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How do I measure client profitability in a services firm?
Client profitability is the fees earned from a client minus the cost of the time and expenses spent serving them, as a currency amount and as a percentage of fees. Cost of time uses a cost rate per hour for each person, not the billing rate.
Formula in words: (fees collected or billed minus direct staff cost of time minus direct expenses) divided by fees.
It matters because some clients take far more effort than their fees justify, while others carry the firm.
Commonly misread:
- Using billing rates for cost, which hides real margin.
- Ignoring time that was not recorded, or write-offs.
- Leaving out the cost of slow payment.
- Ignoring strategic value such as referrals, which can be noted separately.
Review regularly and use the result for repricing, scoping and, if needed, ending unprofitable relationships. This requires timesheets, billing and ledger data reconciled.
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