Business Advisory

The 20:225 Rule

What is the 20:225 rule and why is it so important for your accounting firm (and for your clients too)?

Whilst researching content for our new event “Unleash the Heroes Within“, we came across the 20:225 rule and it blew our minds! It also blew the minds of attendees at that event and at subsequent talks we’ve given.

So what is it all about?

Well, most people have heard of the 80:20 rule. For example, 80% of your revenue comes from 20% of your clients. And whilst that’s probably true, it hides the bigger picture and maintains the status quo. That’s because, we assume the other 80% of our clients are generating 20% of our revenue and therefore contributing to our overheads.

"I don't have the time"

Many accountants I speak to say that they just don’t have the time.

They are overwhelmed with compliance work. That’s possibly down to the fact that the process has been over engineered. However, it’s also likely that they are doing too much of the wrong work with the wrong clients.

Spending too much time on too many grade “E” client

We all have them. Those difficult or unprofitable clients. They are always querying fees and their direct debit/credit card often bounces, or they pay late. You are always chasing them for information. Their records are a mess and they drop everything in at the last minute and expect you to turn it around in record speed. They don’t understand or value what you do. You may hear them say things like, ”My records are great, all you’re doing is creating a set of accounts. It won’t take you any time!” But they do actually soak up a lot of the team’s time, can be quite curt, and everyone groans when their name is mentioned.

How many grade E clients do you have and how much of your time is taken up with them? If you haven’t undertaken a client grading exercise (with your team) within the last twelve months, I highly recommend it. [ps if you want a copy of our Client Grading Matrix, please get in touch]

20:225

So if 80:20 fools us into sticking with too many bad clients, because at least they are contributing to overheads, wait until you see 20:225!

The 20:225 Rule

From the work of costing giants, Cooper and Kaplan, the 20:225 rules states that although 100% of you clients generate 100% of your profits, interestingly, 20% of your clients generate 225% of your profit.

That means that 80% of your clients are ‘stealing’ 125% of your profits.

And that’s a very different (and eye opening) proposition to, “80% of your clients are contributing 20% of your revenue towards overheads”.

Armed with this knowledge, what different action will you be taking?

PS – here’s a graphical representation of the 20:225 rule.

And of course your numbers might be different t0 20:225, but what are they?

About Clarity

Clarity® is the complete end-to-end business advisory engine solution that helps accountants thrive, by realising the full potential of their team, their firm and their clients.

Our multi-award winning platform and Member Success Team give accounting firms the structure, tools and plans to build better businesses; and the confidence to make it happen.

We help them introduce and create a profitable, repeatable and scalable business advisory service for their firm. One that increases revenue in excess of 40% and profitability by over 125%.

Using Clarity adds significant value to small business clients. Value they clearly understand and want to pay for.

Why not book a call, so we can schedule a strategy session with you to create a customised implementation plan? We will then work with you to execute your plan.

And download our free report “The 7 Reasons Why Business Advisory isn’t Working” here.

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