Focus on Profitability Instead of Growth

Source:  Accounting Today

August Aquila, writing in Accounting Today, notes that it used to be relatively easy to acquire new staff. That is no longer true and is not likely to change, hence the need to devote resources only to profitable clients.

Firms know the profitability of clients in terms of gross margin, but don’t account very well for the costs of marketing, administration, and service—costs that are not incorporated into the gross profit calculation.

Aquila advises firms to rank clients according to real profitability, and set profit criteria for new and current clients.

Consider the case of a client that provides the firm with a relatively good gross margin, but demands immediate service frequently and pays its bills slowly. Compare this client with a less profitable client (in terms of gross margin) that schedules work well in advance and pays promptly. The real profit on the latter may be more than the former.

Firms can no longer afford to retain clients that do not meet their profitability standards. When firms create more intimate and broad based involvement with their profitable clients, they will be unable to serve the less profitable ones.

For the complete article, see Accounting Today, January 24, 2005, or go to

http://www.webcpa.com/article.cfm?articleid=10424&;pg=acctoday