{"id":54211,"date":"2018-04-16t05:00:00","date_gmt":"2018-04-16t09:00:00","guid":{"rendered":"https:\/\/48e130086c.nxcli.net\/?p=54211"},"modified":"2024-08-14t09:30:25","modified_gmt":"2024-08-14t13:30:25","slug":"gross-profit-professional-services-firm-opening-dialogue","status":"publish","type":"post","link":"\/\/www.g005e.com\/2018\/04\/16\/gross-profit-professional-services-firm-opening-dialogue\/","title":{"rendered":"gross profit in a professional services firm: opening a dialogue"},"content":{"rendered":"
<\/a>plus specific ways to improve in services, marketing, sales, delivery and support.<\/strong><\/p>\n by august j. aquila<\/i> accounting firms focus on top-line revenue or net profit. but are they focusing on what really matters?<\/p>\n more:<\/b> tomorrow\u2019s leader in 9 bullet points<\/a> | checklist: 18 essential steps to effective billing<\/a> | how to get partners to accept a new pricing philosophy<\/a> | 12 pricing factors beyond cost<\/a> | 13 questions about providing value<\/a> | how to shift from production to marketing orientation<\/a> profitable businesses involve more than just selling more products and services to increase revenues. there is an old joke in the retail business: a salesperson tells the manager that they are losing $1 on every shirt they sell. the manager says, \u201cdon\u2019t worry, we can make it up in volume.\u201d one reason could be the gross margin. a deeper understanding of gross profit margins should aid in choosing the services on which the firm owners need to focus. the current economic environment should cause even the most astute managing partner to examine the gross margins on their services.<\/p>\n accounting 101<\/strong><\/p>\n i think everyone would agree that if there is no profit, there is no firm. the most important unit of measure in a professional services firm, then, is profit. to keep it simple, we can say that profit is a factor of several variables \u2013 billing rates, hours billed, direct labor cost, sales, general and administrative expenses. think of it this way:<\/p>\n billing rates times hours billed = revenue<\/p>\n direct labor costs times hours = direct cost<\/p>\n revenue less direct cost = gross margin<\/p>\n gross margin less sales, general and administrative cost = profit<\/p>\n gross margin in a service firm<\/strong><\/p>\n unlike product companies, a professional services firm has labor for its key cost of goods sold.<\/p>\n each service has a different gross margin and unless you know the gross margin for the various services you offer, it is impossible to maximize your firm\u2019s profitability. ultimately, improving the firm\u2019s performance comes down to understanding and taking action to improve and maintain your gross margin level.<\/p>\n in professional services firms, gross margin can vary widely from service to service. at one time, accountants used to say that one-third of revenue went to employee compensation, one-third to overhead and one-third to profits. if that were the case, firms were looking to have a gross margin of 66.6 percent. the first thing you want to do is to establish a realistic gross margin target if your firm is going to stretch itself to grow. then, start evaluating the business functions that have impact on your gross margin.<\/p>\n in 1997, david maister in “managing the professional service firm” presented his profit per partner formula, which remains highly relevant today:<\/p>\n profit \/partner = profits\/fees \u00d7 fees\/hours \u00d7 hours\/staff \u00d7 staff\/partners<\/p>\n = (margin) \u00d7 (value) \u00d7\u00a0 (utilization) \u00d7 (leverage)<\/p>\n<\/blockquote>\n because many of the above variables can be manipulated, maister noted that firms \u201cshould hold each practice (or partner) accountable for a profit per partner target and let the practice (or partner) figure out the best mixture on margin, productivity and leverage necessary to achieve this goal.\u201d<\/p>\n as maister noted in 1997 and is still the case today, few firms use net profit per partner as their main method for regular reporting of practice economics.<\/p>\n improving gross margin<\/strong><\/p>\n analyzing your current gross margin should reveal areas for improvement. you may have identified new issues or ongoing ones, which never seem to go away. either way, you have to implement changes that will be sustainable and not overly cumbersome. where do you start?<\/p>\n the section below presents a number of ways to improve or maintain gross margin either directly or indirectly. some are quick fixes, while others will be more difficult to operationalize. select the ones that appear to meet your needs, prioritize the list and begin implementing them.<\/p>\n for most companies the importance of gross margin is well understood. the challenge is operationalizing all areas that impact it \u2013 making the time to review all sales opportunities and delivery projects, evaluating and enhancing internal processes, providing relevant education for sales and delivery, etc. these efforts can seem overwhelming. if you cannot do some of it because of time constraints or not having some of the knowledge, get help from a consultant.<\/p>\n managing your gross margin is that important. can you afford not to?<\/p>\n services<\/strong><\/p>\n impact on gm: having unique and value-added offerings enables you to charge more of a premium for your services. also, the more you sell of these services, the more efficient you become at delivery. both the increased revenue and controlled delivery costs will favorably impact your gross margin.<\/p>\n start by asking these questions:<\/p>\n marketing<\/strong><\/p>\n impact on gm: targeting the right the markets (i.e., geography, industry, companies, buyers, influencers, etc.) for your services is essential, followed by creating awareness and demand for these offerings. having prospective clients want your services will enable you to value-price your work for them.<\/p>\n start by asking these questions:<\/p>\n sales<\/strong><\/p>\n impact on gm: qualifying and pursing the right opportunities increases your probability of winning deals and enables your sales team to work more efficiently. these should result in shorter sales cycles, a better contracted backlog of business, and higher booked margin per project.<\/p>\n start by asking these questions:<\/p>\n service delivery<\/strong><\/p>\n impact on gm: having good project management and a delivery methodology and tools that are followed on a consistent basis should enhance project quality and efficiency, helping to control costs. resulting project margins should be on target; unplanned fee write-offs should be minimal, if any; and ultimately, client satisfaction should be high.<\/p>\n start by asking these questions:<\/p>\n support services<\/strong><\/p>\n impact on gm: internal business operations have an indirect, yet important influence on revenue and costs affecting gross margin. for example, untimely turnover of delivery personnel can create inefficiencies on projects resulting in delays and cost overruns, which will reduce gross margin and possibly impact client satisfaction.<\/p>\n start by asking these questions:<\/p>\n
\nprice it right<\/i><\/a><\/p>\n
\nexclusively for pro members. <\/span><\/strong>log in here<\/a> or 2022世界杯足球排名 today<\/a>.<\/span><\/p><\/blockquote>\n
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\neven though your firm may have a sizeable client base and predictable income streams, the firm may not be sustainable. how can this be?<\/p>\n\n
ways to improve gross profit<\/h2>\n
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