How to Avoid the #1 Financial Pitfall Professional Service Firms Make

Profitability is the chief goal for every firm. It should be the driving force behind key decisions. Yet firms often fly blind because they don’t fully understand the financial components of their bottom line – the #1 financial pitfall of professional service firms.

Running a P&L is a good start, but it doesn’t glean much information on the underlying drivers of profit.  Are the firm’s specific services profitable? Is the firm losing money on particular clients? Are employees working efficiently? Slicing and dicing the firm’s profit and loss this way can be enlightening. Having this information can lead to more timely and informed financial and operational decisions.

In this three-part blog series we’ll take a look at these different profit components – staff, services and clients. This first installment will focus on staff.

Tracking Staff Time

What professional service firms really sell is their staff’s expertise, knowledge and skill.  And the delivery of that expertise, knowledge and skill is achieved through the increments of time staff spend on specific activities for specific clients.  This in turn impacts the profitability of the firm’s services, and even the profitability of its clients.

Do you know how much time each staff member spends working on specific identifiable activities? Do you know how much time they spend on each particular client? These are important questions to have answers to for each staff member.

Setting Expectations

Tracking time for each employee is your launching point. Doing so allows you to set expectations (i.e. standards) on how long activities should take.

For example, you may have a gut feeling that an activity should take an hour. Yet after reviewing staff time reports you find that on average, the activity consistently takes 90 minutes. That’s 50% longer than you expected, which equates to 50% more staff cost for that activity. More staff costs translate to higher overall cost for the project. This surprise revelation may mean you have to dig deeper to understand what is really happening.

Was your gut feeling just unrealistic? Maybe. But the firm may also have an efficiency problem. Processes currently in place may need improving so that staff members have the tools needed to be more productive.

Measuring Up

Once the standards are set you can begin to see how each staff member’s time compares to the standard, and also to each other.

For example, you may find that two different staff members who have done the same activity for the same client spent much different amounts of time. Now you dig deeper.  Perhaps the slower employee needs more training, or maybe the faster employee is more adept at finding the easiest and fastest way to achieve the same result. In other words, they are more efficient.

Inefficiencies can arise for the same employee, but with different clients. For instance, you may see that a staff member always takes longer to do a certain activity for one client than he or she does for another client. Same task, but for different clients.

A proactive approach is to have a discussion with the staff member. He or she may reveal that one client always promptly provides the information requested, while the other client consistently provides incomplete information. The staffer then requires extra time digging for needed material to complete the work. Armed with this information, you can then decide a course of action – increase your fee, have a discussion with the client, or do nothing at all.

Billing Hourly vs. Flat Fee

Firms who bill clients a flat fee may think time tracking doesn’t make sense for them. After all, they aren’t billing by the hour, so what’s the point? On the contrary, it’s equally important for these firms to track staff time.

When billing by the hour, more hours equals higher staff cost, but also a higher fee. Thus, the profit margin remains relatively the same (though more hours may indicate an efficiency problem, as discussed earlier).

However, when billing a flat fee, the more hours the lower the profit margin on that client and that service, because the client’s fee doesn’t change. The extra staff cost is silently eating into your per-client and per-service profit margins, which is why tracking time is also very important for firms who bill a flat fee.

Toss That Paper

Tracking staff time doesn’t have to be a headache, and once in place it becomes second nature for everyone. And forget about manual tracking with paper time sheets and spreadsheets. Today’s technology makes time tracking easy, with cloud based apps, such as <a href=””>Big Time</a> and <a href=””>Ebility</a>. These apps work on both a desktop computer and mobile device, integrate with QuickBooks and facilitate calculating costs by employee, customer and service.

As discussed above, detailed time tracking by staff member – further broken down by activity and client – will help management move forward in the right direction.

As discussed above, detailed time tracking by staff member, further broken down by activity and client, will help management begin to understand where inefficiencies lie, when additional training may be needed, and even when it may be time to let an unproductive staff member go. It is also a first step toward determining how profitable the firm’s services and clients are.  Check out our next two installments to learn more about these two approaches.

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Get the Ball Rolling: The Perks of a Rolling Forecast

Creating a budget is an essential piece of any company’s business plan. Or is it? In today’s fast-paced world, companies need to adjust and pivot as desired to not just survive, but thrive. Traditional budgeting is just not cutting it anymore. Many companies have embraced this philosophy and have added a rolling forecast in tandem with a yearly budget or replaced the budget completely.

A rolling forecast is an ongoing plan instead of a fixed budget. At first glance, it may seem more laborious to continue to update finances continuously, however, that is inaccurate. Instead, it creates a dynamic strategy that keeps up with your company’s needs. It allots more time to focus on business demands, grants faster adjustment time and builds increased accuracy.


Budgets serve their purpose. It’s important to set goals for the company and take the financial steps to get there. However, getting these figures situated is easier said than done. It’s common for department heads to turn in their budget worksheets, only for the finance department to have to wade through inflated spending projections or low-balled revenue projections.

