Profitability Per Project = A Made Up Metric

Hey 👋 - Brandon here.

Happy Saturday to 1,410 growth-minded accountants.

Here’s one growth tip for you and your firm.

Today’s issue takes less than 5 minutes to read.

Today, I’m going to tell you why tracking profitability per project adds no value to your firm.

And I’ll show you how we track success otherwise.

As with all of my takes, this opinion has been developed from my personal experience growing my firm to $8M+ in annual revenue.

Let’s start with my recent LinkedIn post that riled people up.

Profitability per project is a fake metric is because the cost of the marginal hour an employee works decreases as the employee works more hours.

Our costs related to labor are the annual salaries we pay employees.

If an employee earns $100k per year and works 2,000 hours, their hourly cost to the firm is $50. To develop a cost per project, you multiply the $50 by the number of hours an employee spent on a project.

But what happens when an employee works an extra, and unexpected, 100 hours in December?

Technically our cost per hour is now $47.60 ($100k / 2100 hours).

Do all prior projects that were already completed become more profitable?

Or do you celebrate a 100% margin on the extra 100 hours of work?

My goal is to simplify business.

Unfortunately, many accountants employ such theatrics in their firms.

Profitability per project feels good but adds no value

Accountants can’t let go of tracking profitability per project because we love designing complex ways to allocate costs across a business.

We also enjoy the mental sparring with other leaders in the firm about whose projects should be allocated labor costs…

We think profitability per project is an indicator as to whether the firm should keep the client or how effective our people are.

But neither are true.

I experienced the above until I decided to ignore this level of detail and focus on results such as:

• Revenue (and profit) per team and business unit

• Deliverable quality

• Client satisfaction

When you build metrics and ongoing data analysis around these three areas, you don’t need time tracking or a subjective metric like profitability per project.

Here’s how:

Step 1: Track revenue per team

Tracking revenue per team is simple and you probably already do it.

A team could be one person - a sole producer who handles all of the project work completely on their own.

Or it could be a tax team made up of associates, seniors, and managers.

The reason I focus on “team” rather than “employee” is to avoid getting too granular when a team effort is truly needed to deliver the project (like a tax return).

The beautiful thing about tracking revenue per team is you can also track profitability per team.

Each team has annual costs (labor, software, licensing, etc) that can easily be assigned and tracked.

Comparing teams against each other will be an eye-opening exercise.

Some teams will be crushing it. Others will be struggling. Your job as a leader is to find out why a variance exists and to eliminate it going forward.

Step 2: Monitor deliverable quality

I’ll admit, this is hard to do.

It’s also subjective - people have varying definitions of “quality” work.

Regardless, you need systems and controls to ensure high quality work is being delivered to clients.

Such systems may consist of internal quality feedback surveys, review points, and even client satisfaction scores.

When poor quality is identified, it should be discussed in the employee’s weekly 1-1. That 1-1 will help you assess what type of problem you have (pricing, client organization, employee capability, etc).

Step 3: Implement a client satisfaction system

If your clients are unhappy, profitability will trend downward.

They won’t accept price increases and client churn is expensive to replace. The most profitable clients are those who buy all the services you have to offer year, after year, after year.

We measure client happiness with an NPS survey.

It has one question:

On a scale of 1-10, with 10 being the highest, how likely are you to refer us to a friend or family member.

It’s effective because you wouldn’t refer a shoddy product/service to a dear friend or family member.

Every single client gets NPS requests throughout the year as we deliver to them.

This enables us to track NPS per team and service line. It also sets us up for future performance goals (i.e. “improve NPS from X to Y”).

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If you implement systems to track data around these three metrics, you’ll start focusing on results rather than inputs.

And you’ll arrive at the same conclusion I did:

Profitability per project is a made up metric that adds no value to your firm.

That's all for this Saturday. See you next week.

Whenever you're ready, here's how I can help you.

→ Work with me 1:1 to grow your firm (now accepting waitlist coaching applications)

See you again next week.

Cheers,

Brandon

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