Debating Whether or Not to Fire a Client?
We’ll talk about that jerk in a moment. This post is about the decent folk who are, nonetheless, bad clients. You may even think you recognize some of them, but how do you really know? I mean, can you really afford to lose that revenue? Let’s look at a few numbers and find out.
Client Gross Margin
Client gross margin is the revenue received from the client less the direct cost of delivering work to the client. If a client pays $5,000, and you pay your employees $2,500 and a vendor $500 for an item directly related to that work, your client gross margin is $2,000 or 40%. Now, compare your clients. Client #1 has paid you $50,000 with a gross margin of 10%. Client #2 has paid $20,000 with a gross margin of 30%. Which is the better client? In this case, client #2 is better both relatively (30% versus 10% gross margin) and absolutely ($6,000 versus $5,000 contribution margin). Who doesn’t want more profit with less work?
What to Do: Cull those bad contracts you entered when you were desperate for work or those legacy clients you’re still serving even though you’ve grown/shifted focus.
Contract Gross Margin
Contract gross margin is like client gross margin. To calculate, look at your contract. Calculate the contract revenue and associated costs for the contracted services. Then identify the revenues and associated costs of services outside the scope of the contract. Are you making a profit on ancillary services? Or are you giving away something for nothing just to collect what is owed per the contracted terms?
What to Do: Cull scope-creep offenders who don’t pay for extra work.
Realization rate calculates the difference between the work your team puts into a project and how much the client pays. Your “write-off” is that difference. Say your engagement states that your team’s services are billed at $100 per hour. You put in 20 hours. Why, then, do you collect only $1,600? Sometimes, it’s because ol’ Newbie needed to be trained—that’s on you. Other times, it’s because a client refuses to pay, and you feel you have no choice but to write off something to collect anything.
What to Do: Cull clients who constantly nit-pick and dispute your invoices for no valid reason.
Days to Pay
Days to pay analyzes your accounts receivable at the customer level. It’s exactly what it says it is: the days it takes to receive payment on your invoice. Most pay according to your terms. You know the ones, however, that you have to call: “Hi, me again. Just sent you another invoice. Sure would appreciate payment on the one we sent last month … and two months ago.” Often, these are clients who ask you to write down their invoices (see realization rate, above). They may be broke or they may not truly value your services. But you must watch out for your business.
What to Do: Cull clients who force you to be their banker, too.
The Pareto principle (aka the 80/20 rule), says that you’ll generally receive 80% of your revenue from 20% of your clients. Conversely, 80% of your cost will be attributable to 20% of your clients, but not necessarily the same as the former (see margins, above). But if you find that 80% of your revenue comes from one or two clients, then you have an organizational issue because they have you by the … big toe. Concentration on one lucrative client may work for a time, but a diversification issue coupled with a negative indicator in one or more of the other metrics means trouble.
What to Do: This is the one that may be too big to cull, but you need to focus on diversifying your business to the point where you could conceivably cull any client at any time without having to close your doors.
If you find it in your staff, and it’s all related to one client, there’s a problem. Now, we’re talking about that jerk, the one who berates and belittles, makes unreasonable demands, takes all the credit but none of the blame, constantly wastes your time, abuses his own customers and staff, does not listen, fails to heed your good advice, and generally sucks the life out of you and your team.
What to Do: Say goodbye. Be tactful, not spiteful, but do it quickly. Your staff will thank you. And that’s often more important to your long-term success than a short-term bottom line.
It’s Time to Say Goodbye – Now What?
So, you’ve decided to cull them. Now what? First, don’t be hasty. If you and your team otherwise enjoy the work—meaning it’s simply an adequate compensation issue—ask to renegotiate. You may find that your client is willing to pay more. My father taught me that it never hurts to ask. Second, if the work is too small or not your focus, refer it to another provider. Satisfying a customer and a referral partner is a win-win exit.
If you have identified a relationship that needs to end, look at your contract (do you see the pattern, here?—you need a contract) and abide by its terms. Don’t put yourself in legal trouble by failing to perform. Keep the communication brief and respectful when giving notice of the end of the relationship. Complete your work, if possible, and wind it down professionally. Consider your integrity and reputation.
Questions about these metrics? Need help capturing and calculating them? Give us a call or reach out here.