Utilisation, realisation and project margin
Three numbers decide whether a service firm makes money. Utilisation is the share of available hours that are billable. Realisation is the share of billable value that is actually collected. Project margin is what is left after the fully loaded cost of the people who delivered it.
- Utilisation by person and by team, tracked monthly
- Realisation rate including write-downs, discounts and unbilled time
- Project and client margin with delivery cost fully loaded
- Revenue per employee as the headline efficiency measure
- Scope creep quantified as unbilled hours rather than absorbed silently
Retainers, deposits and revenue recognition
Money received in advance is a liability until the work is delivered. Firms that book deposits as revenue overstate profit early, understate it later, and lose the ability to see whether a month was actually good.
We recognise revenue as it is earned, hold deferred revenue properly on the balance sheet, and reconcile it every month so the P&L reflects delivery rather than collection timing.
Owner compensation and the S-Corp split
For owner-operated service firms, the single largest recurring tax decision is the split between salary and distribution under an S-Corp election. Set the salary too high and you pay unnecessary employment tax. Set it too low and the position is indefensible if examined.
We set it from a documented analysis of the role, the market rate and the firm's profit, run it through payroll consistently across the year, and keep the supporting file in case it is ever needed.
Cash planning around lumpy revenue
Payroll is fixed and fortnightly. Client payments are neither. The gap between those two facts is what kills otherwise healthy firms, and a 13-week cash forecast built from actual collection behaviour rather than invoice dates is the standard defence.
Frequently asked questions
What counts as a service business here?
Marketing and creative agencies, consultancies, engineering and design firms, IT services, staffing and recruiting, and most professional practices that sell expertise rather than product.
Do we need time tracking for this to work?
For project margin, yes, at least at a coarse level. Time data does not need to be perfect to be useful, but without any of it, profitability by client is guesswork.
How do you handle subcontractor-heavy delivery?
Subcontractor cost belongs in cost of delivery rather than operating expense, so that gross margin reflects the real economics of the work and pricing decisions are made against the right number.