Accountants and bookkeepers are in the business of adding value for their clients.
But how do you know how much value clients are adding for you? The goal of cloud accounting is to increase efficiency, and that means efficient selection of clients too.
It can be tough to admit, but not all prospective, or current, clients are good clients for your firm. That doesnβt just mean that theyβre not going to bring in much revenue β some might actually lose you money.
THE TRICK FOR MORE PROFITABLE CLOUD ACCOUNTING
A good way to sort your client list is via a Pareto analysis.
The Pareto principle illustrates the lack of symmetry that often appears between work put in and results achieved. In essence, it generally finds that 80% of results usually come from 20% of your efforts.
A Pareto analysis will tell you what percentage of your cloud accounting customers contribute to 80% of your revenue. You can then do a separate analysis of the percentage that contributes to 80% of your gross profit.
If you do a thorough analysis of your client list you will inevitably find that around 10-30% is unprofitable for your firm.
A SIMPLE ANALYSIS
- Export your client list with respect to revenue, gross profit, cost and your average hourly charge rate.
- Sort away until your heartβs content!
Here is an example client list and hypothetical revenue structure for Accounting Firm X.
Looking at the numbers above itβs quite clear to see that the distribution of revenue and hours billed were not much different from one another, yet, there are some flaws with using that to predict the relative βvalueβ of each client to the firm.
In actuality, total revenue says nothing about profitability, and hours billed says nothing about lost opportunity costs.
To use 80/20 thinking weβd want to know two other pieces of information:
- How many total hours did the firm work on each client that it did not bill?
- What was each clientβs share of the firmβs cost?
Once you work that out, youβre off to the races. From this subsequent analysis, your firm can now truly identify who their most important, and profitable, clients are.
Now itβs time to run this analysis on your own client list to see what insights you can pull from the information when looking at it through Paretoβs eyes.
You can also do a similar analysis on your product/service offerings to see what those numbers give light to.
THE PARETO PRINCIPLE IN PRACTICE
See a full Pareto analysis in practice, and find out how you can classify clients with our magic quadrant in our new Ebook βCreating Value: How to Find Your Most Profitable Clientsβ.