Managing Your Firm's Profitability at the Client Level
Rosemarie A. Fisher, CPA
December 2006 - NJCPA Magazine

The professional service organizations and accounting firms manage their own profitability on a big picture, overall basis. The bottom line guides them in decision making for all areas of the firm. Many have specializations and look at them with an eye to cross selling the standardized services of tax and audit preparation.

Accounting firms look at growth percentages, utilization rates and total profits to determine the success and profitability of their practices. Few firms however, look at or manage profitability at the client level. If a firm is looking at profitability at the client level, it often does nothing about loss leaders for a variety of reasons. For example, some revenue covers the cost of salaries during slower times of year, and some clients are a good source of referral business.

How many times have you heard from a partner, “Yes, I know that we lose money on that job every year, but it’s during the slow time and it helps offset our overhead and keeps staff busy.” This is common in heavily loaded tax practices that need to pay salaried employees over the entire year, not just through the busy season.

Client Profitability Model
As your practice grows, you should implement a process that actively manages profitability at the client level, while making good business decisions regarding clients that do not fit the practice’s profitability goals. Developing a client profitability model will help you standardize and measure clients against a solid plan of profit growth for the entire practice.

To institute a client-based profitability model, calculate the practice’s overhead and how you will apply it to each client and job. Any non-billable time, such as support staff and administrative staff, needs to be calculated. All of your fixed costs, such as rent, utilities, computer support and depreciation, then need to be totaled to determine an overhead factor. You can apply overhead as a standardized rate based on labor hours, similar to the way a manufacturing company would apply overhead to its products’ pricing. Armed with this rate, you can determine a client’s profitability to the firm.

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