Six Sigma application to accounting processes

Yesterday, we took a look at applying the Six Sigma-style process improvement model to a specific marketing example. Today, we’re going to do the same thing, except we’re going to do it to an accounting example.

Remember, the steps are as follows:

1. Define the problem.
2. Identify how to measure.
3. Analyze your data.
4. Implement experimental improvements.
5. Measure the outcome of the new methods.

Let’s start with a common problem among tax and accounting professionals: The Return on Investment (ROI) of doing 1040 returns. Let’s go through each step one by one.

1. Define the problem: It is not uncommon for the equivalent hourly fee for 1040 preparation to be far less than your regular hourly billing rate. If you bill out at $175 per hour, then you should also be getting that amount from your tax preparation activities. For the sake of this example, let’s say that it turns out that you gained $80,000 in revenue from 1040 preparation this last tax season, and logged 640 work hours in the progress, including your time meeting with clients, preparing returns, and delivering client clients. That works out to $125 per hour, a full $50 per hour less than your target.

2. Identify what to measure: We’ve already pegged that, actually: Dollars per hour. This introduces three ways to look at our data, for the next step.

3. Analyze your data: In order to increase equivalent hourly rate for this example, we can either increase revenue, decrease our time, or leverage ourselves with a tax preparation assistant at a lower hourly rate.

4. Implement new methods: For the next tax season, you decide to hire a tax preparation assistant to help you with returns. For $20 per hour, including payroll taxes, worker’s compensation insurance, and other employee costs, you have a full time assistant for 8 weeks, at a cost of $6,400.

5. Measure results: With an assistant, you’re able to handle more new client interviews, including more time to spend on complex returns that your assistant can’t handle. In the end, you end up with $96,000 in revenue for this tax season, with 520 hours of your own work. Subtracting the $6,400 you paid your assistant, and dividing by the 520 hours, you end up at $172 dollars per hour of your time. At only a few dollars shy of your target hourly rate, this tax season experiment can be called a success!

Next year, you can repeat this process, but perhaps this time around increase tax prep fees across the board by 10%. In that case, you’ll overshoot your target hourly rate.

This same process can be applied to ANY aspect of your practice. There isn’t a single thing you do in your practice that can’t be systemized and improved. Pursuing that improvement, of course, is up to you to choose or not choose to do. I would hope that you would choose to take action.

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