By Ronald S. Niemaszyk
I have been known to say that accounting is the “backbone of business.” You probably expect accountants to make such statements, but let me explain. My belief stems from the fact that accurate accounting statements can provide insight into every aspect of your operation. Are you charging enough? Are you paying your CSR’s too much? Do your clients pay too slowly? Although the answers to the question do not always jump out at you, the numbers on the financial statements can lead you to ask the right questions. They show you where you need to probe. In my article in the March/April issue, I introduced several ratios to assist you in this analysis. This month we will focus on digging deeper into the books to answer the question, “what does it cost to answer that call?”
In most cases, when a company is loosing money, or not performing to expectations, management will say, “we need to increase sales.” A joke that is often heard in accounting circles is about the company owner who was producing widgets. He looses a dollar on every widget he sells. When asked about the losses, he responds, “we’ll make it up on volume.” The reality is that by selling more he is just going to increase his losses. I hope this illustrates the need for all of us to have a clear view of what each call and each client adds to, or in the worst cases takes from, the bottom line.
When looking at “cost accounting,” you first have to look at all expenses and break them down into two categories: direct costs and indirect costs. Direct costs are costs that you can allocate or charge to a specific client. A good example of direct cost is any line charge or usage charge for telephone service. Whether it is computed per minute or per line, these costs may easily be broken down and applied to each client. The average teleservice organization will most likely have a minimal amount of direct costs. This is common in most service industries.
A simple definition of indirect costs is costs that cannot be directly attributed to a specific client. Examples of indirect costs include, facilities charges, depreciation of equipment, general maintenance, and management salaries.
After the total number of indirect costs is computed, you now have to determine a reasonable way to allocate the expenses. One method is to divide the total costs by the number clients. Another option is to divide the total indirect costs by numbers of calls or minutes utilized. Once these numbers are computed you can easily compute a profit per client or even a profit by call.
In the following, we will compare two clients of a hypothetical answering service:
|Client A||Client B|
|Revenue (month)||$ 70||$ 150|
|CSR Answer Time||$ 12||$ 45|
|Phone Usage||$ 2||$ 15|
|Line Charge||$ 4||$ 4|
|Indirect Costs (per minute used)||$ 15||$ 38|
|Monthly Margin||$ 37||$ 48|
|Margin Per Minute of Call Time||$ .50||$ .25|
Client B has three times the volume, three times the issues, and three times the concerns. Which client would you rather have?
Most business owners do the above analysis in their heads, or maybe scribble it on a sheet of paper, as they bid on a job for a new client. One of my goals as an accountant and a business advisor is to motivate my clients take a more proactive approach. By performing the above analysis, you will see what type of clients you want to keep and ones you are not concerned if you lose. You will also determine which potential clients you want to pursue and what you are going to need to charge them.
Ronald S. Niemaszyk is a Principal in Jordan/Patke & Associates, a certified public accounting firm in Deerfield, IL. He can be reached at 847-382-1627 or email@example.com.
[From Connection Magazine – July/Aug 2002]