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=”https://www.bigtime.net”>Big Time</a> and <a href=”https://www.ebillity.com”>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.

Need assistance with accounting services? We’re here to help you. Contact us today!