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Determining Profitability of an Engagement
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Here's a foolproof system for understanding the true profitability of every engagement. This tool helps identify opportunities to pursue, which to let go, and to track true profits. There are three simple steps:
1. Establish an hourly or daily billing rate for yourself and support staff. Then, estimate the fee for the engagement.
2. Calculate True Cost of the engagement
Cost of Time = Total hours applied to the engagement multiplied by Billing Rate(s)
Include hours spent on selling, preparation, customization, travel, and the presentation
Gather Unreimbursed Expenses
Include marketing materials, postage, bureau fees, etc.
True Cost = Cost of Time + Unreimbursed Expenses
3. Calculate Client Profitability
- Client Profitability = Fee minus Total Cost
- Client Profit Margin = Client Profitability divided by Fee
Client profitability is often different than expected. Depending on overhead (e.g., office space, insurance), client profit margins can be winners (above 45%), or losers (below 20%).
I've prepared an Excel Spreadsheet that automates this analysis. Download it here.