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 … Continue reading

Six Sigma systemization: A marketing example

Yesterday, we discussed the value and process of creating systematic processes and checklists for running your practice. Performance analysis and procedural improvement systems themselves, such as Six Sigma, exist in order to provide a framework for guiding the improvement process.

Today, we’re going to apply this type of process to a specific marketing problem. Let’s start with step one from the step-by-step process we discussed yesterday, which is to define the problem.

Let’s say that you’re looking at the various marketing methods that you use, and you realize that you are getting dismal results from your direct mail campaign. Moving on to step two in our improvement process, you are able to quantitatively measure your results. In our example, let’s assume you’re getting one new lead for every 5,000 mail pieces you send.

In general, if you’re getting less than 5 inquiries out of every 1,000 direct mail pieces you send, then you have significant room for improvement. The problem is that you don’t automatically know what needs to be improved. Here is just a short list of things that can impact the effectiveness of a direct mail campaign:

  • Your mailing list criteria
  • The type of mailing piece you use
  • How frequently you mail to the same list
  • Your headline
  • Your sales copy
  • Your offer
  • Your call to action

…and this is just the tip of the iceberg when it comes to direct mail.

So, part of the process over evaluating your current system is to make sure that you are fully educated in regards to the subject matter. This is why it helps to bring in experts to assess the situation sometimes (it’s why people hire you, don’t forget).

After some additional education, and perhaps consulting with a direct mail expert, you temporarily rule out your mailing list and several other factors, because it is brought to your attention that most people on your list won’t respond until they’ve heard from you several times. Thus, you implement step four in our improvement process, and create a series of mailers that will be mailed out to the same people, once a week for eight weeks.

After sending out 1,000 mail pieces every week for eight weeks to the same list, you find yourself at step five, and evaluate your results. You now have 35 new leads in place from this series of mailings, representing tens of thousands, if not six figures worth, of new client … Continue reading

Implementing Six Sigma processes even in small firms

Wherever there is some task being done, there is a way to improve HOW it’s done.

It’s been called by many different buzzwords over the past several decades, with the latest and greatest name being Six Sigma. Whatever you call it, the process of reducing mistakes and increasing efficiency is a worthwhile objective for any practice, no matter how big or small. Even solo practitioners can benefit from implementing process improvement programs, and you don’t need a Black Belt in anything to do it.

From the standpoint of an accounting practice, there are two things I consider important for making process improvements:

1. Systemize everything. In other words, create written checklists for the completion of all tasks.
2. Adopt a “continue and never-ending improvement” (CANI) mindset.

Longtime readers of my articles already know that I’m big on the use of checklists. I personally believe that everything you do in your business needs to have a checklist associated with it. Why are checklists so important?

Checklists ensure that everything that needs to get done, actually gets done, and it gets done the right way. Also, checklists give you a structured process that can be analyzed and altered for improvement. Without the system of checklists, there’s nothing to examine, nothing to improve.

Creating checklists is pretty simple. Just write down all the steps that you currently take to complete a task. Also, create a hierarchical series of checklists that apply timelines for those specific tasks to get done. For example, have a Weekly Marketing Checklist, listing the marketing you are committed to each week, and referencing the exact day of the week each marketing task gets done. Then, you’ll have a sub-checklist for accomplishing that particular marketing task.

Checklists are great because they give you some to analyze, and improve. Once you’ve written down how you’re already doing something, it often becomes readily apparent that there is some way to do it better. Not only that, but checklists allows you to easily guide how your staff completes tasks, and you can improve how that task is done over time. Input from the people doing the actual work, plus experimenting with ideas that you obtain through courses, seminars, books, and other resources allows you to tweak, hone, and always be improving how your firm functions.

Six Sigma, Total Quality Management, and other methodologies taught over the years create a cycle of CANI through a logical process that looks … Continue reading