Whittle Down WIP

13 Jul Whittle Down WIP

If you don’t have these measures, get them, or turn in your CEO title. If, as a value pricer, you’ve sworn off practice metrics based on productivity, you’ll learn nothing from this article. You just don’t have the numbers. Mark Cuban is on hold waiting to yell at you.

There are only three ways to increase client happiness and thus increase retention:

1. Lower your prices.
2. Decrease the turnaround time for client work.
3. Increase quality.

Let’s discuss lowering your prices first. Hahahahahaha. No. Unless you are losing significant business to competitors in your area based on price, pricing is not your problem.

Decreasing turnaround time and increasing quality create happier clients. Taking a month to deliver screwed-up tax returns loses clients. In a few paragraphs, I’ll show how effective project management, using principles from Lean Six Sigma, speeds project delivery and reduces errors.

There are two ways to increase profitability:

1. Increase prices.
2. Do more work.

I wish increasing prices were as simple as chanting the value pricing mantra, “My services are better than the other guys’ services.” It’s not. There are established market prices for CPA and accounting firm services in every geographic market.

I don’t care what pricing method you use. I use a Ouija board. If your prices get above the local market, you’ll lose business. Stay significantly below the market and you’re just passing on free money. So, determine what the local market prices are for your services, and price in that range.

The second way to increase profitability is to get more work done. You can accomplish this in two ways: decrease project turnaround time and increase capacity. Decreasing project turnaround time gets more done in the same amount of time with the same resources. Increasing capacity gets more done by adding resources.

After these few paragraphs, you should conclude that decreasing turnaround time creates happier clients AND increases profitability. That’s a big win-win. This is the lean part of Lean Six Sigma.

This article draws heavily from “Lean Six Sigma for Service: How to Use Lean Speed and Six Sigma Quality to Improve Services and Transactions,” brilliantly written by Michael George. This article adapts the book’s principles to CPA and accounting firms.

Most people remember exactly where they were during formative life events like the Kennedy assassination, or the first time a client told you his donated 10-year-old Nissan was worth $10,000. I remember exactly where I was when I first read Michael George’s book.

I was sitting on a deck overlooking the beach on a vacation to Emerald Isle in North Carolina, cold beer in hand.

Why was I reading a business book on a beach vacation? Why wasn’t I reading something like “Fifty Shades of Grey”? Because business books are my porn. Yes, I’m in therapy for that. Reading this book makes you a good candidate for therapy as well. We can negotiate a group rate.

Reading the book on that deck, I discovered the basic “lean” equation that changed my life and practice. It will change your practice as well. This equation is even more beautiful than Einstein’s E=mc². When was the last time you made on money on Einstein’s theory of relativity? The lean equation isn’t a license to print money, but it’s close. Here it is:

Turnaround time = Work in progress / Capacity

We commonly abbreviate work in progress as “WIP.”

Sitting on the deck, I realized that I needed another beer. Then I realized that I had all of the numbers necessary to calculate our turnaround time. The lean equation is like a balance sheet in that it expresses a value for turnaround time at a moment in time. Turnaround time, also like a balance sheet, is dynamic. It changes continually.

For instance, your turnaround time for personal tax returns may be five days in early February but 20 days in late March. You should intuitively grasp that your turnaround time lengthens as tax season progresses into late March.

Let’s put some numbers in the right side of the equation and see what results. Keep in mind that using like units matters. For instance, you can calculate turnaround time using WIP and capacity expressed in dollars, but you can also calculate turnaround time using hours as units. You can probably accomplish the same result using other units of measure as well, but they’ll all take you to the same result.

I like using dollars, at standard billing rates, for WIP and capacity, as I can get these numbers readily from our time and billing software. Multiply your hourly rates times hours worked on existing projects to get WIP at standard rates. This is done on an employee-by-employee basis and totaled for the firm at a point in time. We have a standard report to calculate WIP in our time and billing software.

Capacity is how much work your firm can perform in a day. Capacity is calculated by multiplying standard billing rates times hours worked in a day for staff. The total from all staff is your daily capacity. Obviously, capacity is a moving target. People work more hours in late March than in June. So, capacity is also a measure at a point in time. Now for some real numbers.

Let’s assume that our WIP on March 21^st is $100,000 and our capacity is $5,000 per day. The lean equation tells us that our turnaround time is 20 days. It’s that simple. And I’ll bet your turnaround time on March 21^st is pretty close to 20 days. You could also calculate this with WIP and capacity expressed in hours.

So, you don’t believe your turnaround time is 20 days or more during tax season? When are you getting late February returns completed? I’ll bet it’s mid- to late March. That’s 20 days or more. I won’t harass you right now if you don’t have the exact numbers to solve the lean equation for your firm. But by observing your WIP and approximating capacity, you can take a rough shot at calculating turnaround time to satisfy yourself that we’re on to something with this lean equation.

Let’s roll with some numbers and approximations. Let’s assume that you can roughly approximate your capacity in early March as 10 returns per day. Note that we aren’t using dollars as units. We are using tax returns as the unit of measure, as approximating this measure may be a bit easier if you aren’t used to thinking about or measuring WIP in dollar terms.

Let’s further assume that on March 5^th, you have about 250 tax returns in progress at various stages of completion. When we calculate turnaround time, we have 250 returns (WIP) divided by 10 returns per day (capacity) = 25 days in turnaround time.

This tells us that when we start a tax return on March 5^th, it will be completed by about March 30^th on average. In the following paragraphs, we will tackle why your turnaround time is probably higher than you would have guessed, prior to reading this chapter, and how you can improve your turnaround time.

Improving your turnaround time is as simple as changing the right side of the lean equation. There are only two ways to decrease turnaround time:

1. Decrease WIP.
2. Increase capacity.

Decreasing WIP is less expensive than adding capacity. Typically, adding capacity means adding expenses. Managing WIP drives profitability by getting more out of your existing capacity. You manage WIP by controlling the flow of work through your system.

Michael George advocates managing WIP by controlling when work gets into your system. For tax returns, this means not starting returns until you have enough data to advance a return to at least the questions stage.

For example, I have one client who schedules meetings every tax season. We haven’t completed a return for her in five years. Every year, she wastes precious meeting time, assures me that this time she’s serious, and leaves me with a little information and a promise to bring in the rest the following week.

We have no projects in process for her. I’m not going to invest in work that I know isn’t going to be completed any time soon. Working on her returns would be investing more money in WIP with little prospect of turning that WIP into cash before I start drawing Social Security.

Even if I didn’t care about the monetary investment in WIP, assigning her returns to staff would delay someone else’s returns. So not only do I get to invest money with no return, another client’s work remains in WIP and that return ages. If you don’t see when a project will be turned into cash for you, don’t start it. Work on something else. Don’t feed the WIP monster.