Client P&L vs. Billable Time Reporting; What is More Important? And Why?

Part One:

Time. Time. Time. As I look back on the time-consuming events over the last 12 months. Our fourth and fifth grandchildren were born, two bike accidents in Asia had a wedding in the south of France, and just completed 30 years in my office. 

Some of it gave me great personal joy, and some of it left me with the feeling that it sucks getting old. 

The time that went into those events is a ton of time that I will never recoup. 

As a result, the last year certainly heightened my mindfulness and reflection regarding the agencies I work with and how they spend their time with their clients. 

More than ever before, I have watched how agencies have put more and more (not less!) time into their clients in every possible way because it is in their culture to do so.
 

They do so because:

1. They may be afraid of losing or upsetting the client

2. They could earn even more business from the client or over time - they could become the “marketing arm” of a niche-based client.

This Article Series is About:

Reflecting on the time you’ve put into your clients
The money you’re earning (or not) from them
What else could you be doing with the people in the company, and what is your agency’s overall strategy for deploying your staff? 

This article's heart is that I am firm on agencies entering time. Period. Management Consulting Companies, Law, Architecture, Accounting, and IT firms all do it. Why? That is how they earn money. I consider marketing and advertising agencies to be in the same professional status as the ones previously mentioned. 
No time entry. No accountability to… yourselves, not the client! 

You'll need the necessary reporting tools to analyze the time incurred. I rely on Client P&L and Billable time reporting for my clients' time analysis framework. 

What is the rationale behind this analysis? Easy.
Did we receive sufficient and appropriate compensation for the resources we deployed to our client? 

Client P&L, The Calculation:

Why is the client P&L so important to an agency? Let’s first define it. 
Many agencies believe that the gross profit, also known as Adjusted Gross Income  (AGI), IS the profit earned from the client. Some even believe the cash they collect from the client is the client's profit. Not quite. Everyone gets AGI. Gross billing less reimbursed costs.  

However, three additional expenses must be factored into the equation to arrive at the final figure for what is formally called a client's profit and loss. 

1. Labor costs 

There is an industry standard for determining an employee’s hourly cost. It is the salary cost plus all benefits divided by a standard number of annual hours (this standard ranges between 1,500 and 1,600 hours): salary * 1.2/ 1,500 hours. 

Incidentally, there is a direct correlation between the external billing rate and an employee’s hourly cost, but more on that later.  

Employees who enter time on a client/project add their labor cost against the client’s AGI. If the employee chooses to enter that  block of time elsewhere despite working on that particular client, they may overstate the profit of their specific client’s P&L by understating their labor cost and can unfairly place their labor cost on another client or simply bury it in a non-client time category like new business or education.  

It is important to be precise with one’s time entry to accurately report a client's P&L. 

2. Nonbillable third-party costs 

From time to time, as we are only human, we make honest mistakes with respect to third-party vendor costs on client work.  

When the decision to not bill these costs happens, it is most correct to link these costs to the client that the outlay is related to Client P&L purposes.  

Ideally, an agency should keep these costs to a bare minimum annually. 

3. Overhead Allocation 

Many agencies do not consider the fact that there are overheads that need to be apportioned against client AGI. This is the third “expense” required to determine a client’s profit or loss over a given period. It is important to ensure that the overhead costs of the agency, for example, rent, IT costs, and non-client salary costs, are allocated to each client’s P&L in order to see the net profit per client.  

How Would One Allocate Overhead

 1. AGI percentage 

The larger the AGI per client, the larger the overhead allocation, regardless of how much or how little effort was exerted in servicing the client. How fair is that? 

 2. Labor hours percentage

The more hours entered on a client, regardless of how senior or junior the staff member was, the more the overhead is allocated. Is that any more fair than the AGI percentage allocation?  

 3. Labor cost

Overhead is allocated based on the labor cost per client. It includes the time of everyone entering time on the client, whether they are junior or senior…so long as they enter their time. This is the fairest way to allocate overhead to clients as it represents the allocation of the agency’s overhead based on staff labor costs.  

To Recap

to calculate a client P&L, it is AGI less labor cost, non-billable third-party costs, and overhead allocation.  

If your software system is an all-in-one program, the total net income(loss) of the individual Client P&Ls will add up to the agency’s income(loss) at a given point in time. This way, you can see which clients contributed positively and negatively to your company’s profit or loss for the period in question. 

In part two of this article series, I delve into Client P&L Analysis, Billing Time Calculation, and Billing Time Analysis.