How Your Income Type Affects Your Freedom at Workby
As Michael Gerber says, “Most small businesses don’t work ….. the owner does!” Small business ownership is seen as the dream destination for so many, the vehicle of choice to enable a better life for the owner and their family. However, the reality is often very different. In the worst cases, running your own company can verge on an inescapable nightmare, where both time and money are scarce, and excitement and hope are a distant memory.
As accountants and bookkeepers, we see clients inflicted with this condition, and we ourselves are certainly not immune from it. But it doesn’t have to be this way. Taking time to understand the symptoms, design a business model and implement smart technology can help you avoid the “small busyness trap.”
So, What is the Small Busyness Trap?
Remember that day you found your first client? Chances are you treated them like a brand-new child: You gave them all your attention (“Call me any time you like with any questions you have!”; “Here’s my home phone number”; “I’m here for you 24/7”).
If this sounds familiar, chances are, you are already starting to build you own busyness trap. As Richard Branson popularized, your purpose as a business owner is to build a team with a system that looks after the clients, who then look after the business. Ultimately, the company takes care of the owner, in that order. Unfortunately, what many of us do is go straight to the client and neglect building a team with a system. As a result, you end up taking care of your business.
It’s Not What You Make But How You Make It that Counts
When it comes to creating any business, it’s important to start with the end in mind: Why are you in business in the first place and how are you going to achieve your desired outcome. For some, it’s about creating a company that supports a lifestyle enabling more freedom (time and money), while for others, it’s about building a business and realizing the asset in a sale (the lump sum retirement plan). Unfortunately, for many, it remains an organization they progressively despise, consisting of monotonous, unfulfilling work (no time and not enough money).
Three types of income exist in an accounting firm, and your mix of these will have a strong correlation to the amount of freedom you are able to obtain from your business:
1. Active, Non-Recurring Income
This income type typically requires physical effort to generate. These firms often bill on an hourly and/or charge-and-recover basis. There are physical constraints on this type, such as number of hours in a day and market tolerated hourly rates that place a limit on its upside potential. The work is often ad hoc in nature and geared around solving problems or undertaking specific tasks, such as troubleshooting a client’s accounting file, answering tax queries or converting desktop to cloud accounting systems. There is a high potential for the commoditization of these types of services, as they are also often reactively performed following a request from the client.
2. Active, Recurring Income
This type, as the name suggests, is recurring in nature but still requires the physical effort of a team member to perform it. Examples include monthly client accounting services (CAS), quarterly preparation of sales tax returns, SLAs (service-level agreements) for software system support and maintenance and virtual CFO services. The services can be packaged and bundled to clients on a monthly retainer. They shore up and smooth out cash flow for firms and create certainty for clients on deliverables and price. Leverage for the firm is gained through process efficiency and technology that caters to the increased volume of clients utilizing the packages. Customer service is critical: If you are going to introduce clients to this sort of solution, you must ensure the services are being visibly undertaken on the same frequency the client is being billed for them.
3. Passive, Recurring Income
Revenue sharing with software vendors is a growing example of how firms can generate recurring revenue that is passive in nature. The Software as a Service (SaaS) model adopted by web-based software vendors is built on the subscription model, involving an ongoing commitment and cost by end users for access to the solution. With accounting professionals seen as a preferred channel to market by many business software vendors, there is opportunity to partner with appropriate ones that have solutions to suit your client base. This type of revenue includes referral commissions and partner/reseller margins; however, it’s important to remember that this is “external” passive revenue, which means it’s ultimately out of your control whether you will continue to receive it or not. Consider how you can adopt the subscription model in your own firm by generating “internal” passive income for product and services you have control over, e.g. creating an online resource library (webinars, checklists, procedures) for clients in a niche industry you have domain expertise in.
A healthy mix of recurring revenue (both active and passive and externally and internally generated) can significantly enhance the time returned to you from your business. Better still, if you end up with a firm that continues to be fulfilling and affords you the time and the income to have more choices in life, you may choose to keep it. Even if you don’t, a firm that runs on a high percentage of recurring income is likely to have greater value in the eyes of a prospective purchaser.
So, either way, it’s worth reviewing every income stream in your business and determining its type. This may be the catalyst for a renewed vision for your future and passion to help your clients transform their business into one they love.
Clayton Oates is recognised as a respected member of the Accounting | Bookkeeping and Technology Industries in Australia and Internationally. He has been working in (and consulting to) the Accounting | Bookkeeping and Software Consulting industries in Australia for more than 25 years. After completing a Business (Accounting) degree at Monash...