In our experience, most advisory practices don’t have an accurate picture of how much it costs them to actually deliver each element of their client service offer. And while trying to deter mine the exact cost of each service can be a difficult (and sometimes frustrating) exercise, it is no excuse for not undertaking the task.
The following process might help you calculate the cost of each of your primary services and to better understand the key drivers of bottom line profitability and enable you to make more informed business decisions.
In the breakout box, we have included a very simple worked example of producing a client e-newsletter. These calculations do not have to be 100 per cent perfect and audited to the second decimal point – estimates are fine to begin with.
1. DETERMINE THE STEPS TO DELIVER THE SERVICE
Don’t over-analyse. Simply document the major steps that need to be taken from the beginning of the process to its completion. A good start could be your procedures manual. Or better still perhaps, ask the staff person most involved with the service to do it – there’s a fair chance they’ll have a better handle on exactly what’s involved than you!
2. HOW LONG DOES IT TAKE TO IMPLE MENT?
How long does each step take? Be conservative here and try to round up to the nearest half hour. If you don’t know how long it will take, your best guess is good enough.
3. WHO DOES EACH STEP?
Identify who in your practice is responsible for completing each element itemised at step 1.
4. WHAT IS THE SALARY COST OF THE ROLE?
Again, let’s not overcomplicate things. Let us assume each team member works 40 hours per week for 48 weeks in the year – 1920 hours. Then simply divide their total yearly salary cost by 1920. As an example, let’s say you pay your administra tion assistant a total package of $40,000 per year. Their hourly salary cost would be $40,000 divided by 1920 = $20.83 per hour.
You will also need to decide on an appropriate hourly rate for yourself, but don’t include divi dends/distributions as they will be picked up later.
5. ADD ‘OVERHEAD’ COST
This figure is effectively the balance of your operational expenses after all salary costs are deducted. It includes expenses such as your rent, electricity, IT, marketing and general administra tion costs.
Again, let’s assume that your business is open for 40 hours a week, 50 weeks each year. If over head expenses (net of salaries) are $250,000 per year, the hourly “overhead” rate would be $250,000 divided by 2000 = $125.00 per hour.
6. ADD PROFIT MARGIN
An acceptable profit margin is important – this is, after all, the return for all your hard work. As a guide, our consolidated HealthCheck database indicates the average practice profitability is around 25 per cent. As the business owner, you will need to decide the figure with which you are comfortable.
7. CALCULATE THE COST TO DELIVER
This is simply:
Salary cost = the hourly salary rate from step 4 x the total hours from step 2
Overhead cost = the hourly overhead rate from step 5 x the total hours from step 2
Profit margin = the margin from step 6 x (the salary costs + overhead cost)
Total costs = Salary cost + Overhead cost + Profit Margin
8. ANALYSE THE RESULTS
Once all of these calculations have been made for your complete service offer, you will then know what it costs to service each client. An interesting test then is to look at the individual revenue each client generates – are they all profitable or do some of your clients subsidise others?