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 doesn’t just mean that they’re not going to bring in much revenue – 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 heart’s content!
Here is an example client list and hypothetical revenue structure for Accounting Firm X.
Looking at the numbers above it’s 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 ‘value’ 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 we’d 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 client’s share of the firm’s cost?
Once you work that out, you’re off to the races. From this subsequent analysis, your firm can now truly identify who their most important, and profitable, clients are.
Now it’s 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 Pareto’s 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 “Creating Value: How to Find Your Most Profitable Clients”.
Download the Ebook to find out:
- How to conduct a Pareto analysis on your own clients and services
- The 4 client types you need to know to grow profit
- Which clients are losing you money