Every small business has experienced the client with a difficult account. Each week they bring a new last-minute request that was “due yesterday,” and like most business owners, you do it. After all, they have been a client for a while. There is also the client who you diligently work for each month who routinely complains that the bill is too high. They are not happy, nor are you. Instances like these also affect your profit margins. What do you do?
Understand Your Profit Margins
In a product-oriented business, profit margins are often largely focused on tangible goods and materials that are easily quantifiable. However, if you are in a service-based business, understanding profit margins can be a bit trickier.
For services, determining profit margins requires looking into more intangible factors to figure out whether your business is really getting a good return on investment for its efforts.
What Time and Resources Are Allocated to the Service?
Make sure you can adequately track the time involved in servicing clients. There are several software programs that track time by project. If you know exactly how much time each service takes, it is much easier to determine the cost of a project.
Employees
All employees are not created equally. The legal assistant who has been with your company for 10 years commands a higher rate than the receptionist who came onboard a few months ago. Factor in the differences in hourly rates when the service requires the touch of a senior employee compared to a more generalized employee. Determining an average hourly rate when figuring out this overhead cost will help keep comparisons as close to reality as possible.
Direct and Indirect Costs
Unless you’re looking only for your gross profit margin numbers, the hourly cost of your employees isn't the only cost to deduct from your profit margin. Make sure to include your indirect costs as well. Overhead costs such as training, benefits, rent, utilities, technology, etc. all impact your profit margin. Look at your chart of accounts to determine which expense categories are applicable to the profit margins of the services you offer.
Marketing and Audministration Costs
Today's business world is a competitive arena that requires plenty of marketing effort to succeed. These costs continue to affect the profit margins on your services, as well as administrative costs such as getting project specs, invoicing, and billing the clients. Every factor that works into the overall cost of the product you offer needs to be considered.
Look at Your Data From Different Angles
You may have a good grasp of how much it costs to gain a new client and how much it costs to keep them. But do you know how much revenue each client represents? Some clients may become excellent referrers, bringing you new clients with very little additional expense on your part. These factors should be assessed in an ongoing review of the immediate and long-term costs of a client. You may find focusing on referral programs and client services significantly improve your service profit margins.
What Is a Good Profit Margin?
Each industry varies; however, generally a 10% profit margin is considered average, a 20% margin is considered high (or good), and a 5% margin is low.
Final Thoughts
If you have a client who refers little business, requires a lot of employee time, and is typically cranky about your bills, it may be a good time for that client to find a service that better meets their needs. As unpleasant as that may seem, it allows you to focus on clients that have higher profit margins and are thrilled with the service that you provide.
Contact us at kathy@budgetease.biz to see how we can help you analyze your profit margins or provide our bookkeeping expertise.
