Here's a fascinating question for you- are all of your customers profitable for your business?
There was a survey done by a financial services business some years ago and what they concluded was that two hundred percent of their profits came from just twenty percent of their clients. Now what that means is the other eighty percent of their clients actually consumed a hundred percent of their profit. In other words their profit would have doubled if they fired eighty percent of their clients.
Now it might not be quite that extreme in your business but the question to ask is do you know what the numbers look like for your business. And so the Pareto principle probably applies, you may have heard of the Pareto principle, where eighty percent of your profit on average comes from twenty percent of your customers. Similarly eighty percent of your grief for your complaints or your challenges with receivables will come again from around about twenty percent of those customers. Many accounting firms or legal firms tend to find that clients for whom they invest a lot of hours will often yield very low average hourly rate. You see we tend to equate effort with profitability and it's often not the case at all. And what people often miss is the opportunity cost what could you do with the extra time that you're currently investing in a low margin client.
What if you took that time and redeployed it on a more profitable client your accountant can help you run these numbers for your business so that you can make some informed business decisions as to which clients are profitable and where you should be focusing your limited resources.
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