Case Study: Client’s professional services business is breaking even but isn’t providing adequate net income

1. “The biggest outlier is revenue per employee. A composite of the two industries puts that benchmark at $100K, whereas yours, even if we just count the 5 (redacted) employees, is $38K.
2. You should think about budgeting more for advertising to find some new clients. Even at the lower of the two industries, you can afford about .5%, or just under $1000/year, where you have been spending between $100 and $370. If we look at the (redacted) industry, it’s 8X as much; that equates to approximately $7K per year.
3. When we were talking, my instincts were screaming that there is a gross profit margin problem, and the numbers bear it out… If you charge $55 per hour and pay out $25, that sounds profitable on paper. However, in your industry, the typical billable hour efficiency is 66% or so – in short, you can’t bill for about a third of your employees’ time. That brings the effective revenue per hour down to less than $37 ($55 X .66). On the other end, if you pay an employee $25 an hour, they really cost you closer to $30 after payroll taxes and benefits. That leaves a gross profit per hour of just $7, no where near enough to pay the other expenses – or to provide a profit for you.

We’ll have an in-depth conversation at your convenience, but there are only a couple of levers to pull in most businesses: price, volume and expenses. With just a few small exceptions, I don’t see anything alarming in your expenses. Changing volume won’t do much, given that effective $7 per hour gross profit. We need to change prices. If your current customers won’t budge, we’ll need to find new ones. Luckily, there is money you can budget toward that, and of course, you needn’t cast a wide net, such as for a consumer product nationwide – our Reference USA database is a good place to start. We can discuss a relationship sales campaign to reach them. And then another conversation with SHRM may center around productivity – as you should be able to do nearly $200K in sales with two employees, per the benchmark data. Yes, a big component of the disconnect is pricing, but clearly there’s a productivity gap.

We started to discuss KPIs (Key Performance Indicators) during our call. There are a number of them, of course – see: https://www.scoro.com/blog/key-performance-indicators-examples/ if you want to be overwhelmed! For the immediate future, I’d be tracking:

• Revenue per employee
• Billable hour efficiency
• Project revenue vs. quote

We always try to keep the number of KPIs manageable. Think about a car’s dashboard: speed, gas, engine temperature.”