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Evaluate Your Profitability By Client
We generally know who are biggest customers are and which customers pay us the most money. It is much more difficult, however, to know who our most profitable customers are. The end of the year is a good time to evaluate your customers and figure out which ones have earned you the most profit during the year. Because it is often difficult to break costs down on a customer-by-customer basis, using your financial data to determine which customers were the most profitable might be difficult or even futile. All the same, the financial data is the place to start.
QuickBooks (and most other accounting software) allows you to assign costs to customers and even to specific customer jobs. If you are doing this, review the resulting data first. If not, consider whether you should start doing it so you will have better data next year. Another thing to do is to ask your employees. Consider putting together a simple survey of general questions about how they spent their time, whether or not some customers require more time than others, if so, which customers and types of customers take the most and least time, etc. This will help you ascertain which customers took the most time and caused the most headaches and also which took the least time and were the most pleasurable to work with. Since employees are a major expense, this will also help you figure out which customers generated the most profit.
Next, look at your top five expense accounts and think about how they relate to your products and services and whether or not some customers drive more of these expenses than others. Finally, think about the costs associated with acquiring customers. Do certain types of customers cost more to acquire than others? If so, does the business you are getting from these customers justify the added expense? A thorough understanding of how much it costs to acquire different types of customers is certainly a part of measuring the real lifetime profit from a specific customer.
Going through these exercises is likely to result in some useful information. Equally important, it should give you some great ideas as to things you should measure in the coming year. If you do this annually, you will eventually know exactly which customers you want and which you don't.
