Many accounting firm owners, partners and managers plan for growth based on the number of new clients and projects they intend to take on.
But the flip side of the equation is how to get all the work done.
In this article, we’ll explore why the right level of capacity is crucial for growing a profitable firm, as well as how to build all the capacity you need, at the right price.
What Is Capacity? A Definition:
Why Is Capacity Management and Planning Important?
Most accounting firms have revenue and growth targets. But far fewer firms are in the habit of calculating and actively planning the capacity to deliver the work. Firm leaders need to answer this question:
Do we have enough people and hours (at the right level) to do the work? Or are we just going to say ‘yes’ and hope for the best?
When there’s a mismatch between work volume and capacity, undesirable effects can result that tend to decrease profitability, staff morale and client satisfaction.
The Top 6 Downsides Of “Too Little Capacity”
When you say ‘yes’ to new work, but don’t have the capacity to deliver it in a timely manner, negative outcomes result:
1. Files Gets Stuck In WIP
When your WIP pile gets too high, files move at a snail’s pace. Your team become overwhelmed, dividing their focus between too many projects. As a result, work moves out the door slower and cash flow stagnates.
2. Work-Life Balance Gets Sacrificed
When firms over-commit to too much work, your staff have to work longer hours to get it done. Pretty soon, staff morale suffers and team members start looking for greener pastures, resulting in higher-than-average attrition.
3. High-Value Staff Are Under-Utilized
It’s also true that when you are short of capacity, the focus shifts to simply “getting the work done” by any means necessary.
Firms with insufficient resourcing frequently fall into this “Capacity Trap” – a situation where high-value resources are forced to do lower-value work. This is what the Capacity Trap looks like:
There are two big problems with the Capacity Trap:
- Wasted profit: when an accountant who has the ability to bill $150 per hour does $30 per hour work, the opportunity cost is $120 per hour. Now multiply the opportunity cost for every under-utilized resource in your firm. Ouch!
- Staff Morale: team members may be initially willing to do whatever needs to be done. But if a mismatch between ability and requirements persists, staff soon become unhappy.
4. Value Delivery Decreases
When your team gets bogged down in too much compliance and procedural work, you end up not being able to review and add value to your clients based on what the numbers are saying. Eventually, clients “get the message” and they no longer call you to seek your strategic knowledge, or they come to see you as simply a “compliance shop”.
5. New Business Development Suffers
Ironically, what starts as enthusiasm to bring new business on board ends up having the opposite effect.
Once you become bogged down with Work In Progress, your accountants end up sitting in front of a computer, instead of sitting in front of clients. All of a sudden, your new business pipeline runs dry.
6. The Cash Flow Rollercoaster Results
Firms that have a chronic lack of capacity tend to suffer from a painful cash-flow rollercoaster that looks like this:
- You go out and get a stack of new work
- Your team gets busy doing the work
- New business development dries up
- You finally get the work out the door, but…
- Your pipeline of work and cash is at an all-time low, so…
- You re-focus on getting new work and…
- You return to step 1.
As you can see, having too little capacity is loaded with negative consequences for accounting firms.
Now, let’s look at the flip side — having too much capacity — before exploring potential solutions to your capacity challenges.
The Flip Side: Having Too Much Capacity
Some accounting leaders worry that they’ll end up hiring too many people who will only end up sitting around idle.
The reality is that this seldom, if ever, occurs in practice. In fact, in order to grow, you always need extra capacity.
We advocate planning your capacity to match your requirements 6 to 12 months in the future. By the time the future arrives, you’ll need more again.
Excess capacity is actually good for your firm – providing you’re paying the right price for it.
You just have to ensure that you balance your capacity so that the staffing you have matches the staffing required by work.
(The way our [toa_count target=”firms”]+ client firms do this, is by adding an Offshore Team to handle their compliance and procedural work, so their local staff can perform at higher levels of utilization. See below for what the Current and Future state looks like:)
“But What If I Hire Too Many Staff And They Have Nothing To Do?”
For argument’s sake, let’s say you did go ahead and hire many more additional staff to handle your future capacity requirements, but you didn’t have the work to keep them all busy right now.
All you would do is to switch into “Business Development” mode by:
- Getting your best performers to meet with your clients to discuss new project opportunities.
- Putting more focus on lead generation, marketing and sales.
