The Economics of Professional Services 5 - normal time based charging

Most professional services businesses derive the majority of their revenue from time based charging. Revenue therefore depends upon the combination of billable hours times the charge out rate achieved per billable hour.

CALCULATING MAXIMUM BILLABLE HOURS

In theory, there are 365 days in a year. In practice, time needs to be taken out for weekends, holidays and illness. This holds, or should hold, even for the sole practitioner.

Deducting this down time, there are around 220 available working days in an ordinary year. With eight working hours per day, this gives a maximum of 1760 working hours in a full year.

Note that the eight hours per day should hold even for the sole practitioner. We work to live, not live to work.

I know that the reality is that many of the big shops work on more hours than this. Yet the real core economics of the practice do revolve around this lower figure.

Not all the 1760 hours is available for charge. Time has to be spent on business development, marketing and administration. The next step, therefore, is to calculate the charge target, the real time available for client specific work.

There is no absolutely correct figure here. However, as a guide:

• within the constraints set by an eight hour day, the sole practitioner is unlikely to be able to achieve more than sixty per cent charge time
• charge targets for junior staff members are generally higher, round eighty per cent
• with partners or team leaders, charge time will be lower because of greater marketing, business development and administrative responsibilities.

Once charge targets have been set for each staff member, total available charge time can be calculated by simply adding the staff totals together.

CALCULATING TARGET AVERAGE CHARGE RATES

Available charge time can now be used to calculate target charge rates.

Each business has to cover its costs plus the desired profit. Proprietor’s income can be counted as either a cost or included in profits.

Both approaches are followed in practice. However, it is generally desirable to make a distinction between:

• the target return for the proprietor’s labour which should be counted as a cost
• the target return on capital which should be profit.

Once costs and target profits have been calculated, target average charge rates can be calculated by dividing available charge hours into target revenue.This gives the average billings per hour that must be achieved if the practice is to achieve its financial targets.

Note that this calculation provides a basic reality check. If the average charge target cannot be achieved, then the whole business plan must be revisited.

CALCULATING INDIVIDUAL CHARGE RATES AND CHARGE TARGETS

Once the average charge target rate has been calculated, it should be broken up by staff member or staff category.

There are no absolute rules governing charge rates. Charge rates vary for different professional categories, for different types of work and by industry and market position.

Once the average charge rate target has been broken up into charge rates for individuals or staff categories, individual billings targets can be calculated by multiplying charge rates by target billable hours.

Once this task is done, we will have calculated:

• available billable hours in total and by staff member and staff category
• revenue targets covering both costs and desired profits
• the average charge rate necessary to achieve target revenues
• the average individual/staff category charge rate necessary to achieve the average
• individual charge targets required to achieve total revenues.

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Note on copyright

This material is copyright Jim Belshaw. It may be reproduced or quoted with due acknowledgement.