The accountancy business is usually profitable. A good portion of small and mid-sized CPA practices make a net margin of over 20%.
Yet, if you were to divide the profit of the CPA firm and calculate the net margin by the client, you’d see the truth – a small portion of the clients make up for the vast majority of the profit.
Moreover, some clients could have a margin of 50% and others would be in the red – say -15%.
This is why every CPA firm needs to establish the clients that are losing money for the company.
This will open up the option of different resource redistribution. Playing this right can enable healthier development and bigger profitability for the company.
Here are a few steps you can take to identify unprofitable clients who are reducing the growth of a CPA practice.
1. Keep track of work and time
Time is money. So, the first step is to identify where we are wasting it.
Time is the key resource of any CPA company.
Oftentimes, assessing how much time has been spent on a client will bring us to the wrong conclusion.
We can do this effectively by using a time tracking software solution.
Easy time tracking tools provide valuable insights into figuring out how long your accounting firm takes to perform service for the client.
Time tracking systems aren’t a popular tool among accountants like to use. However, we shouldn’t see It as a tool that monitors the accountants. Instead, it should be clear it is being used to track client profitability.
2. Keep track of costs related to client
No matter how much time we spend, the spending should be placed in the context of costs and income related to the client.
Let’s assume your accountants spend 50 hours a month on a client.
There is a difference between a team of juniors and a team of seniors and managers working for the client. They all have different pay rates.
This means that besides the time spent on the client, we should take a look at the cost rate of the staff engaged with the client.
Time x hourly rate = cost
This type of calculation can be complicated.
However, if you’re already using a time tracking tool, you usually have the option to assign a pay rate for each team member. The best option is to assign a total cost rate (pay rate + overhead rate) for each of them. This way, you can automatically get the cost for the client.
Namely, once the employees have recorded time for a client, the program itself will allocate their rates to that client.
A single click can start a report that shows the client’s cost.
3. Calculate the profit (loss) for each client
Once we have the cost per client, we are left with the easiest step – calculating the profit.
As the income from the client is a known category, subtracting the costs from it gives us the profit per client.
When we see that there are loss-generating clients, the question arises as to what to do with them.
How to manage unprofitable clients
Internal improvement
Consider if redistributing the costs would make sense. For example, if a senior employee works on a job that costs twice as much as a junior’s, would it make sense to let a junior fill in the tasks for an unprofitable client?
Observe your team’s productivity as well as time utilization. Was a rational number of working hours spent on the client’s tasks?
Cross-sell and up-sell possibilities
Firstly, you should define the strategic importance of a non-profitable client. If there is an indication that the client could advance to a higher fee that enables profit in the long term, you should consider investing in that client.
For example, if you can expand your portfolio to the client while knowing the costs, you can set the fee for the new services so the client is profitable on an aggregate level.
Fee increase proposal
An immediate proposal for a fee increase is another option. If the client is unprofitable for a certain time and you don’t see it changing anytime, try raising the price. Either way, it is better to lose a client and create room for new, more profitable, ones, than to work in the red with unprofitable clients.
Client Termination
If there is no opportunity to optimize profit through cross-selling, and you know the client wouldn’t accept the price increase, there is always the option of client termination.
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