A thorough financial analysis can help you switch from hourly billing to a value-based pricing model and improve your understanding of your agency's financials.
If you still use hourly billing, the dire situation that one of our clients experienced may become a scenario you might soon find yourself in.
You see, our client was a full-service agency struggling with its niche and service offering. When they started seeing revenue go down, it was apparent their cash flow management was in need of some immediate changes.
The sharp drop in profits led the agency to decade-low results, and that trend wasn't showing signs of slowing down.
Our first step in resolving this serious issue was using extensive reports to determine the most profitable services and promote efficiencies.
The client, with our assistance, was able to reexamine their niche and focus on high-value offers for the best-performing services they had available.
Following that course correction, we introduced the essential technology and standardization to increase the client's internal capacity and simultaneously reduce their costs of operations.
Backed up by the insights gained, our client was then able to consolidate their resources and efforts and move towards well-defined goals.
Our client’s agency overcame the crisis and achieved net profit growth of 217% in the following six months.
Determining the most profitable and valuable services was critical in making the pivot from the worst situation to the best. And without switching over to a value pricing model, our client likely wouldn't have made it through the year.
The core concept of value pricing can be manifested in moving from the traditional hourly billing model to a model where you charge based on the value offered.
However, this change isn't easy to introduce on its own.
You need the help of thorough internal reporting to determine what your most profitable services are before you can introduce significant changes. For this, your chart of accounts is a powerful tool that can get you through the process.
What Is a Chart of Accounts?
This chart lists the revenue, expenses, equity, and other essential accounts, providing you with a clear overview of all business aspects. Naturally, your chart of accounts will be specific to your industry, describing the particular financial details of your daily business.
The accounts in your chart can fall either under balance sheets or income statements. While balance sheets show assets, liabilities, and equity, income statements break down expenses and revenue.
The comprehensible layout of the chart of accounts will help you map out the financial state of your business and plan further actions accordingly. You can also add accounts as needed, making the system quite flexible.
Reviewing the chart allows you to determine average figures for your earnings and product value and highlight areas that need some adjustments.
Once you know you've got an X number of clients and your business completes Y projects yearly, you can find out how many projects you need to achieve your goals.
To make this tool help you transition from hourly billing to a value-based pricing model, your chart should be designed with that value in mind.
How to Create a Chart of Accounts That Focuses on Value
Do you want to target the most profitable services and clients? If so, you need to avoid billing hourly at all costs and your chart of accounts needs to reflect that intention.
Create a table for use as a chart of accounts and follow it up with a process that allows your business development team to input potentially valuable components for each campaign.
Keep in mind that the process needs to eliminate human errors completely. And the way to do that is by having sufficient margins in every project and accurate budgeting.
While a simple Excel workbook can serve your purposes in this regard, you could opt for a CRM that can help automate and systematize various aspects of your business analysis and operations.
Design your reports around campaign expenses and the services covered by those expenses. If you manage your chart of accounts this way, you'll generate a report that compares your performance to the budget in as much detail as you need.
The information gleaned from those comparisons can be invaluable moving forward, especially when you need to get an executive-level view of projects.
While sometimes the level of detail presented is more than you would need, you can always summarize the information. On the other hand, if some information isn't available, it's much more challenging to incorporate it into the overall picture. It’s always best to summarize than create additional details that were previously unavailable when it comes to reporting.
Proper reporting and reviewing the chart of accounts will allow you to learn from every project and tighten up your budgeting for the future. Your accuracy and profitability will improve every time you go through the process, and detailed insight into your operating costs can help you pinpoint the worth of the value you're providing.
Once you’ve made up your mind to bill based on value, you'll have a clear guideline that you can further adjust and improve.
Leveraging Your Chart of Accounts
The complete overview of your profits, expenses, ratios, and other financial aspects will give you a clearer picture of the value that your service delivers. A well-built chart of accounts will provide you with insight into what you should charge for your service relative to expenses and your goals.
Financial reporting is a staple in business, but you don’t have to stop at the four basic statements. Start leveraging your chart of accounts and reap the benefits of the knowledge you'll gain from it.