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Fixed Fee Pricing

April 22, 2014

Professional fees are typically billed based on time.  Yet, clients want outcomes and place a value on results which doesn’t necessarily relate to time spent.

Ingrained habits are hard to break away from.  For ages, many professionals quoted jobs by providing hourly rates and possibly a range of expected hours.  Some projects are open-ended in the sense that no one knows where it will take them and what will be uncovered once work commences.  This might include a forensic investigation, litigation where the discovery process becomes acrimonious, unraveling transactions in a complicated bankruptcy, a first-time audit of a multinational corporation or a tax audit for a reasonably sized business.  However, for most work, there is an understanding of what will need to be done and the approximate value to the client.  This could include an annual audit, tax return, setting up a cost accounting or internal control system or a transfer price study.

Many experienced professionals have good ideas of a project’s scope and usually a ceiling is provided which, on some level, becomes a “fixed fee.”  Fees really do not get out of hand since there are competitive pressures that keep fees within a reasonable range.

Pricing an engagement is not an exact science and can never be perfectly done, but regardless of how it is done, things seem to work out for the client and accountant.  A suggestion to better match the fee with the value is for the client and professional to map out the purpose and deliverable, what is expected of both parties, a time table, primary contact person at each firm, the scope of the services, how to determine when there is scope creep and at what time the price for the additional work, if any, will be discussed.

A problem arises when scope creeps past the “little extra” stage and work cannot be halted due to deadline pressures. Depending on how it is brought up, there can be an appearance of the accountant “holding up” the client for additional fees. But, it has to be done and the sooner the better.  If nothing is said and a bill is presented at the completion of the project, the client can complain that they did not either expect an extra bill, one so high or that they should have been told earlier when they may have had alternatives.  In any event, there will be a conflict no matter when it is done.  My suggestion is to mention it as soon as you realize there will or should be an extra billing.  You are a business person that will be speaking to another business person and this is part of doing business for both of you.  Explain that it appears services are needed that is beyond the scope you jointly worked out; explain what the services are; why they weren’t originally anticipated; and that you did some extra work into it but now have to work out a price for it.  In effect, you are issuing a change order.  This works because when done early, the client has some control, can appreciate the value and will understand there is a need for you to be compensated for the extra work.

Setting fees is complicated, occasionally uncomfortable, absolutely necessary and the earlier handled, the better.

Sports Managers Do Something Business Managers Should Also Do

April 22, 2014

After each professional game, sports managers or coaches give a critique of the game and key players.  This is done whether their team wins or loses.  I often wonder what effect this has on the players’ performance.  When they lose, do they play better the next time and when they win, are they lulled into complacency?

Business managers do not provide such instant evaluation.  At best, there is a review when a project is completed and at customary annual intervals.  I have been a part of many of these evaluations and have noticed very little, if any, sustained changes because of them.  I am imagining what would happen to performance if a valuation was done almost daily such as in sports.  I can suggest what might happen.  A continuous stream of these negative reports would have the manager thinking about why they are subjecting themselves to this employee?  It also might trigger an “aha” moment for the employee causing them to improve their performance.

My style has always been different than the periodic valuations and closer to what the sports manager does.  If someone does something they shouldn’t have or just something bad – I tell them right away.  My technique is not much different than the One Minute Manager’s.  I tell them that they are better than what they did; that they screwed up and need to fix it and make sure they don’t do that again.  And then I walk away and forget about it and those that know me know that I won’t bring it up again.  Of course, too many of these One Minute Reprimands indicates unchanging unsatisfactory performance, and that will need to be looked at.

I also promote the One Minute Praise.  When I see someone doing something good, I tell them.  I also try to catch them doing something good and tell them that also.  I noticed from my varied consulting that bosses are stingy with their compliments.  That makes no sense.

The One Minute Manager was written by Kenneth H. Blanchard and Spencer Johnson and is worth reading or rereading. Also chapter 20 in my Power Bites book addresses this very effectively.  My next blog will post this entire chapter.

Accounting Fees

April 17, 2014

…Actually, any type of professional fees.  Accountants, lawyers, physicians and even plumbers’ fees – many clients complain they are too high.

