1. Understanding the Business of Accounting Building Better Business Ric Payne Principa www.principa.net

2. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Today’s Agenda Business model defined The 5 elements of a business model The unique characteristics of the PSF model How to design a business model that fits your market Does your current model need to change? Six initiatives to re-jig your current model

3. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Create Customer Value by meeting a need or want What is the purpose of a business? The purpose of a business is to create (and keep) a customer which means an enterprise really has only two basic functions: innovation and marketing ~ Peter Drucker

4. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Create Customer Value by meeting a need or want What is the purpose of a business? The purpose of a business is to create (and keep) a customer which means an enterprise really has only two basic functions: innovation and marketing ~ Peter Drucker Product innovation Process innovation Business model innovation

5. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Examples of BMI

6. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net What is a business model? A business model describes the rationale of how an organization creates, delivers, and captures value. A business model = “The Theory of The Business” – Peter Drucker (1994)

7. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Value Create Capture Deliver What is a business model?

8. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net The 5 elements of a business model? Customers Relationship Channel CostsRevenue Leadership & Management 1 Customer Value Proposition 2 Resources 3 Processes 4 Profit Model 5

9. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net The 5 elements of a business model? Customer Value Proposition An offering that solves a customer problem more effectively, reliably, conveniently or affordably at a given price The job to be done How important is this to the customer? How satisfied are customers with the current solution? How well does the new offering get the job done relative to other options? Source: Seizing the White Space: Business Model Innovation for Growth and Renewal, Mark W. Johnson

10. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Customer Value Proposition It’s not just what is sold but also how it is sold Gone At risk Searching Loyal At riskAdvocateLoyal Dissatisfied Satisfied Delighted Process Outcome Met Not Met Exceeded

11. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Customer Value Proposition Before you can develop a CVP you need to know who you want your customer to be

12. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Customer Value Proposition To find out what your customers want i.e. the job they are trying to get done … observe them and ask them “The customer rarely buys what the business thinks it is selling.” ~ Peter Drucker

13. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Resources & Processes Resources People Technology Facilities Equipment Information Alliances Finance Brand Processes Operational and managerial systems Service definition & design Marketing & sales Training & development Processes are the source of value creation

14. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Profit & Funding Model Revenue Price x Volume Costs Cost structure – fixed & variable Capital Requirements Scale Resource utilization Profit target

15. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Traditional CPA Business Model Revenue Rate x Hours Costs Labor Scalability Capital Requirements Customer Value Proposition WIP AR Infrastructure All things to all comers Resources & Processes Same people Same systems Same business rules Same performance metrics

16. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net An Alternative CPA Business Model Revenue Value priced Costs Labor Scalability Capital Requirements Customer Value Proposition WIP AR Infrastructure Targeted Resources & Processes Same people Different systems Different business rules Different performance metrics

17. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net My own experience 194719871991 $3.3m $1m Clearly articulated business vision 10 in 10 Targeted business clients Small client practice Focused marketing & sales Bundled CFO services Fixed price agreement Training investment to develop saleable skills & capacity to delegate Systemized processes 40+% margin <30% margin

18. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Examine your own competitive landscape Pricing Client selection Service offering Process design - systemization Relationship management Organization structure - CSMs Your assumptions about your environment, your mission and your core competencies must fit reality. Core competencies

19. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net When do you need to think about changing your current model When your revenue growth has stalled When your margin is shrinking When you lose clients you want to keep When you are attracting clients you don’t particularly want When you are losing talented people When you are losing interest in your business

20. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Source: Bob Kaplan and published in the Balanced Scorecard Report (August 2005) called “Add a Customer Profitability Metric to Your Balanced Scorecard" 100% Most CPA firms have a flawed business model

21. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Most CPA firms have a flawed business model 54:140

22. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Six keys for re-jigging your business model Key 1: New client growth of the type you want Target your market Design a referral system Conduct CABs with non-clients Conduct CABs with clients Design services that “get the job done” for the type of clients you want Firm visits – the 20% rule Public profile Reject unsuited clients

23. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Six keys for re-jigging your business model Key 2: Improve team member productivity Undertake a client profitability analysis – re-price or replace loss contributors Put the right person on the job Is the job valuable to the client & can the value be captured Is there sufficient work in the pipeline Has the job been properly scoped and time budgets put in place Is all information required to complete the job available before it is started Is a lower cost team member being used for all admin and highly systemized tasks Is an After Action Review undertaken at the end of the job Is the right performance metric in place – revenue generated not hours charged

24. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Six keys for re-jigging your business model Key 3: Increase Average Realization rate Price the job up front based on value to the client as well as the time required to complete the task – most firms are pricing 10-20% below the value of their services Effective Hourly Yield From a Price Increase and/or an Efficiency Gain Price Increase Efficiency Improvement 0%5%10%15%20%25% 0% 100.00105.00110.00115.00120.00125.00 5% 105.26110.53115.79121.05126.32131.58 10% 111.11116.67122.22127.78133.33138.89 15% 117.65123.53129.41135.29141.18147.06 20% 125.00131.25137.50143.75150.00156.25 25% 133.33140.00146.67153.33160.00166.67

25. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Six keys for re-jigging your business model Key 4: Reduce Write offs In addition to the initiatives relating to productivity … Ban write-offs unless they are due to your errors or they are strategically justified Price up front and implement Change Orders to accommodate scope creep Do not pass efficiency gains on to the client unless this is a key element of your strategy Do not allow partners to price the job or do the billing

26. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net Six keys for re-jigging your business model Key 5: Reduce WIP In addition to the initiatives relating to productivity will result in faster work flow … Bill the job immediately it is completed and interim bill monthly Key 6: Reduce AR Require payment before starting the job (full or part) Get monthly payment schedule in place Bill jobs immediately after completion Payment terms to be ‘payment on receipt’ Do not send statements out with ageing analysis shown Implement a firm debt collection process

27. © 2008-2009 Principa. All rights reserved. © 2010. Principa. All rights reserved. No part of this presentation may be copied or used without the written permission of Principa. www.principa.net “It’s not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change” ~ Charles Darwin www.principa.net 775-826-7771