Profitability Calculator

[Fredman]

Does anyone have a profitability calculator they'd like to share?

More specifically, I'm designing one for our office so we can determine the profitability of each client. We are a full service 401k shop. I realize that each shop will have a different model, but I'm looking for something to get me started.

If you don't want to share with the group, feel free to email off the board. Thanks much!

[actuarysmith]

If it is a first year takeover plan, you will need a loss calculator!

[Fredman]

True. I'm sure we have plans that have been here for years that would fall into that category.

Its time to weed the garden.

[vebaguru]

Fredman-

Perhaps I misunderstand what you are getting at. Do you bill based on the job or on time and charges? If T&C, do you bill at different rates?

We use a fee schedule, but track time and charges also. Certain additional services are not included in the fee schedule anyway. We also invoice extra for rush processing.

A few years ago we found that our 401(k) plans were not profitable to us when we used a fee schedule comparable to that of competitors. We faced 3 choices: (1) Dump the unprofitable clients; (2) Raise our fees so that they would have the same profit margin as our other plans, or (3) Find ways to reduce the time we spent on those clients. We used a combination of (1) and (3), so I understand "weeding the garden". I don't understand what a "profit calculator" is.

[Fredman]

veba-thanks for the response. for me, a profit calculator will be able to tell me the bottom line profit for a client. in other words, fees paid-our expenses=profit (you can also divide profit by our expenses to come up with a %). we are a full service shop to our clients (rking, trustee, documents, etc.) and work off a fee schedule. time and extras don't get billed, we consider it part of our service.

i realize that only i will be able to come up with the right variables to determine the formula for our shop, i was hoping to find some existing examples to work off of.

thanks again.

[vebaguru]

For administration fees we use a couple of guidelines:

Salary of Administrator = 33% of total invoice

Fixed Overhead = 33% of amount invoiced

Variable Overhead = 33% of amount invoiced

Since the fixed OH is constant and the variable is approximately the same for all clients, if you track the administrator's time the fee from the fee schedule should be at least 3 times that amount. [Note: the Administrator's salary is a higher percentage (as much as 50%) for 401(k) plans.]

The ratios will change proportionately for the additional services you provide. Trustee fees should be approximately = to plan administration fees for the smaller plans. They will diminish on larger plans, but you have an opportunity for more investment income on the larger plans.

The only way to lose money in this business is by not correlating the revenues with the expenses. And yet I watched a trust company lose a couple of million per year on their administration because their trust services were so profitable. While I don't disagree with your decision to treat certain extras as a part of your service, I do recommend that you track at least the professional and para-professional time spent for each client.