In my last post, I talked about doing some basic profit analysis to answer two big questions:
- Which types of jobs are most profitable?
- Which customers are most profitable?
When you have this information, you can make much smarter decisions about how much to charge, and what kinds of new business opportunities to pursue. You may even decide to “fire” a customer.
(A brief digression: In any service business, there are three factors smart business owners use to evaluate customers: profitability, growth potential, and hassle factor. Personally, if I suspect a client is going to be difficult to deal with, I automatically raise my bid by 15 percent. (If I’m going to be hassled, I’m going to get paid for it!)
There is one more analysis you should do, and that is profitability per employee. To do this, multiply each employee’s total hours for a 3 or 6 month period by his or her burdened cost. (The total hours here would be all the hours for which you paid an employee, whether they worked or not.) Then, multiply that employee’s total hours actually worked by the rate you charge. In this way you can rank the profitability of each employee.
In this example, the employee with the lowest percentage of hours worked actually made the biggest contribution to profit.
So far, I’ve glossed over a few very important questions about the mechanics of tracking hours. I’ll cover that issue in a future post. For now, I’d like to concentrate on a more fundamental problem, which is getting employees to log their hours work a) on time and b) accurately. Typically, the more you’re paying someone per hour, the harder it will be to get them to comply with both (a) and (b).
To ensure on time submission of hours, I’ve never seen a practice that beat the one at the first ad agency where I worked. On the 15th and the 30th of the month, you walked over to the accounting department and handed the clerk your time sheet. When you did that, he handed you your check. Even in these days of electronic billing and direct deposit, you can arrange some variation of this approach, and I guarantee that it will work.
The problem with accuracy is a little trickier, particularly in the case of employees (vs. contractors you’ve hired.) Employees are motivated to bill as many hours as possible in the month, and some of them, it’s sad to say, may add a couple hours to a job here and there to make sure it looks like they’re busy. For this reason, I recommend sharing the number of estimated hours you budget for any job with the employees who are going to do it, and making it clear that you’ll evaluate them based on their ability to stay within budget. This works even better if you let them play some role in estimating their hours.
In the last few posts, I’m well aware that I’m suggesting you collect a lot of numbers and do a lot of math. In my next post, I’ll suggest ways to get that accomplished without wearing yourself out.