opiq TEAM › Guides

How to find unprofitable clients: a step-by-step method

Most service firms know their total revenue and their payroll. Far fewer know which individual clients pay for themselves. The method below works for accounting firms, agencies, IT support companies, architects and law firms — anyone who sells their team's time. All you need is revenue per client, hours per client and a cost per hour.

The short version

1. Collect revenue per client for one period (a month or a quarter).
2. Collect hours per client for the same period — all hours, not only billed ones.
3. Work out your cost per hour (salaries plus overhead, divided by working hours).
4. Calculate margin and effective hourly rate per client.
5. Sort and decide: reprice, rescope, fix the process — or let the client go.

Step 1: Revenue per client

Take what each client was invoiced in the period. For retainers and fixed fees use the monthly amount; for projects, spread the fee across the months you worked on it. Use net amounts without tax. Keep the period long enough to smooth out one-off spikes — a quarter is often more honest than a single month.

Step 2: Hours per client — including the ones you never billed

This is where most analyses fail. Unprofitable clients rarely look unprofitable on invoices; the problem is the time that never reaches an invoice: quick calls, "small" changes, chasing documents, internal coordination, rework. If you only count billed hours, every client looks fine.

So you need hours logged per client by everyone who touches the account, as the work happens. Hours reconstructed at the end of the week are usually too low and too round. Make logging fast (one click per client switch) and make it clear that the purpose is pricing clients correctly, not watching people.

Step 3: Your cost per hour

For each employee (or for the whole team, if you want a quick first pass):

Cost per hour = (monthly gross salary + employer costs + share of overhead) ÷ working hours per month

Overhead means rent, software, accounting, management time — everything that is not billable. A team-wide average is good enough to spot the worst clients; per-person rates make the picture sharper when senior and junior people work on different clients.

Step 4: Margin and effective hourly rate per client

Labor cost = hours × cost per hour
Margin = revenue − labor cost
Effective hourly rate = revenue ÷ hours

The effective hourly rate is the easiest number to talk about with your team: "this retainer pays us €38 an hour" is clearer than a margin percentage. Compare it with your target rate — the rate you need to cover costs and make the profit you plan for.

Worked example (fictional numbers)

A small firm with a cost per hour of €35 and a target rate of €60:

Example calculation only — replace with your own numbers in the client profitability calculator.

Client B still makes money, but every hour pays €14 less than the target. Client C costs more in labor than it pays — and that is before anything else goes wrong. On the invoice list, neither of them stood out.

Step 5: Decide what to do with each client

• Reprice. Show the client what the work actually involves and adjust the fee. Hours data makes this a factual conversation rather than a feeling.
• Rescope. Write down what the fee includes and quote extras separately.
• Fix the process. Sometimes the client is fine and the time goes into internal rework, unclear handovers or waiting for documents.
• Keep it on purpose. A low-margin client can be worth keeping for strategic reasons — as long as it is a decision, not an accident.
• Let go. If repricing fails, the hours you free up can go to clients who pay your target rate.

Make it a monthly habit, not a one-off project

Clients drift: scope grows a little each month, a new contact person asks for more, a fixed fee stays the same for years. Check effective rates monthly or quarterly and watch the trend. If hours per client are logged continuously, this takes minutes instead of a spreadsheet weekend.

Common mistakes

• Counting only billed hours (hides the real problem).
• Ignoring overhead in the cost per hour (makes every client look better).
• Judging from one unusual month.
• Using time tracking as surveillance — people log less honestly when they feel watched, and the data gets worse.

Free tools: client profitability calculator · effective hourly rate calculator · billable utilization calculator