Link: Small practice guide
Do you know where your profits come from? Working on the Pareto principle – named, incidentally, after the Italian economist – you will find that 20% of your clients produce 80% of your profits, and indeed 20% of your clients produce 80% of your problems. You can only hope that it’s not the same 20% in both cases.
Contrary to popular belief, it is not the size of a client that is the issue, but whether they are ‘good’ clients. The key elements that make for a good client are prompt payment (cash), profitability and work referrals.
It is vital for the continued and healthy growth of your practice that as many of your clients as possible are generating all three.
In order to appraise your clients, partners and firms need to analyse them to identify problems and devise a strategy for dealing with them.
Generally speaking, clients fit into four categories. Clients for whom the firm has achieved ‘trusted adviser’ status sit in the first division.
They probably already use some specialist services, have excellent growth potential and will require more services in the future. What is more, they pay their bills on time and actively promote the firm.
Second division clients are typically small but growing companies. If they do not need specialist services yet, they will in the future. Again, they are trouble free and have some potential to provide recommendations.
Third division clients are the bedrock of most practices. They are the steady eddies who are unlikely to set the world on fire, but can be relied on to listen to and act on advice, produce their paperwork on time, pay their bills promptly and seldom complain or cause trouble.
In the fourth division are clients who contribute little or nothing to your profitability. Some may simply be too small for the economic minimum fee and have no growth potential. But they could be unprofitable for other reasons: perhaps their fee recoveries are consistently below 80%, or they always take months to pay their bills.
With the raising of the audit threshold, smaller firms may only have one or two audit clients left. The question you need to ask is ‘are the profits from these clients worth the hassle of the regulatory regime?’
A considerable number of fourth division clients will end up in the relegation zone along with the real troublemakers. These are the clients from hell.
They tie up endless hours of partner time, ignore the advice they are given and complain constantly. Their paperwork is always late and they never pay on time.
Unless clients in the relegation zone can be returned to profitability (for example, by doubling or even trebling the fee) there is no point in keeping them. But it is important to balance the urge to drop a client, otherwise you could seriously damage the image of your firm.
Most partners know which category their clients fit into, but a formal appraisal system may reveal a few surprises. It will also act as the impetus for clearing out the dogs and making room for profitable work.
- Phil Shohet and Andrew Jenner are directors of Kato Consultancy.
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