Analyze client profitability

Direct answer

Client margin is net fees minus the cost of delivering and servicing the work, with any shared overhead allocation shown separately. Compare both margin dollars and percentage. Review late payment as a cash and credit risk, not automatically as a project expense.

Why this question comes up

Revenue alone does not show which clients cover their delivery costs. Use the same cost rules and reporting period when comparing clients or tracking changes.

Records to gather

• Net fees by client for the period, after discounts and write-offs
• Direct delivery cost: time, contractors, licences bought for that client
• Allocated overhead with the allocation basis documented
• Invoice dates, payments, and open receivables for a separate cash-collection review
• Scope changes, discounts, and write-offs by client

Review workflow

1. Attribute direct cost before allocating anything. Time and pass-through cost that clearly belong to a client should be assigned directly. Only genuinely shared cost needs an allocation basis.
2. Disclose shared-cost allocations. Use a basis that reflects how the cost is incurred where possible. Show margin before and after allocation, and keep the method consistent across periods.
3. Include the cost of servicing, not just delivering. Meetings, revisions, and account management take time that may not reach a project code. Slow approvals can extend delivery or delay billing.
4. Check payment timing separately. A long collection period may strain cash even when the engagement has a positive accounting margin.
5. Rank by margin percentage and absolute margin. A high-percentage small client and a low-percentage large one need different decisions.

What a useful answer should include

• Revenue, direct cost, allocated cost, and margin per client
• The allocation basis, stated and applied consistently
• Servicing cost included, not just delivery cost
• Both margin percentage and absolute margin per client
• Payment timing and overdue balances shown separately from margin
• Any client whose margin is negative once fully loaded

Common failure modes

• Ranking clients by revenue. A large client can still have a low margin after direct and servicing costs.
• Skipping servicing cost. Account management and revision cycles can consume the entire margin on an otherwise healthy engagement.
• Changing the allocation basis between periods. Profitability appears to shift when only the method moved.
• Mixing margin and collections. Payment delay affects cash timing; estimate any financing or expected credit loss separately before including it in a profitability figure.