It could take several months before a realistic budget is in place. And then a few months after that, it’s time to start the process all over again. This leaves little room to learn from the previous year and look for ways to improve for the future.

A rolling forecast sidesteps these issues. With this type of policy, business forecasting is the company’s primary plan, instead of a budget. It is a projection of the future that is regularly visited and changed throughout the year to adapt to current conditions.


Companies need to have the ability to adapt to current economic conditions. Whether it’s being proactive when a new competitor enters the market or weathering a tough sales period. As opposed to a traditional budget, a rolling forecast is not a fixed target. It has the ability to ebb and flow, just like your business does.

For instance, if your business is dependent on the seasons and winter is warmer than usual, when is it better to adapt: a month later or a year later? Having more options, sooner, allows you to be more proactive in your business.


Because of its ability to save time and be more agile, your business goals and objectives can be met more accurately. The efficiency of your business forecasting changes the game because it’s consistently changed. It’s no longer just something you dust off from time to time, but instead, it evolves with your business, in real time.

Soulsby Accounting offers the unique blend of CPA-level expertise with bookkeeping and other accounting services. Learn more about how outsourcing accounting services can work for you.

Answered: Your Burning Questions About Cloud Accounting

If you want more control over your company’s financial information, cloud accounting is a great choice. Not only does it increase the security of your financial data, it offers the flexibility and convenience that you need when you’re on-the-go. It gives you the freedom to focus on what’s important – running your business – while providing all the information you need to monitor and make important decisions about the financial health of your company.

Before jumping on the bandwagon, take time to learn what cloud accounting is, what the benefits are and why you can rest assured that your financial data is safe and secure.

What is Cloud Accounting?

To understand cloud accounting, you need to know what the cloud is. Much like our system of roads and highways connect cities, “the cloud” is an infrastructure of connected computers all over the world. The network (a.k.a. the Internet) acts as a highway, allowing your computer to run software applications, as well as save and access files, stored on computers in giant data centers across the globe. And your device – whether it’s a laptop, tablet or smartphone – acts as a dummy terminal that connects you to the network that allows you to access cloud-based applications and files.

Just like you may save files on your personal computer or a company network, you can save them in the cloud. And just like you can purchase software for your computer, you can buy programs that run in the cloud. The concept is the same, but since the files are located elsewhere, they don’t bog down your devices. There are plenty of other benefits too.

It’s also important to know that unlike owning software or equipment that you buy in a store, you lease cloud-based applications and storage. So when you pay for cloud-based applications, you are purchasing access, not ownership.

What Are the Benefits of Cloud Accounting?

Accessibility and convenience are the most common benefits associated with cloud accounting. Unlike a traditional setup where the software and data files are maintained on your office server, a cloud accounting solution allows you to access your financial data anytime, anywhere – from your laptop, tablet or smartphone, and whether you have a MAC or a PC.

That means if you’re on a business trip, you can snap a photo of a receipt for your expense report and submit it immediately; you don’t have to drag receipts back to the office and staple them to a report or find a scanner to convert them into a digital file. By allowing you to submit information on the spot, cloud accounting software makes it fast and easy to submit financial documentation, while maintaining the “paper trail.”

If also means if you’re in an important meeting and need to confirm data, you can. And if you wake up in the middle of the night worried about a transaction, you don’t need to get out of bed to check on it.

Leveraging cloud accounting puts less stress on your IT team too. There’s no need to manage software and hardware upgrade; software and equipment in the cloud is updated continuously. And because the workload is spread across a network of powerful computers, cloud-based accounting applications operate more efficiently and are more dependable than individual computers and office networks.

Even better, when you work with a cloud accounting company like Soulsby, you no longer need to recruit, manage or train internal accounting staff, in turn reducing.

Is My Data Secure When I Use Cloud Accounting?

Yes, and for two great reasons!
First, storing your data in the cloud protects you against common accidents that can destroy years of information. When you store your company’s financial data on the hard drive of an individual computer, you risk losing it forever if the computer breaks. Dropping a laptop, spilling coffee or other drinks on your equipment and electrical power surges, all common mishaps in an office environment, put you at risk for losing your company’s accounting information. The computer could also be stolen or lost.

The same is true even if you store your accounting information on the server for your company’s network. Power surges, failed equipment and fires, as well as floods and other natural disasters put you at risk.

When your accounting data is stored in the cloud, it’s in a secure facility with safeguards in place to prevent these types of common accidents. There’s also redundancy, so that if equipment fails for any reason, there’s a complete backup – so you’ll always be able to access your financial information.

Second, IT security technology has improved significantly. Cloud companies work hard to set up data encryption software, administrative controls, anti-virus detection software and hold security audits to ensure your financial data is secure.

Have any more questions? We’d love to answer them. Learn more about cloud accounting and what we can do for you.