Customer profitability, the holy grail of business analysis?

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    Written by HarmonyPSA on 2014-02-03 Last updated 2018-06-27 - 2 minute read
 People we speak to frequently talk about the need to understand customer profitability. Getting this right on a reliable basis is not straightforward, it takes a little pre-planning, discipline and the right support from the control solution.

But before we go into the how, we should clarify the what.  Firstly, instead of profitability, we tend to talk about contribution.  Going back to the 80’s, you can find a wonderful exposé of cost accounting call the Peanut Rack (http://www.campos-stratis.com/archives/peanut.html).  This explains that once cost accountants get involved, nothing is ever simple.

The answer to the peanut rack conundrum was, and remains, contribution analysis.  What contribution does your customer (or project) make towards the net costs of doing business?  The key difference is the handling of overheads.  Far from business acquiring overheads, so the more the business, the more share of overheads, overheads are distributed across your primary delivery mechanism, your staff.

So, your customer contribution is now simple.  It is the revenue they bring in, less any direct cost of goods (purchases tied directly to their sales) and less the fully overhead-loaded cost of the time it takes you to support them.

Calculating the fully loaded cost of time deserves a blog post to itself, but at a high level, it is the direct cost of employment plus a share of the fixed costs, in proportion to the number of people delivering service.  Once you calculate this figure, as an average or on an individual basis, you have the starting point for automatic customer contribution analysis.

The discipline is then to ensure that everyone supporting your customers’ records customer time correctly, and assuming you also record your purchases and expenses on a customer specific basis, you are there.

Sounds simple?  Well, it is with HarmonyPSA which offers the ability to not only model back to back purchases at true cost, but automatically records the cost of time alongside the revenue each time booking earns. Combine this with inbuilt pivot capability and you have all the customer contribution tools you need.

For more information or to organise a free personalised demo get in touch with us today.

 

About the Author: Harmony Business Systems Ltd (HBS) is the company behind HarmonyPSA, the most complete cloud PSA software on the market. Developed with functionality to cater for even the most complex needs of MSPs, VARs, ISVs and Professional Services organisations, HarmonyPSA truly is the next generation of PSA systems. HBS is an independent company based in the UK. Follow HarmonyPSA on


Tags: Business, contribution analysis, control solution, cost of time, customer profitability, HarmonyPSA, peanut rack conundrum, profitability, General PSA, recording time

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