{"id":13720,"date":"2020-02-10T15:09:57","date_gmt":"2020-02-10T19:09:57","guid":{"rendered":"https:\/\/www.cofinia.ca\/?p=13720"},"modified":"2023-04-26T17:08:03","modified_gmt":"2023-04-26T21:08:03","slug":"the-business-case-for-a-service-business","status":"publish","type":"post","link":"https:\/\/www.cofinia.ca\/en\/blogue\/comptabilite\/the-business-case-for-a-service-business\/","title":{"rendered":"The business case for a service business"},"content":{"rendered":"
\n
\n

The business case for a service business<\/span><\/h1>\n<\/div>\n<\/div>\n

With cloud applications, it is increasingly easy to have (almost) real-time access to the financial performance of our company.\u00a0Of course, as an accountant, I am quite well equipped to analyze the numbers.\u00a0On the other hand, as an entrepreneur, I must say that it takes on another meaning.<\/span><\/p>\n

For what?\u00a0Because it’s not just numbers and it’s not enough to make decisions based on the analysis we make of these indicators.\u00a0In the past, as CFO, I gave my opinion, I issued recommendations, but ultimately, it was the CEO and the management team who made the decisions.<\/span><\/p>\n

Since I founded Cofinia, I have asked myself the same kind of questions as the entrepreneurs I meet.\u00a0My advantage, I know how to structure information to analyze results and make decisions.\u00a0I must say that I don’t always make the right decisions, but as I’ve been told before, it’s better to make decisions and make mistakes than not to make any decisions.\u00a0At least we learn.\u00a0And I must say that I learn every day!<\/span><\/p>\n

Gross margin<\/span><\/u><\/strong><\/h2>\n

If your charter of accounts is well structured, you should be able to calculate the cost of the services you offer and, by extension, the gross margin.\u00a0Why is this important?\u00a0Because it is the first milestone in the analysis of profitability.\u00a0Turnover is important, but what’s really important is making a profit.\u00a0Many companies record salaries and expenses in a single accounting account heading.\u00a0I always suggest separating the accounts into at least 3 distinct sections.<\/span><\/p>\n

Direct costs (related to services rendered)<\/span><\/p>\n

Sales and marketing costs<\/span><\/p>\n

Administrative costs<\/span><\/p>\n

In this way, it is possible to identify the gross margin (revenues less direct costs).\u00a0A company generally owes a minimum of 50% gross profit.<\/span><\/p>\n

The effective rate<\/span><\/u><\/strong><\/h2>\n

I really like this indicator, because I find it very revealing about the performance to be achieved.\u00a0It is calculated by dividing the income for the period by the number of hours worked.\u00a0Note that if you have a lot of rebillable expenses, you must reduce the income by these amounts to give a more accurate picture.<\/span><\/p>\n

Thus, if you charge a rate of $100\/hour, you will have an idea of \u200b\u200bthe real rate realized on your mandates by calculating the effective rate.\u00a0There are often times that we are not able to charge our customers (learning about files, travel, resumption of work, etc.).\u00a0It is therefore relevant to ensure that we are able to cover overhead costs and this will not be possible if our effective rate is lower than what is required and anticipated.<\/span><\/p>\n

Profitability by project or client<\/span><\/u><\/strong><\/h2>\n

Profitability is the key.\u00a0It sounds simple, but when you start a business, you always want to give the customer more to establish our credibility, provide good service and ensure that our customers come back and refer us.<\/span><\/p>\n

Calculating the profitability by project or by client implies that timesheets must be made.\u00a0For many, this is not a pleasant part, but it is essential.\u00a0By assigning average rates to our resources, it is quite easy to determine if our projects\/clients are profitable or if action needs to be taken.<\/span><\/p>\n

Sales recovery time<\/span><\/u><\/strong><\/h2>\n

Getting paid is the sinews of war.\u00a0I often hear people say “I am making a profit, why is my bank account always empty?”\u00a0“.<\/span><\/p>\n

The first thing I validate is if the company is indeed making money.\u00a0When the entrepreneur pays himself in dividends, we sometimes realize that the profits are not enough.\u00a0If we added the contractor’s salary, we would see that the income would not be sufficient.<\/span><\/p>\n

Then I look at the recovery period.\u00a0No, I don’t look at the age of the accounts.\u00a0It is useful, but it does not take into account the work carried out, but not invoiced.\u00a0Indeed, it sometimes happens that we cannot systematically invoice all the work at the end of the month.\u00a0According to accounting principles, it would be appropriate to recognize work in progress, but in general, small companies do not do this.\u00a0Result, we do not realize, but we find ourselves recovering the costs between 60 to 90 days later.<\/span><\/p>\n

To calculate the DSO, here is how I proceed:<\/span><\/p>\n

    \n
  • Monthly income \/ Accounts receivable * 30 days<\/span><\/li>\n
  • Monthly income \/ (Accounts receivable + work in progress) *30 days<\/span><\/li>\n<\/ul>\n

    This gives us the number of days to recover our costs.<\/span><\/p>\n

    The\u00a0<\/span>burn rate<\/span><\/em>\u00a0or our monthly costs<\/span><\/u><\/strong><\/h2>\n

    The costs of a service company are mainly made up of salaries.\u00a0Next come administrative expenses such as rent, software costs, insurance costs and professional fees.\u00a0It is quite simple to make a monthly average of these costs.<\/span><\/p>\n

    Once this amount has been established, simply add an amount to cover interest costs, debt repayments, taxes and the shareholder’s dividend if applicable to establish the income to be generated. to meet the company’s obligations.<\/span><\/p>\n

    I have, of course, simplified the explanation by not taking into account investments to be made and significant variable costs, but it can give you a good idea.<\/span><\/p>\n

    Why is it useful?\u00a0To find out how many sales you need to generate each month to generate enough profit.<\/span><\/p>\n

    Stay tuned and don’t miss any of our new publications<\/span><\/h2>\n

     <\/p>\n

    Access our Tools<\/span><\/h3>\n

    We provide you with completely free tools to help you familiarize yourself with the management tools<\/span><\/p>\n

    Make an appointment!<\/span><\/h3>\n

    Make a telephone appointment with us to learn more about what we offer as a service and how we can help you.<\/span><\/p>\n

    Follow us<\/span><\/h3>\n

    Follow us on our social networks to learn more about our company, our values \u200b\u200band our services.\u00a0facebooktwitteryoutube<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

    The business case for a service business With cloud applications, it is increasingly easy to have (almost) real-time access to the financial performance of our company.\u00a0Of course, as an accountant, I am quite well equipped to analyze the numbers.\u00a0On the other hand, as an entrepreneur, I must say that it takes on another meaning. For […]<\/p>\n","protected":false},"author":9,"featured_media":13721,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[252],"tags":[],"class_list":["post-13720","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-comptabilite"],"_links":{"self":[{"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/posts\/13720","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/comments?post=13720"}],"version-history":[{"count":0,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/posts\/13720\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/media\/13721"}],"wp:attachment":[{"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/media?parent=13720"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/categories?post=13720"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cofinia.ca\/en\/wp-json\/wp\/v2\/tags?post=13720"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}