Editing Clients and Profits
Have you ever considered “firing” a profitable client? From my experience, most small business owners (myself included) are inclined to keep a client who contributes to cash flow. The real question isn’t whether or not a client brings added cash flow, but rather is the margin favorable? In other words,”Is the pearl worth the dive?” Or as my brother likes to say “Is the juice worth the squeeze?”
In the above, I’m already identifying some variables and unknowns to unpack. What is client profitability or contribution to cash flow and how is it being measured and to what is it being compared? What about margin? How is it being measured and what is acceptable? This isn’t a perfect one-size-fits-all exercise, but it does get us thinking in a good critical/strategic way.
What about the client and the profit contributed to cash flow? Let’s say we have a client who, when you look at the profits generated over a year, is generating $50k net to cash flow. That’s not a small number. For the purposes of this exercise, let’s say that represents 5% of your business’s annual gross profits. I don’t know about you, but that $50k might go pretty far in helping cover company overhead for the year.
A quick way to start to put this in context is to chart out gross profits from all clients. Rank the clients by how much cash (gross profit) they bring over a twelve month period. As you look at this chart, think about the ease or trouble for tending to each client. While you might be hesitant to let go of the cash, about what you could do with the time and energy you gain back.
A number of years ago I had an eye-opening experience by doing this exercise. I was spending over fifty percent of my time and energy on less than ten percent of the cash it generated. I don’t think it could have been any clearer. While I didn’t immediately replace that time with client work, it did provide additional margin in my schedule (and mood) to dial in other aspects of my business.
I’ve seen it over and over again, the smaller clients tend to take larger amounts of time. Letting these clients go is an option. Remember, it’s your business—you can do what you want. Another consideration is to make the client worth your time. What if you worked on pricing such that smaller revenue jobs had much higher margins? If anything, this will make your time and energy worth dealing with what comes with a smaller (and sometimes higher maintenance) client. If the increased margins create a price point that the client doesn’t like, then the situation just solved itself.
Another angle to this exercise is doing this for projects rather than clients. You might come to a conclusion of firing certain types of projects or services rather than clients. Some offerings might be lower margin and just not worth the hassle. Sounds like a good topic which will bleed into pricing and marketing based decisions. We’ll save that for another time.
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Kyle Dreier enjoys pressing small business owners on difficult decisions, all with the goal of moving the business and the owner to a more productive and pleasant (and profitable) place.