Compounding works on expertise just like it works on money

I was working with Beth, the CEO of a fractional CFO (Chief Financial Officer) firm. They have about twelve clients each year, which keeps her and her team of 3 associates pretty busy.

“But” she said, “We never seem to really get ahead.

At the end of 2018 we had $1.3 million in revenue.

I set a goal of increasing revenue by 20%, and we did that in 2019. Total revenue was $1,560,000.

Since then it has remained at $1,560,000 each year.”

Beth continued: “I hear about companies doing 20% growth year over year but we can’t seem to crack our ceiling.”

What’s at stake?

Before we began to work on cracking the ceiling, we took a moment to look at what’s at stake.

Nothing like the numbers in black and white to focus the mind.

Revenue of $1,560,000 each year for five years is a total of $7,800,000.

We compared this to the effect of 20% growth year over year (YOY). Beth was overcome to see it on paper:

Start: $1,300,00

20% growth end of year one: $1,560,000

20% growth on top of year two: $1,872,000

Another 20% growth on top of year three: $2,246,400

20% growth on top of year four: $2,695,680

20% growth on top of year five: $3,234 816

Total revenue for five years at 20% growth YOY: $11,608,896

The difference: $3,808,896!

Compounding

The official term for this effect is compounding.

You learned the concept the first time you opened a savings account or got a savings bond as a kid. When interest (the growth) stays in the account, the total grows bigger in the given period of time.

Compounding is not just for the money

In a business, there’s another way to benefit from the effect of compounding.

This is what my pricing strategy work is based on.

The more you build on previous client work, the greater the IMPACT you deliver to clients in the future.

The more you take continuing education courses, attend industry conferences, and participate in webinars, roundtables, and other professional education, the greater the significance of the IMPACTs you’re capable of delivering.

Your fees should reflect this greater IMPACT.

In other words, as you compound your knowledge and expertise, which compounds the life changing differences you deliver to clients, your fees should also compound.

Beth told me:

“We work hard, we keep up on all the changes in tax regulations, interest rates, financing issues, and the changes to our client’s markets and industries.

But I don’t see how to achieve growth 20% year over year.”

Here’s how to achieve 20% YOY

The answer lies in something she said and yet didn’t recognize as the answer.

They keep up and ahead of everything important to their clients. That’s what professional and business services do as a matter of course.

But they started each engagement, whether a renewal or a new client, at the beginning.

They were using the same questions, the same checklists, the same processes, and the same pricing that served them well in 2019.

So it makes sense that they’d make the same amount of money.

How to compound

We listed three tasks to complete in the first 30 days:

  • Study and describe in writing the IMPACTS they delivered to clients in the past year. Focus on life changing! Not outcomes, but the IMPACTs of those outcomes.
  • List the top ten changes in their areas of expertise that occurred in the past 5 years. Build the list from their education, experiences, and leading outside sources.
  • Write new processes that reflect these top ten changes. Here’s where they have to be ruthless!
    1. Start from scratch rather than trying to update or revise the old processes.
    2. Give everyone permission to challenge everything.
    3. Take risks! Believe that the proven risk-reward relationship will pay off. The bigger the risk, the bigger the potential payoff.

Each new impact is a compound of the previous impact.

The money follows!

Learn that as IMPACTs increase one on top of the other fees also increase.

The first couple of months will be experimental. Don’t freak out, take it step by step, and you’ll get to the right fees for now.

Fees will never be stagnant because IMPACTs aren’t stagnant. Once an IMPACT is delivered, you and the client will be looking for the next level IMPACT. And that one will earn you a higher fee.

That is compounding.

Progress

“Progress requires unlearning. Becoming the best version of yourself requires you to continuously edit your beliefs, and to upgrade and expand your identity.” Jame Clear, Atomic Habits

Choosing to lead a firm that compounds its revenue requires you to choose to unlearn and to expand upgrade your identity.

I hope you’ll get started without delay.

Text IMPACT to 703-801-0345 or schedule a Virtual Coffee if you want to talk.

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