Kylie Parker

Goldilocks and the three billing models

Accountants have a choice of three billing models – cost-based, fixed-price and value-based. Like Goldilocks choosing from three bowls of porridge, the best model is simply the one just right for your firm.

Traditionally, a public accountant’s billing model was cost-based. The model was built around the salaries of staff members, the cost of general administration overheads, including administration staff, rent, training and other office overheads, and a profit allocation to compensate the partner for their risk, knowledge and business ownership.

These costs are typically accounted for as a third, a third and a third. Firms that have been operating for more than 10 years are using this model to ensure the owners derive an adequate income for the risk they take in becoming business owners.

Cost-based billing has worked well in the accounting profession for many years, from the days of the paper ledger to spreadsheets to computer-based accounting programs. However, the introduction of cloud accounting software has led to the introduction of new business models that started to productise or commoditise compliance accounting and tax services. These transparent fee offerings have put pressure on traditional firms to also provide a fixed fee under an annual engagement letter.

Fixed-price billing

New clients shop around online before they come to you and they have an idea of the pricing they should be expecting from your business. Your existing clients might be happy paying the same way they have done for 30 years, but how long will it be until a younger family member pushes them into reviewing their accounting services?

In general, newer firms advertise openly on websites three types of packages, with the aim that the buyer buys the mid-range service. This is often referred to as the three-pronged pricing methodology. Think Goldilocks. Not too cheap, not too expensive but just right in the middle.

The aim here is often to ensure the traditional model of compliance fees above is fitted into the mid-range service package, the difference being they are billed on a monthly basis so as to both benefit the client and the business in providing a cash flow that is in alignment with the costs of the business (i.e. monthly wage, rent and online software subscriptions). This is a direct result of having access to real-time financial information at a lower cost than previously was available.

The three types of fixed-fee pricing compliance models are generally as follows:

COLD ACCOUNTING PACKAGE

– Annual financial statements

– Tax return

– Review and lodge BAS

– ASIC-registered agent

– Annual meeting

$500 per month

THE JUST-RIGHT ACCOUNTING PACKAGE

– Annual financial statements

– Tax return

– Review and lodge BAS

– ASIC-registered agent

– Quarterly meeting

– Quarterly management reports

$750 per month

HOT ACCOUNTING PACKAGE

– Annual financial statements

– Tax return

– Review and lodge BAS

– ASIC-registered agent

– Monthly meeting

– Monthly management reports

– Bookkeeping services

From $1,000 per month

These new businesses often work based on a salary of around $100,000 for a technically strong senior accountant managing 50 small businesses clients, each on a package of $6,000 per year to produce an income of $300,000. This really is still just another way of looking at the third, a third and a third pricing methodology we are used to.

The advantages of smoothing out the cash flow for both clients and our own businesses still makes this an appealing option. The business can either decide to run blind and look at a monthly P&L to see if the income is covering the expenses or track time through timesheet recording so at the end of the year, you can bill for additional out-of-scope services or review the fee for the following year. This is a personal business decision. There is no right or wrong answer.

If you are not yet offering a package of accounting services and unsure where to start, just review online other options available, and then start something similar with a few of your clients this June where they are already using an online accounting program. These packages work only where the data is now in real time and being reconciled monthly.

Value-based billing

Value-based pricing is determined not on the costs to run your business but on the perceived value to your clients. Anyone commencing in a big four firm from a sole practice would be given a higher charge out rate and wouldn’t think twice about billing this. There is an expectation that has been set that the firm has a brand, technical expertise and the legal backing to provide security, status and technical competence to the client. You have not changed your knowledge overnight, but your value has increased because of intangible benefits around the advice you are providing.

There are many ways in which you can improve the value of the services you offer to clients. They can be based around efficiency and timing of communication, providing upfront tax refunds or ease of meeting with you in a manner which the client values. How you decide on the additional value you provide to clients can be found in a number of areas discussed below:

Traditional compliance. People unfortunately often don’t see the value until an ATO audit highlights their tax adviser wasn’t technically competent. If you are a strong technical compliance person, highlight this, state you have never had a client have ATO audit issues, discuss the training you and your team attend, consider the network of specialists and highlight those you work with on your website. Given there is a broad range of technical standards across firms, a good accountant isn’t going to be replaced by automated data entry. Don’t be shy in telling people just how great you are at tax compliance – it is extremely important and does need to be valued.

Specialist compliance. What areas of technical expertise do you have? Farming clients need specialist tax concession knowledge and family succession planning, tech start-ups need assistance with grants, R&D and employee share schemes, Entertainment need knowledge of government film and TV incentives that are enacted through tax legislation, this list goes on. Determine your niche technical skill, and start to increase the marketing and value of these services.

Industry experience. What areas of industry expertise do you have? It is very easy for smaller firms to say “we do everything” mining, film and TV, online retail, legal profession, hairdressers, cafes, hospitality, trades – there are so many industries and their associated add-on software programs now. It is beneficial to select the ones you already like and know a lot about and then start marketing and growing this area of your practice, you can then start charging a premium for your knowledge and advice.

One-off transactions. This requires a working knowledge of insolvency and forensic accounting — small business tax concessions are all transaction-based services that generalists refer on. How are you placed online, so that public accountants can find your specialist knowledge?

Professional reputation. Referrals from within the industry based on trusted knowledge coming from speaking engagements, publications or just plain old word of mouth when you did a great job.

Simply, the more in demand you are for a specialist skill, the higher the fee you can charge. This is simply something we all learnt in university – the law of supply and demand.

Kylie Parker, director, Lotus Accountants

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