Sent by Jonathan Stark on May 31st, 2017
Several people have asked me recently how to track profitability when paying employees or contractors.
In other words, “Even though we’re giving fixed prices based on value, we should still track hours internally to make sure we’re not losing money, right?”
Ask yourself why you’re worried about tracking profitability at that level of granularity.
What decisions will you make based on that data?
Probably decisions that you could make based on data gathered another way.
But there’s a bigger issue here...
Tracking profits at the project or employee level on the basis of hours is a warning sign that your profit margins are way too low.
And slim margins are a sign that you’re not really value pricing.
That you haven’t completed the mental shift.
That you’re still setting prices based on your perceived costs rather than the client’s perceived value.
That you’re still taking on clients that are not ideal.
If you want to check your profitability, have your accountant run a P&L.
Tracking hours is not required.
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