Service Businesses can do Better - How to add value

Aug 02, 2012

It’s something of a cliché that law firms have a tough time with billing and collections because lawyers see it as beneath them to actually bill their time. And why is it that owners of marketing agencies sometimes take more satisfaction in being creative, than in creating a more valuable business?

Most consulting type companies exist by selling talent and services to their clients, and are often started by talented professionals who want to focus on a specific niche. But running a service business often takes different talents, that are not always obvious to the business owner. To build a profitable, valuable business requires that an owner focus on Finding activities: client service, new customers, strategy. When an owner either ignores, or perhaps worse, becomes focused on Minding activities: banking issues, financial management, and collections; then the business will start to suffer. Fortunately there is abundant help available to support the business owner such as hiring a part-time CFO to help deal with some of these Minding activities.

Here are some ideas for improving the focus, value and profitability of your service business:
1. Keep your payroll to 50% of total revenues. This might give you a clue that billing rates should be at least double your wage rates, and preferably much more. Allowing professional payroll to exceed 50% of revenue will make it very difficult to target and achieve high net income.

2. Target a net income of 25%. If you have kept your payroll less than 50%, then you can now allow no more than 25% for overhead: rents, admin payroll, technology and office costs. Top performing service companies operate by these benchmarks and in consequence have the highest business value and the most market ready business.

3. Focus on Utilization – Do you religiously track employee hours and require minimum levels of client billing? Failing to keep staff utilization at a consistently high rate will eat into your margins quickly.

4. Increase your hourly rates. Frequent small increases are needed to keep up with costs. If you maintain your rates you will be doing more work for ever lower returns. Better to lose one or two clients than never increase your rates.

5. Focus your Business. Are you taking on all or any business? If so, it is likely you don’t have a specialty, and are providing mediocre service to a broad range of clients. It makes it harder to find and keep good staff, and will ultimately affect your business value. Buyers place a higher multiple on specialty and niche service companies, with skilled staff and a clear understanding of your sales machine.

These ideas may help you re-think how you operate your service business and what your long term goals need to be. You will want to exit gracefully with appropriate financial rewards, and the key to success is focusing on the business benchmarks that build appropriate value.

Call David Kirkup – Partner B2B CFO at 404 348 0326 or dkirkup@b2bcfo.com – for a discussion on how to bench mark your service business.

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