Home Accounting and Auditing How to implement the laziness equation

How to implement the laziness equation

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From CPA Trendlines: One of the funniest parts of launching Clarity Practice Management has been watching my business partner, Peter Daniel, learn about the business acumen of CPAs and accountants. Peter and I founded Clarity as a collaboration between a CPA firm client (Peter) and a CPA firm (me.). He knew what he wanted from a client perspective, and I knew what we wanted as a CPA firm.

Peter owns a software development company and believes in the rational decision-making model for businesses. The rational decision-making model is totally irrelevant to the way most CPAs and accountants run their practices. For instance, consider this interchange between Peter and a practitioner at our Clarity booth during a trade show.

Practitioner: “How much does it cost?”

Peter: “It costs $50 per user per month.”

Practitioner: “That’s too much. I can get it for less.”

Peter: “How do you know it costs too much, when you don’t know what it does or how much money you can save?”

Peter violated the cardinal rule of dealing with accountants – assuming they have any clue about running businesses. Why would anyone care about benefits versus cost?

Peter and his firm have been clients of my CPA firm for well over a dozen years. The other day I asked him if he was feeling better about his choice of CPA firm after his experience with potential Clarity customers.

Obviously, I am not insulting YOU. Reading this manifesto puts you in a small minority in our industry – those who get it. The “it” is the importance of effective practice management to our success and leading sane lives.

I’m basically a lazy guy. Todd Rundgren sang, “I don’t want to work. I just wanna bang on the drum all day.”

I agree with half of that. I don’t wanna work. But I want someone else to bang on the drum all day for me. I’m not that ambitious.

When I dated my now wife, Laura, I told her that I’m absolutely useless around the house. Don’t expect me to do anything. I am more than happy to pay someone else to do things. I am a thoroughbred. I only do a few things well – very few.

The key to achieving hall of fame level laziness is delegation. If I have no ambition to do anything, but want things to get done, someone else has to do them.

Effective practice management is putting the right people in the right places accomplishing the right tasks at the right times. That’s a pretty damn good definition of effective laziness as well. There’s a subtle genius in that.

We were looking at acquiring a really nice firm, where the two partners were working 100-hour weeks during tax season. As a result of the acquisition, they wanted to work fewer hours. We were happy to accommodate them. They were preparing the vast majority of tax returns themselves. We suggested having them act as reviewers instead. That would also transfer knowledge of the clients from them to us – a central objective of any successful acquisition.

One partner told me, “Reviews are a snore fest.”

Yes, they are. But there was no way for them to work fewer hours if they were still preparing the same tax returns. Time doesn’t work that way, unless you have discovered some way around Einstein’s theory of relativity.

Here’s the real downside of working 100-hour weeks over a few months. After a couple of weeks, you work 100 hours but only get about 60 hours of work done. Your productivity suffers. You are better off working consistent 60-hour weeks during tax season. That means proper staffing and delegation. In 30 years, I have never worked a 100-hour week. I’m lazy.

There’s a science to laziness. That’s what we will explore for the rest of this post. In the “Relentless CPA,” I wrote the story behind my discovery of the laziness equation. I won’t repeat that. Buy the book, if you absolutely must know the whole story. For our purpose, just know that it involved vacation and beer.

The equation to help you achieve hall of fame laziness is as follows:

Turnaround time = WIP / capacity

I found this mother of all practice management equations from the brilliant book, “Lean Six Sigma for Service” by Michael L. George. The brilliance of this book comes from the author’s ability to explain lean concepts in a way that makes the principles easily adaptable to many different industries. I realized the applicability to accounting in less than one IPA. If I were drinking a Pilsner, it might have taken two. If you’re drinking wine or smoking crack on vacation, your time may vary. I’m not here to judge.

Why is this equation so important? There are only four ways to increase client satisfaction:

  1. Lower prices
  2. Provide more value
  3. Increase quality
  4. Provide better service (better turnaround time)

The first three are likely going to cost you real money. The last is potentially free. In future posts, we will explore no- or low-cost ways to decrease your turnaround time, thus turning your increased efficiency into a competitive advantage. As a side benefit, happier clients provide more referrals and more revenue. The cost to acquire a client by referral is zero.

