How profitable are your clients?

Posted April 28, 2015

As a small business, there is always a temptation to accept any client who contacts you. In the early days, taking on every client could be a good way to build up your business, but you must be able to measurably ensure that each new client you take on does not cost you more than the revenue you generate from them.

The importance of time and resource tracking

The most valuable asset your business owns is time, particularly for small businesses or sole traders billing on a per-project basis, so tracking how time is spent is an important task. Using the time logging features built into accounts software like Xero you will be able to see:

The amount of time spent on each project.
The amount of time spent on each client.
The invoiced amount for each project.

Using this information you should be able to calculate a basic hourly rate for each client. By comparing this actual hourly income against your per-hour running costs, you can see which projects are failing to cover the basic profitable rate your business needs to stay afloat.

You can then decide which option is needed to remedy the situation:

Charge more per project / change to charging the client by hours spent. This can be difficult to enact when the market is competitive and clients have budgets.
If you can do so affordably / within the resources you have, delegate work in order to complete work faster.
Cut the waste: it’s hard to track wasted / waiting time in projects, but be pro-active in offering easy methods (from phone or Skype to Google Hangout and similar ‘meeting’ software) to set efficient, scheduled meetings with clients to get all the information you need for projects.

Where you find a particular client is consistently failing to make the required profitable rate, you will need to take the difficult decision of whether you can afford to keep doing business with them. Remember that your ‘time is money’ so you must be careful to prioritise the service you continue to provide for clients with this consideration in mind.