Your Biggest Client Generates the Most Revenue. Does It Generate the Most Profit?
By ProfitWise - a Visa Business Plans company
Ask the partners at a law firm to name their best clients, and chances are some of the firm’s largest accounts will come to mind.
That makes sense. A corporate client generating $300,000 a year in billings is clearly important to the firm.
But is it one of the firm’s most profitable clients?
That’s a different question.
Suppose that $300,000 client has negotiated discounted rates and requires significant partner involvement. Matters frequently take longer than originally anticipated, additional work isn’t always billed, and invoices routinely take 60 days or more to get paid.
Now compare that with another client generating $175,000 a year. The firm charges its standard rates, matters are appropriately staffed, most of the work is handled by associates, and invoices are generally paid on time.
Looking only at revenue, the first client appears much more valuable.
Once we look at what it takes to generate that revenue, the picture may change considerably.
How Much Does It Cost the Firm to Serve That Client?
This is where understanding client profitability is critical.
For a law firm, we want to understand how much attorney and staff time is devoted to the account and who is doing the work.
If a partner spends significant time doing work that could be handled by an associate, the cost isn’t limited to the partner’s time on that matter. We also need to consider what else that partner could have been doing with those hours.
Discounts matter too.
A client that consistently negotiates lower rates may still be very profitable if the work is efficient and predictable. But if discounted rates are combined with frequent write-offs, scope changes and heavy partner involvement, the firm’s margin can become very different from what the annual billings suggest.
Revenue Can Hide a Lot
This is why we wouldn’t evaluate a client simply by pulling a list of the firm’s largest accounts.
We want to understand what is happening underneath the revenue.
How many hours does the firm spend generating those billings? How much of that time is ultimately written off? Which attorneys are doing the work? How long does the client take to pay?
Once those questions are answered, the partners may discover that some relationships they assumed were highly profitable are producing much thinner margins than expected.
They may also find the opposite.
A smaller client that rarely attracts attention during financial discussions may actually be an excellent account because the work is appropriately priced, efficiently handled and consistently paid.
What Do You Do With That Information?
The point isn’t to identify a less-profitable client and immediately get rid of them.
There may be very good reasons to maintain the relationship.
Instead, understanding client profitability gives the partners better information when making decisions about the firm.
Perhaps pricing needs to change when the engagement is renewed. Maybe certain work should be assigned differently so partner time is used more effectively. The firm may need to become more disciplined about work that falls outside the original scope, or reconsider discounts that no longer make financial sense.
It can also influence business development. If the firm discovers that a particular type of client or matter consistently produces healthy margins, that information can help determine where the firm wants to focus its efforts going forward.
This Is Where the Numbers Become More Useful
Good bookkeeping tells the partners how much revenue the firm generated and whether the business was profitable.
But sometimes the more valuable question is where that profit is actually coming from.
For a small or midsize firm, this is one of the areas where Fractional CFO analysis can be useful. By combining the financial information with billing, staffing and client data, the firm can start looking beyond total revenue and understand which relationships are contributing most to the business.
A $300,000 client may still turn out to be one of the firm’s best clients.
But the partners shouldn’t assume that simply because the client generates the largest invoices.
