Overcome Profitability Challenges in Professional Services

Nick Roell

Oct 29, 2024

Profitability can be a difficult metric to measure in any industry, but owners of professional services businesses face an added challenge: underestimating the cost of uncompensated time.

Time as a Product

In professional services businesses, time is the product being sold. When extra work is done without payment, it can quickly reduce profitability. This often occurs due to:

Scope creep
Insufficient time spent on billable work
Underpricing services
Inefficient processes or lack of training

Unfortunately, this problem often gets overlooked in the fast pace of day-to-day operations. Busy professional services firms, such as IT providers or veterinary practices, may struggle to achieve the level of profitability they desire due to poor accounting practices that give them a distorted view of their financials. While sales may grow, profits can remain stagnant or even decline. For example, if your revenue increases from $10 million to $15 million but profits stay at $1M, you might be overly focused on sales growth and missing the fact that profit margins are shrinking. In this scenario, profit margin has decreased from 10% to 6.67%, indicating a significant decline in operational efficiency.

The High Cost of Uncompensated Time

Shrinking profit margins, however, should not go unexamined. When business slows or clients leave, a slim profit margin can disappear, putting the business at risk. This issue affects all industries, but it’s especially important for professionals like lawyers, doctors, counselors and consultants who are selling their time. Even when they choose to be generous with their time, they need accurate accounting to make informed business decisions.

Holistic accounting practices, aligned with the short and long-term financial goals of the business, ensure that business owners have timely and reliable financials that provide clear visibility into profitability by client, by service, by location, and by employee.

Keeping Profitability Metrics at Your Fingertips

When you have financial data and reporting you can trust to answer the right questions and illuminate the key performance metrics that drive your business, you elevate your decision-making and put your business on track for sustainable growth and profitability.

Reliable financial reporting provides the information you need to understand the underlying factors that impact the profitability of your business:

Which clients are consuming a disproportionate share of your time relative to profitability?
Which employees are generating profits, as opposed to sales?
What is the optimum staffing level for your business?
Are you targeting the right clients? Do you know who your most and least profitable clients are?
Is your profitability growing as fast as your revenues?
Do you have the right pricing structure?
Are you doing enough to leverage technology and innovation to drive efficiency?

Accounting Support for Growth-Minded Professional Service Businesses

At Kirsch CPA Group, we are committed to helping our professional services clients meet their business and personal financial goals. That’s why our accounting support is designed to provide timely, reliable, and holistic financial reporting that does more than show you where you are; it analyzes the trends and breaks down the contributing factors to show you how to get where you want to go.

Reach out to a member of our team to learn how we can help your service-based business become more profitable, with data-based strategies to ensure you’ve got the right sized-team, the right time management practices, and the right target clients to ensure profitable engagements.