Peter Johnson CPA CFP

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Value Pricing and Fixed Fee Agreements Tips
Traps
Presented by Peter Johnson CPA CFP Partner,
Redman Partners Pty Ltd
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Agenda
Value Pricing vs Time Billing Fixed Fee
Agreements What about Timesheets? Monthly Direct
Debits Work Flow Receipts versus Billings Case
Study Questions
Reducing your cash lock-up
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Value Pricing

• What is it?
• An alternative to hourly billing
• Time x Rate ? Value
• Value pricing is about pricing on purpose
• We do it anyway with write ups/offs
• Take it one step further and fix the fee

Reducing your cash lock-up
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Value Pricing

• Hourly Billing
• Hourly billing sets an artificial ceiling on what
  can be charged
• Hourly billing creates a conflict between our
  interest and clients
• Hourly billing has a focus on hours not value
• Hourly billing fosters a production mentality,
  not an entrepreneurial spirit

Reducing your cash lock-up
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Value Pricing

• Hourly Billing
• Hourly billing creates a subsidy system
• Punishes technological advances
• Hourly rates are set by reverse competition
• Hourly billing creates bureaucracy

Reducing your cash lock-up
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Fixed Fee Agreements

• What are they?
• Heres an example
• Fixed fee quote
• Fixed fee agreement
• Schedule of fees

Reducing your cash lock-up
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Fixed Fee Agreements

• Why have them?
• Benefits to us
• Attractive to clients
• Clarifies client expectations
• Prequalifies the client
• Upsell services
• Regular income source
• Lock-up reduction
• Assist budgeting

Reducing your cash lock-up
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Fixed Fee Agreements

• Why have them?
• Benefits to us
• Develops client loyalty
• Forces efficiency

Reducing your cash lock-up
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Fixed Fee Agreements

• Why have them?
• Benefits to clients
• Become priority clients
• Assist budgeting
• Assist cashflow management
• Gives the client a chance to complain

Reducing your cash lock-up
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Fixed Fee Agreements

• Whats the downside?
• Disadvantages to us
• Underquoting
• More complex than hourly billing
• Hourly billing is a cost-accounting tool

Reducing your cash lock-up
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Fixed Fee Agreements

• Whats the downside?
• To clients
• May be more expensive
• Being tied down
• Seasonal clients (e.g. farmers)

Reducing your cash lock-up
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Timesheets
Costing Tool Only, Not a Billing Tool
Reducing your cash lock-up
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Monthly Direct Debits

• Calculate annual fee
• Divide by 12
• Receive fees monthly in advance
• We control not client
• Direct debit not direct credit
• Receipting separate to work billings
• WIP Debtors usually negative

Reducing your cash lock-up
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Receipts versus Billings

• Moneys receipted every month
• Against debtors account
• Bill raised when work completed
• As per fixed fee agreement
• Client receives one annual tax invoice
• Schedule of Fees

Reducing your cash lock-up
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Bill Bobs Bait Shop

• Refer Fixed Fee Quote
• Period 1/7 to 30/6
• Bills prepared as work completed
• Write up/down at year end
• Debtor stays positive
• WIP billed as soon as work completed
• Spreadsheet

Reducing your cash lock-up
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Tips Traps

• Easier with new clients
• Timing
• July June
• 7 months positive debtors
• Average Debtors 694
• October September
• 1 Month positive debtors
• Average debtors -1,419
• Bill on a monthly basis
• Difficult with time sheets

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Tips Traps

• Multiple periods in 1 quote
• 2005 annuals, 2006 interims, 2007 annuals
• Fixed fee up front for work in arrears
• Monthly direct debit for current/future work
• Clients pay up to 3 years in one year

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Questions?