheads are falling with more automation, less admin, more offshoring and staff working from home. At the same time, staff costs are rising as it is hard to find good talent.
Despite this, the “rule of thirds” provides a good framework for setting a target revenue and profit, and monitoring how well we are tracking to achieve it.
A simple spreadsheet can show you where your firm stands. All you need is total wages, total revenue, and profit.
In the likely scenario that you are off target, how do you identify the areas to improve?
One Melbourne firm decided to figure out exactly what was going on. But the partners quickly discovered that this wasn’t so easy. They needed to get information straight from their practice management system, Xero Practice Manager (XPM).
“We realised our wages were high compared to our revenue,” says Marc Grasko, a partner in JM Partners, “but it was very hard to tell where we needed to improve.”
Marc was beset by questions. “Are our staff as productive as we think they are? Are we profitable on our fixed priced agreements? Are we over servicing our clients? Do we write off too much time? Or is it simply that our pricing is off?”
“There were certain things we just couldn’t easily find in XPM’s reporting. And trust me, we went through several ‘implementation experts’ and XPM support too,” Marc says.
Both always ended with either “can’t do it” or “export to Excel and do it there”.
Marc realised the best way to work out why wages were high was to create a productivity dashboard. The dashboard reads data from Xero Practice Manager through the software connector (API or application programming interface).
The API has access to more data than is available in Xero Practice Manager’s standard reports. You can create custom reports that show you all sorts of metrics on a dashboard, including productivity.
Where is our time going?
The report Marc uses the most is the productivity report. It shows the staff’s productivity rate, along with the listing of all non-productive time entries for each employee.
Marc can decide what “non-productive” actually means. He decided that this doesn’t include public holidays and leave. But it does include in-office activities which are not billable and do not promote the firm. Primarily this meant admin time, whether on a job or general admin.
At the beginning, Marc had to get staff into the habit of completing their timesheets. So he created a simple report that highlighted incomplete timesheets. Like this:
Next, Marc started looking at productivity. This quickly showed where the non-productive time goes:
You can click on the number of hours for one employee to see all the timesheet entries that make it up. This is how Ajwa Decker spent her 29.58 hours:
Our internal managers who own client groups receive this report on a weekly and monthly basis to identify where time is leaking.
How do we monitor efficiency?
With this detailed reporting Marc could see information similar to what you find in Xero Practice Manager, but he can drill down as much as he wants.
For example, you can look at your monthly efficiency, including billable hours, and the percentage of billable hours. (This would also take leave into account, for example.)
Then you can break it down further by manager, by employee, by job type, or even by fixed price agreement vs hourly billing jobs.
A partner can look at WIP control for each job manager: opening WIP, billable time across all the manager’s jobs, disbursements and outsource costs, invoices, write offs, write ons and closing WIP.
“This level of information is very empowering for our managers. We found that when you give them meaningful reporting with the option to drill down and analyse, they actually do, and they come up with the most interesting insights and ideas,” Marc says.
How do we evaluate employees and managers?
Marc embarked on the dashboard project to obtain operational reporting. But an unexpected benefit was that he could also use it for staff feedback, self analysis and reflection.
“It is now easy for us to look at productivity rates for a staff member or for an entire team before reviews,” Marc says.
Billable value for a staff member comparing two years
Productivity rate for a team comparing two years
Do you want a “Rule of Thirds” dashboard too?
If you are wondering why your profit isn’t a third of revenue, then take a look at your wages. That’s most likely where you’re losing margin.
If you want to work out exactly where the time is going – the specific jobs and employees – then take a dive into the data. It’s all in Xero Practice Manager, if you know how to get it out.