Retired Senior Partner of Grant Thornton US Consultant to Grant Thornton China 1

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 Principal business purposes are to: ◦ Increase each others success ◦ Maximize earnings “One for all; all for one” 3

 Importance of managing financial performance  Counting cash at the end of the year is not management 4

 Do you know what each engagement really costs your firm?  Do you know whether each engagement is profitable – or how profitable?  Do your partners know what financial performance objectives are expected of them? 5

 Some basics are required ◦ A budget from each partner ◦ A consolidated budget for each department/ office and the firm ◦ Reporting of actual hours devoted to each client by all personnel ◦ Rate per hour for all personnel 6

 Financial Management requires basic information: ◦ An engagement revenue budget from each partner, listing  Total revenues expected  Collections of revenue by month 7

 Financial Management requires basic information ◦ Number of hours required for each engagement  By level of personnel  By month  To complete the engagement 8

 Can you recognize where changes are necessary? ◦ Net revenues ◦ Salaries and number of personnel ◦ Operating expenses ◦ Number of charged hours to clients ◦ Average rate per hour to be charged to clients ◦ Average realization rate of fees 9

 A TOOL ◦ to create a financial strategy ◦ to manage the financial strategy ◦ to establish partner objectives ◦ to identify variances ◦ to correct variances - timely 10

 Starts with the Partners’ Plans ◦ Expected revenues for each client ◦ Expected hours by staff level to complete engagement ◦ Expected cost of engagement, including potential profit 11

 Do the Partners’ plans agree with the Firm plan? ◦ Do net revenues meet your expectations? ◦ Do you have an adequate number of personnel each month? ◦ Do net revenues produce adequate profit? ◦ Are some engagements “loss” engagements? ◦ Are all Partners profitable – adequately profitable? ◦ Do their plans justify their compensation expectations? 12

 Time is money  We sell time – ◦ Service is a result of our time 13

 We always correctly estimate how many hours it will take to complete an engagement!  All client engagements proceed exactly as planned!  Client financial records are always orderly and complete!  We can always easily obtain the documentation requested! 14

 Therefore, the need for everyone to keep track of the time devoted to each engagement  Daily or weekly time reporting requirement  “Time is money” - “Service is the result of our time” 15

 Converts time to money ◦ Charge rate per hour - composed of 1.Cost of average salaries by level, plus 2.Cost of operating expenses, plus 3.Potential profit percent  Often regarded as the “Rule of Thirds” ◦ But … 16

 Keeping financial performance “on track” ◦ Periodic financial statements ◦ Analysis of key data ◦ Comparison of data to the budget ◦ Determine reasons for variations ◦ Timely corrective actions 17

 Operating Metrics ◦ Financial statement performance  Performance Metrics ◦ Detail financial measurements 18

 Operating metrics (similar to many companies you audit) ◦ Gross Revenues ◦ Net Revenues ◦ Realization Rate ◦ Gross Margin ◦ Operating Profit 19

 Performance Metrics ◦ Net rate per hour ◦ Number of charge hours ◦ Net revenues per partner ◦ Gross margin per professional ◦ Utilization rate ◦ Number of charge hours per professional 20

 What they tell you ◦ Where are you compared to budget and compared to last year? ◦ Where is corrective action necessary? ◦ Which engagements are profitable – more profitable? ◦ Which partners are profitable – more profitable? ◦ Do we have enough or too many staff? ◦ What goals do I need to set for my partners?  And much, much more 21

Example Firm For the period ending December 31, 2011 Operating Metrics 运营指标 ActualBudgetActual 实际 2011 年 % 预算 2011 年 % 实际 2010 年 % Gross revenues from client services 客户服务总收入 ¥ 452,000, % ¥ 531,675, % 452,600, % Adjustments to gross revenues 毛收入调整 Write-offs 核销 (136,000,000)30.1% (128,100,000)31.5% (143,900,000)31.8% Net client service revenues 新客户服务收入 316,000, %/ 100% 365,261, % / 100.0% 308,700, % / 100.0% Salaries and compensation 薪酬与福利 Employees 员工 Salaries of client facing personnel 业务人员薪酬 ¥ xxxxx Salaries of administrative personnel 行政人员薪酬 ¥ xxxxx Social taxes 社保 ¥ xxxxx 160,500, % 187,014, % 164,537, % Gross margin for services 毛利润 155,500, % 178,247, % 144,163, % Operating expenses 营业成本 Personnel 人员 ¥ yyyyy Facilities 设施 ¥ yyyyy Technology 技术 ¥ yyyyy Marketing and sales 市场和销售 ¥ yyyyy Travel and entertainment 差旅与业务招待费 ¥ yyyyy Office supplies and services 办公费用 ¥ yyyyy Outside services 外部服务 ¥ yyyyy Risk management 风险管理 ¥ yyyyy Other expense (income) 其他费用 （收入） ¥ yyyyy 44,633, % 51,867, % 44,453, % Operating income (loss) 营业收入 ( 亏损 ) ¥ 97,452, % ¥ 126,380, % 99,710, % 22

Retired Senior Partner of Grant Thornton US Consultant to Grant Thornton China 23