Let’s start with some definitions for the equation.

Does it take you two, three or four weeks to complete tax returns on average? Turnaround time measures the time from the beginning of a client project to the final delivery. Typically, we measure turnaround time in days, but you can use other units of measure as well, such as weeks or hours. What matters is using consistent units in the equation. What you use here on the left side of the equation must be used on the right side.

You probably intuitively grasp that turnaround time is a moving target like a balance sheet. Your turnaround time for personal tax returns might be one week in January but four weeks in mid-March.

I don’t know of any published metrics for turnaround time for the accounting business. I would mistrust them if they existed. From my experience with Clarity, I know that few firms have real metrics on this. Any published metrics would be based on surveys and not real data – #fakedata like you get from national “news” sources. The world is awash in it. Surveys are what people say they do, not what they really do.

What is good turnaround time? Good turnaround time is defined by clients. How long can you have the information for a personal tax return, before your client calls you to ask about status? In my experience, that’s about two weeks. If you got the information the last week in February and have not contacted the client with missing information in two weeks, expect a phone call.

What’s the significance of the first phone call? It’s the beginning of spending needless time and money processing a return. If it takes two hours to prepare a return and you get a phone call because you are slow getting the return done, the return now takes two hours and 15 minutes. That’s a 12.5 percent increase in cost that could have been avoided with better turnaround time.

If your turnaround time is bad enough, you end up in “what‘s the status of” hell. You know you’re there when you can’t get any work done because you’re spending all your time answering status questions. You can’t make project statuses better, because the statuses are bad. You run from client emergency to client emergency. Not happy times.

The days of extending half of your clients’ tax returns to spread out the workload are gone. They passed along with waiting six to eight weeks for product deliveries. Blame Amazon or whomever you choose. The standard has changed. After two weeks, the phone begins to ring.

Now we have a standard, at least for tax returns, against which we can measure our performance.  In mid-March (of normal years), not many established firms are turning around tax returns in two weeks. I know we aren’t – yet. But we are headed there using the tools in the ensuing posts.

Let’s define WIP. WIP stands for work in progress. WIP is our investment in uncompleted projects.  There are two ways to quantify WIP: WIP at cost and WIP at standard billing rates. The latter is more common as most practice management software uses this definition.

For example, if you have five hours in a tax return and the standard billing rate is $200 per hour, the WIP invested in that project is $1,000. If you bill $1,500 for that return, you have a write-up of $500. If you bill $750 for that tax return, you have a write-down of $250.

Obviously, write-downs are bad. They result from spending excessive time on things like … needless phone calls that you could have avoided.

Your firm’s WIP is measured at a point in time just like any other balance sheet item. WIP can be compared to WIP for construction contractors. The only difference is that accounting WIP is all intangible. Intuitively, from your experience with construction accounting, you should begin to sense that less WIP is better as it means projects are being completed faster and turned into cash flow.

Total the WIP from all your projects in process, and you have your firm’s WIP.

Let’s define capacity. Capacity is very simply the amount of work your firm gets done in a unit of time. You must use the same unit of measure for time as you used for turnaround time. For example, if you use days in measuring turnaround time, you must use days in your capacity calculation.

Because we are using WIP at standard rates, we will also use capacity at standard rates. For example, our capacity might be $2,000 of billing per day at standard rates.

Once we have WIP and capacity, we have turnaround time. For instance, if we have $20,000 in WIP and $2,000 per day in capacity, we divide the WIP by capacity and get 10 days as our turnaround time. I wish.

Yes, this is an estimate, and turnaround time varies greatly during tax season. However, if your turnaround time is more than 14 days (two weeks) as noted above, clients are going to call. Welcome to “what‘s the status of” hell.

WIP will increase as tax returns are delayed by the phone calls and your capacity similarly goes down. Turnaround time increases. It’s like running in quicksand. You are running faster and sinking deeper.

This brings us to another important realization. As WIP and capacity change, intentionally or unintentionally, turnaround time changes.

The rest of this manifesto will be devoted to intentionally managing WIP and capacity to reduce turnaround time. Welcome to the small club, who understand this. We’re like a fraternity without the initiation ceremony. To get in the spirit, please swallow a goldfish.