How to measure the profitability of a professional services firm
While measuring a company’s profitability can be a very obvious step for every entrepreneur, it’s not so easy when you’re dealing with a professional services firm (PSF).
While measuring a company’s profitability can be a very obvious step for every entrepreneur, it’s not so easy when you’re dealing with a professional services firm (PSF). There is a lot of literature to measure the performance of productive companies, but very little about the ones applied to PSF.
For this reason, we set ourselves the task of finding that formula that measures the performance of our PSF. We found that, by closely analyzing Dupont’s formula, we can arrive at a simple procedure with a great focus on the outcome for shareholders.
The formula used by Dupont Corporation in 1920 measures the profitability of productive companies in terms of return on capital (ROE). It combines the main financial indicators in order to determine the effectiveness of the company’s management, by using its assets, working capital and financial leverage; in this way, a value is created for its shareholders.
Splitting the return on capital (ROE) indicator or the profit/partner ratio into three different equations help us to have a better understanding of the key indicators that a PSF should take care of. It is important to make comparisons between these indicators and historical data, as well as to contrast them with our competitors.