Surprise!  They are not too high.  If they were, then many would retire much earlier than they do, take more vacations or have bigger houses and more expensive cars.  Professionals usually earn good livings, but that is what they are – a living.  Would you trust your work to a professional that did not earn a decent living?  I think not!

The problem with fees is that they are for services, not for tangible products that many times can be compared to similar products widely sold in many places.

What is a service worth?  I also know that it is difficult is compare two professional’s fees for the same deliverable.  Let’s take a lawyer’s one-hour consultation.  One charges $200 and the other charges $600.  Would the advice be the same making the service a commodity thereby making the attorney with the $200 fee the better value?  Well, suppose the lawyer charging $200 has very little experience in the issues discussed while the lawyer charging $600 is a recognized national expert.  Wouldn’t you think the attorney with the higher fee would provide better guidance than the lawyer with the lower price?  Suppose the consultation was for a life altering strategy; wouldn’t you want to meet with the most experienced attorney rather than the least expensive?

With respect to tax returns, two accountants can deliver the exact same return, while one charges $800 and the other $1200.  Might you think the accountant charging the $1200 was priced too high?  However, suppose I tell you that the lower-priced return was prepared after the information was mailed in with a brief call by the accountant, while the higher-priced return included a meeting with a CPA that resulted in suggestions to change the client’s investment configuration to make it more tax efficient, some tips to give charity in a more efficient manner, advice to open a one-person 401k to shelter consulting income in the current year, and a heads up to sign up for their employer’s cafeteria health plan for the next year.  The return is the same.  The advice is not!  You evaluate the fee based on value received.  Perhaps the fee for the $800 return should have been lower, while the advice provided should have been priced higher.  Either way, professional services and fees are not necessarily subject to comparison.

I suggest that every bill you receive be considered a value bill.  Consider the value received and either shop around for a new professional or be glad you had access to a great professional at a bargain price.

Tax Season is Over

April 15, 2014

Tonight, accountants all over the country are collectively sighing with relief.  Tax season is over.

For us at WithumSmith+Brown, we had a good season – all returns were completed where we had the information; our clients that wanted to, filed on time; the higher tax paid by many clients because of the new ObamaCare tax was not much of a surprise because of the projections we did in November and December.  they weren’t thrilled, but at least they weren’t surprised.  The IRS, once they got revved up, handled the volume well.

Our staff did a great job with many young staff as knowledgeable with the new laws as the more experienced staff members since they saw the effects most directly when they prepared returns.  Because of the changes, we added training courses at the beginning of tax season, so our staff were right on top of the tax laws and fresh and eager to work on the returns. This also resulted in reduced review time.  Technology played an important role.  We used smart scanners and cloud based and data population software making our processes effective and efficient and with less tedious date entry work.  Almost all of our clients e-filed reducing handling and delivery time and costs.  Tax season started later than usual and because of this our clients were able to provide more of their information the first time they submitted it to us reducing handling, touches, calls and waiting.  All around, everything worked smoothly.

We had a good tax season, and so did our clients. Our offices are closed tomorrow for a well-earned day of rest.

Thank you to our clients and staff.

What Keeps Businesspeople Up At Night

April 10, 2014

I have gone on many leads for new clients where I was told they are switching accountants because they believe they are paying “too much tax.”  However, at most of these meetings we usually spend a few minutes on taxes and then most of the time on them wondering whether their controls are good enough!

My conclusion from this, as well as from many conversations with clients, is that potential loose controls are a major cause of keeping someone awake at night.  No one stays awake at night wondering if they are paying too much tax – a pending tax audit might, but not paying too much tax.

There are certainly many other reasons, but I want to address controls here.

Businesses are organic and need minding.  Part of this is to have adequate controls that do not tempt personnel to steal and:

  • provide methodology to get things done the right way at the right time by the right people,
  • customer orders do not get mislaid,
  • customer backlogs are managed and are for the right reasons,
  • inventory doesn’t accumulate unwisely or unnecessarily,
  • orders to suppliers are for the right things in the right quantities,
  • operational data is provided timely,
  • overhead is properly allocated and not excessive in space and cost,
  • that the cash flows in the right direction.