- Looking for new opportunities to network.
Pretty soon, you’d soak up your capacity and you’d need to hire again. This is why we maintain that excess capacity doesn’t last long.
Now that we’ve dealt with the importance of maintaining adequate capacity, let’s look at concrete strategies for BUILDING capacity in your firm.
The Two Capacity Levers: EFFICIENCY and RESOURCING
There are two big levers for scaling up your capacity: you can either increase EFFICIENCY by increasing your team’s output per unit of time, or you can add additional RESOURCING to grow your team further.
This gives rise to the 4 broad “Capacity Strategies” featured in the matrix below:
- When you’re LOW on the Efficiency Dimension and LOW on the Resourcing Dimension, we say you’re running a MEAN model: your capacity is capped, and you’re working harder, not smarter.
- When you’re HIGH on Efficiency but LOW on Resourcing, you’re running a LEAN model: you’re getting good value out of the team members you have, but revenue and profit will be capped because there aren’t enough people to take on more billable hours.
- When you’re LOW on Efficiency but HIGH on Resourcing, you’re running a TEAM model: now, “teamwork” is great in general, but when you rely on more people alone, your costs will tend to rise alongside your capacity. You may be able to drive more revenue, but your margins are unlikely to increase.
- However, when you’re HIGH on Efficiency and HIGH on Resourcing, you’re running a MACHINE model: as in a “well-oiled profit machine”. You’re got plenty of team members to help deliver a great service, and you’re also maximising efficiency to ensure both revenue and profit can increase.
Looking at the diagram above, which Capacity Strategy are you currently running? And what do you need to do to become more of a MACHINE practice?
Here are 4 concrete ideas for you to consider:
4 Concrete Methods For Building Firm Capacity
1. Improve efficiency by creating standardized workflows
You already know about Henry Ford and his invention of the production line. By using standardization and workflows, he massively increased the production capacity of the automobile industry.
But what you may not know is that the production line method simultaneously made the cars much cheaper, while also dramatically increasing the average worker’s wage.
The same method works for firms who want to increase their production of accounting work. Building standardized workflows allows you to produce more output in less time, so you can deliver more value for every hour.
2. Improve efficiency by harnessing technology
Using technology efficiently already gets a lot of attention in the accounting world. Cloud Accounting technology is just the beginning. There are many other categories of tools which can also increase the efficiency of other functions, including:
- Engagement letter automation
- Receipt capture
- Workflow management
- Customer feedback
- And more….
Using the right technology and tools – and extracting maximum value from each one – is a solid recipe for making your people more productive.
3. Increase resourcing by hiring more high-value local staff
If you’re coming in on the LEAN and MEAN side of the Capacity Matrix, you may need to expand your team.
Hiring more local staff is certainly an option (if you can find them!). These people are best utilized in client-facing, strategic and managerial roles.
The important thing is to avoid hiring great people, only to put them onto low-value procedural work that is beneath their pay-grade.
Before doing that, we recommend you first ensure that you have re-balanced your capacity so your in-house team members can focus on high value work.
One great way to do this is to….
4. Increase resources by hiring an offshore team
There’s also an option to hire outsourced accounting staff in the Philippines to handle the bulk of your compliance and procedural work.
By having a well-trained and low-cost workforce on the case, your local team can be freed up to focus on:
- Strategic and advisory work
- Networking and business development
- Client meetings
- Interpreting and explaining the numbers
As a result, your revenue, margins and profits grow.
This outsourcing strategy is now completely “mainstream” in the accounting world. (Our client firms alone number [toa_count target=”firms”]+).
Please get in touch if you’d like to explore how this would work for you and your firm. Once you add the resources you really need, the financial impact looks something like this:
Over To You
You’ve seen how having the right approach to planning and managing your capacity equally important as sales and business development.
And you’ve also seen how most firms are constrained by too little capacity, as opposed to too much.
Now, it’s over to you.
How will you grow your capacity – at the right cost – to achieve your growth and profit goals? We hope some of the tips in this article will help.
And if you’d like to explore adding an offshore team as part of your strategy, we’d love to help. To find out more, click here to get a Free Accounting Outsourcing Strategy And Plan for your firm. This is a detailed blueprint for rapidly scaling your capacity, margins and profits for free – a $500 value.