Your business might be entirely service or their might be a service component to your business.

In manufacturing businesses, it’s important to understand the margins that are being made on selling products. In a service business, it’s just as important to know what margins are being made on your particular services.

I don’t mean just sort of in general in terms of what you think you are making. It is knowing what are the numbers that are showing up through your financial statements.

Take a hard look at your financials. Are you really geared to know through your financials what kind of margins you’re generating from each of your core service areas?

In many cases, I find that is not so. One cause can be using cash based accounting, which can be very prevalent in service businesses. What happens then is that revenues may get booked in one period and the expenses booked in another. There’s not really the alignment between the revenues and expenses, so the company is not really aware of how much money is really being made in particular service areas.

Another can be not necessarily having the proper setup in your accounting package. QuickBooks is a program that many early stage service businesses will be using. However, there doing the basics in QuickBooks and then they’re really setting up QuickBooks to get the powerful reports to drive your business. There can be a big difference between just tracking the numbers through versus being able to have profitability reporting by job. Make sure that you’re set up to handle the later.

Another can be the ability to break it down by particular service area. You may have multiple service offerings within your company. Have you setup your accounting to be able to track revenues and the particular service costs by your particular service offerings? In many cases, I see that revenues are lumped together and there’s not the appropriate split out that you need. Have your inside or outside accountant redo your chart of accounts to set it up, so the information can be captured by key product line.

Once you have things setup, take a hard look at the particular numbers. It may take a few months to get more valid information and trends. The first couple of months might be spending just getting the accounting right and, perhaps, tweaking some allocation between different service lines. But soon, you should be able to patters emerge. Almost always there’s some ah-ha moments where you realize that margins weren’t as good in some areas as you thought and were stronger in other areas than you had anticipated.

So, make it an effort to know what your real margins are by your particular service offerings. Have this be something that you keep on top of on an ongoing basis, reviewing monthly or quarterly. You’ll be on the way to making adjustments and ultimately ending up with higher margins throughout your entire operation.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value