Being a businessperson is very difficult.  Aside from knowing how to make the product, manage the process and personnel and control the cash flow, they need to know how to lead and run a business.  Each separate function is essential for a successful business, but many times how well the overall business is managed is the determining factor of its continued existence.  Yet, many owners do not do this claiming they are “too busy.”  The old cliché is true – you need to work on your business, not in it!  Benjamin Franklin said that the eye of the master earns more than both of his hands.

If you don’t want to stay wake at night, have procedures established that watch over and control each of the items in the bulleted points above.  It all has to do with controls.  Each of the items mentioned can be controlled and transparently quantified with information provided regularly and timely so that it can be acted on as soon as a problem is detected.  That is control and this will 1) enable you to sleep better and 2} provide time and comfort for you to work on your business!

Controls work, but only if you work on getting the right controls and then using them.

Internal Controls Explained

April 8, 2014

What are internal controls?  Auditors widely use this term.  It also appears multiple times in engagement letters for audits of businesses and not-for-profits but I do not believe many outside of the accounting profession really know or understand what internal controls are.  I will try to explain it here.

Internal controls refer to an organization’s system of deterrence, oversight, checks and balances.  An illustration is where someone in a business writes and mails the checks to pay a bill.  If this same person then receives the bank statement and performs the reconciliation of that account, there would not be any control or oversight on that person and whether the payment was proper and not misdirected.  They are checking their own work.  This is how many frauds occur.

Another illustration is where merchandise is ordered by a person who also receives it, places it in inventory and authorizes the payment.  There is no oversight of the products received, that they were actually placed in inventory or that the right material was ordered, or even received.  Adding a different person to the process anywhere along the way can provide a control to thwart any theft.

Employee theft can occur at any point if temptation is blatantly put in front of otherwise honest people.  Not always, but occasionally.  Petty thefts of packages of coffee and office supplies, up to scrap metal, to inventory items like parts and finished products and be easily taken without adequate controls.  It is hard to secure coffee and office supplies but parts and inventory can be controlled with a protected location and perhaps a video camera recording activity in and out of the area.

Salespeople can pad their expense accounts and time workers can find ways to punch in earlier than when they show up or later than when they quit for the day.  Simple controls can impede many of these stealth frauds such as with periodic but regular spot checks.

It is incumbent upon every manager of a business or not-for-profit organization to assure that the controls are adequate and appropriate for the organization.  There is also an easy way to approach this.  If you have an independent auditor, ask them to review with you every item on the internal control evaluation checklist they completed for their last review or audit of your system.   If you do not have an independent auditor, email me and I’ll send you a standard internal control evaluation checklist you can start with.

More Than Just an Identity Theft Alert

April 3, 2014

Last week, I met with a client that had money stolen from his business account.  He caught it right away and because his banker was very helpful, he did not lose anything.  He could have lost a substantial amount along with much time trying to recover his losses from the bank.

Here is what happened:  A check was drawn on his business checking account for a seemingly usual transaction amount of just over $20,000.  The check looked exactly like his checks and the signature looked just like his signature.  The check number was about 500 numbers higher than his current check numbers.  The check was not drawn by him and it was to a payee he had never heard of.

This client routinely checks his bank account online every morning, so he noticed this unusual transaction right away.  He spoke to his partner who also did not know anything about it.  His call to the bank was transferred to the right person that could handle it.  He was told that this happens occasionally; that he would be immediately credited in full; that all his accounts with the bank would be closed and new accounts opened; and that he would have no additional inconvenience, unless he notices similar activity in the future, which he should not, based on what the bank was doing.  He was told that he might receive a call from the bank confirming if an outstanding check on the closed account looked unusual; otherwise all his outstanding checks would be diverted to the new account.

The bank handled this excellently and his regard for the bank increased.  He was glad that he checks the balances each day, and knows now that it isn’t just his compulsiveness, but that there is real value to it.

Neither he, his partner or the banker had any idea how this happened.

Takeaway:  This can happen to you.  Check your balances.  Be alert to unusual activities.  And watch your money!

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