I’m struggling to understand how profitable our services are. Our staff performs all the work, and they work on different projects and different clients, with a lot of overlap. My concern is that I may be losing money on some services or clients.
There are a number of ways to measure profitability. One of the best tools is the accounting system. Time and motion studies may be useful. Tracking a specific project and a specific client on a sampling basis may give you an indication of costs. Whatever you do, it will be important to get people involved in separating the time they spend by project, by client, from down time and internal assignments.
We have spent over 100 years measuring profitability of machines and equipment in a manufacturing environment. 100 years ago our economy was predominantly manufacturing. Now, our economy is now over 70% service based.
It is essential for service based organizations to get off the gerbil wheel of working hard and making less than they wanted for all of their hard work. Unfortunately, little has been done to standardize and evaluate profits in a service based work environment. However it is possible for individual companies to tackle the problem, using basic tools available to every small business.
The accounting system can be a business owner’s greatest asset when trying to figure out profits per service offered. The accounting system has to be set up to record and report information accurately, so that analysis can take place. Create income and cost of goods sold buckets, or accounts, according to the types of services you plan to measure.
Work with your accounting personnel, as well as anyone else who inputs data into the accounting system. Explain to them the importance of identifying and segregating revenue and costs by service. Ask them to carefully record information into the right buckets.
Review the results. For each service bucket, Delete cost of goods sold from revenue to establish gross profit by service. Divide gross profit by revenue for each bucket, to obtain a gross profit % per service.
In the manufacturing world, Frederick Taylor was the father of time and motion studies. His goal was to get an accurate picture of how long it should take to manufacture a particular product.
He actually took pictures and notes as people did their work. He was looking to understand the effort and cost of production, as well as to identify opportunities to streamline.
It is possible to do the same with service based activities. Explain to people that you are looking to understand what goes into producing the best services, including standardizing and streamlining the actions taken. Watch how people conduct each stage of the work needed to provide the service.
Make notes. Take pictures. Set up work groups to review and discuss. Ask the people who are doing the work to make recommendations. Set the goal to come up with a standard amount of labor – cost/ person and hours/person – that can be used as a benchmark going forward.
Make sure that you get all employees involved in the project. Explain to employees that the company is looking to increase efficiency so that it can continue to grow profitably, ensuring everyone will have jobs in the future. Tell people it is important to have a standard set of costs, so the company knows how to price the services it sells, to insure profits, and to know if and when there’s a problem.
Ask people to keep track of what work they do. Give them a way to track the time they spend doing specific actions. Find the balance between tracking too few minutes and losing track of hours. Generally, tracking activities in 30 minute increments is a good start. As people build skill at tracking, tighten it up to 15 minute increments.
Keep reminding everyone why you’re doing this. It’s a competitive landscape. The company that best manages and insures profits, finding the right balance between optimal productivity and accurate pricing, is likely to win the day.
