Do you own or manage a business, and desire to improve profitability?
Well, you should be conscious of making sure that while you are increasing revenue, you are not decreasing the amount of money you are taking in while working with a client.
I have seen businesses grow over 50% in revenue but lose money; unless they were a not-for-profit, and I’m sure your company does not intend to lose money either. If you are a service-oriented business that relies on your people to meet your customer needs, you should regularly do Client/Job profitability analysis to keep from losing your hard-earned revenue.
JB Brokaw, President of January Digital, says the following about Client Profitability Analysis that I have helped them develop and analyze.
“It helps us look at true utilization vs. just account assignment. It also lets us look at utilization vs. contracted fees, which enables us to understand the work we are taking on for a given fee. If time is too high for low-revenue clients, we question the scope of work or assess if we are doing less important work that is taking up valuable time.”
Cutting down on work that takes up time and provides minimum value is a great way to improve what your company can gain from a client that seems low-revenue. But how do you improve how much time you spend on a client? Profitability Analysis. Below are four ways that Client Profitability Analysis can help you start making more money and improve cash flow.
One challenge in staffing for client work is determining how many people to assign to a client. In some cases, the revenue is not large, and this may take a fraction of someone’s time. In other cases, you may need to staff with a team. How do you know the ideal staff for the work and revenue?
In the Marketing Agency industry, we look at keeping the Gross Margin (Revenue Less Direct Personnel Expenses) greater than 60%. This margin varies based on the size and scale of the business and the overhead costs. We also look at revenue per person per month, which is best if it is higher than $18,000.
You may need to spend more time with new clients as they ramp up, which is normal. By doing at least quarterly analysis of client profitability, you can ensure you are moving in the right direction with staffing.
Everybody feels overworked, so there is a tendency to keep solving problems with more people. By having more objective metrics to review, it will be easier to approve or decline staffing requests and take the emotion out of it.
As your business grows, you will start to have more managers and directors over accounts. You need to find a way to help them understand when they can hire more employees. Client Profitability Analysis is a scoreboard for them to know that once revenue or margins get to a certain point, they can hire another person if necessary. Also, if the margin or client revenue is dropping, the client might be overstaffed.
Regularly, it could be best to move personnel to and from different teams if needed. It can be frustrating to those leading a team to work hard but not get additional help and not know why. It is easy for emotions and politics to get in the way.
Objective Client Profitability analysis can help cool tempers and level the playing field so that you can keep both employees and clients happy.
The Right Pricing
How do you appropriately price new work if you don’t know how much you are currently making on client engagements or jobs?
We all want to win new business and are willing to negotiate fees down. When we are small, we take on any business that pays us. Is that a good strategy? Of course not. As we do client profitability analysis, we learn so much about how we service our clients. Some companies are more hands-on and require a higher fee. Other businesses might automate more processes and have less individual customer interaction. If you can build an excellent service that automates more and provides what the customer needs, then you can lower the fee.
Client Profitability analysis can help you come up with a different pricing structure for various services and clients. You might also find that you should not take on businesses of a certain size as this does not fit your model and decreases your business’s productivity.
All businesses want to be more productive. Sometimes we feel that we are productive, but the numbers are not making sense. One of the first things to do when a client is unprofitable is to look at efficiencies. Can you delegate tasks to lower-paid personnel? Are there systems that will help to automate? Your team may be doing tasks that are not important or necessary anymore.
Take a look at the time and energy it takes to do something. Make sure you and your team take time out of the week not just to do the work but find ways to do your work faster, more accurately, and with more value.
How to Get Started?
Client Probability Analysis is the first step to improving how you work with clients so that you are increasing revenue. While you may not have good systems in place to track client profitability right now, don’t let that keep you from getting started. At Bender CFO Services, we can utilize an employee survey, payroll, and the accounting system to provide the analysis that we suggest. As your business grows, client profitability analysis will help you with staffing, client pricing, employee communication, and productivity.