Billable time: how much is your time worth?

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Deciding how much to charge for our time is always a tricky thing: if we charge too much per hour, we will lose clients. If we charge too little per hour, we won’t make enough to cover our costs.

Too often, we choose how much to charge for our services based on industry standards, previous jobs, or competition. While those are worthy benchmarks to gage our pricing against, they may not be the best factors to use while building our rate sheet.

Here are a few questions worth answering before choosing a rate:

  1. How much revenue do you need? Work up your costs, such as office rent, administration expenses, wages, etc. Then, add your target profit before taxes. This should give you a good idea of the amount that must be billed in a year. Knowing your costs will also allow-you to compute your break-even rate – the rate at which you’re not losing money.
  2. How many billable hours can you and your team work for? It’s naive to assume that 100% of work time is billable. Previous years can give a good idea of how many billable hours can be expected by a person and by the organization as a whole.

Revenues

Once you know your revenue needs and your productivity, divide one by the other and we get our billable hourly rate. For example, let’s say we have the following costs:

  • A team of 10 employees costing us 500 000$ per year in wages;
  • Office rent, equipment and administrative expenses costing us 60 000$ per year;
  • We aim for a 15% before-tax profit, which amounts to 98 823 $.

Our revenues should be of at least 560 000$ per year (to break even) and of 658 823$ to make our target profit.

Now, let’s look at our productivity:

  • Out of our team of 10, we have 7 consultants who can produce billable time;
  • We estimate that our consultants should bill around 70% of their hours, which equals 28 hours per week per consultant;
  • We estimate that each consultant will work around 48 weeks per year, keeping 4 weeks for vacation, holidays and other absences.

Our total productivity is

7 consultants

x 48 weeks

x 28 billable hours per week

= 9408 billable hours per year.

How much should we charge per billable hour?

To attain our profit goal, we need:

658 823$ / 9408 hours = 70.03 $ per hour

To break even, we need:

560 000$ / 9408 hours = 59.52 $ per hour

Can this work?

  • Once we’ve made those calculations, the question remains: is this realistic?
  • Are those rates in line with your peers in the industry?
  • Is your product more or less expensive than your competitors’?
  • What happens if your team’s billable hours ratio is 60%?
  • What happens if your expenses go up? If one of your consultants leave the company mid-project?

Today’s economy has taught us the importance of hoping for the best while planning for the worst.

Time Is the Product, Profit Is the Goal

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It seems that in manufacturing, business managers are used to having metrics like product line profitability, expected revenue from sales, breakeven points, and the like. In professional service businesses, the same performance metrics can still be obtained, if we use time (and billable time) as our product, and resources as our product lines.

As we can see in the table below, the metrics really are the same; it’s just the names that change.

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Are your projects profitable?

The payments come, checks are cashed but the funds come out as fast as they were calculated in the company’s cashier? Furthermore, what about profitability and profit margins? What tools are available to measure your business’s vital financial information?

In a context of frequent movements of money, it is easy to get a profitability illusion when you don’t properly compare the revenues to the costs incurred.

Let’s not confuse revenues and profits

With a bookkeeping of project revenues and expenses, it is much easier to identify profitable projects from those that are delivered at a loss. The ideal tool should offer management indicators to display in real time the budget situation, the project’s profitability and the return indicators calculated using various parameters. In project accounting, it is possible to know at any time the financial results of your projects with a tool that combines financial and project management.

To do this, you should budget all required expenses and hours while applying a safety factor to the quantities – both on expenses and hours.

Regarding the hours, we will take a cost-plus into account, which involves the contributor’s real cost as well as the calculated proportional operating cost of each resource.

No flexibility

The current economic climate leaves no flexibility for companies. It is therefore essential to know all of our projects’ profitability. This helps making an informed decision: does the project bring anything else than an economic value to the company? Will the loss be covered by another project from the same customer?

The information

Knowing the profitability of our projects at any time allows us to make pragmatic and well-founded decisions for the company. Abak 360 allows a seamless project income and expense accounting; thus, the financial results of each project will have no secret for you!

Contact us for more information!

sales@abaksoftware.com

6 reasons why spreadsheets turn timesheets into a nightmare

Spreadsheets are great: they allow us to log a lot of information in an efficient format. They allow us to make computations, charts, and lots of fancy stuff (if you know the formulas). And because everyone has a spreadsheet program (Excel for most of us), it’s easy to send the information to someone else.

However, spreadsheets are a nightmare waiting to happen

Why? Because we expect spreadsheets to behave like centralized databases, self-updating and self-managed which is not the case.

Here are 6 reasons why you should stay away from spreadsheets for your timesheets:

  1. Spreadsheets don’t report to central when something changes. Updating your timesheet? Making a correction? Unless you remember to let management know about the change, it stays in the spreadsheet.
  2. An endless number of versions. With email, spreadsheets have become even more disastrous. As one version is sent, someone sends back a correction, and then we need to resend the corrected time sheet to everyone over again. We end up with so many versions of the same file, it’s maddening!
  3. Spreadsheets are an island. Unless equipped with advanced knowledge of Excel programming, what is in the spreadsheet stays in the spreadsheet. If we have a team working together, they cannot log everything in the same spreadsheet at the same time. This creates and archipelago of information that needs to be reconnected by the administration.
  4. It is a pain to turn them into an invoice. Unless significant investment is made in turning spreadsheets into a billing system (and think of the pain of maintaining this!), information from the team’s time sheets has to be copied and pasted over to the invoice. Can we think of a better way to introduce mistakes in our invoices?
  5. Consolidation? How does information flow from timesheets to invoices to accounts receivables and to payroll? With spreadsheets, it’s all done by hand, with – of course – risks of error …. And a bonus!
  6. Forgetting is just a fact of life. We forget. We forget about this one billable call we took while driving. We forget about the business lunch we had last week. It’s normal. With spreadsheets, those things get left out, and the company loses revenues.

Isn’t it time those systems talked to each other?

We live in this great modern world. We have the technology to flow information from one system to next, seamlessly, automatically. So why are we so bent on doing it all manually? An advanced system such as Abak 360 allows you to eliminate the risks occurring when using numerous solutions. With Abak, you enter your timesheets, your invoices, your accounts receivables and your payrolls in the same system. Managing your timesheets has never been so easy!

Including operation costs in projects: For or against?

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There are two schools of thought when it comes to project costing:

  • Charge only direct costs to the projects. In a second step use the project’s contribution margin to cover operation costs, also called overhear costs. This method makes the global profit margin more visible.
  • Charge all costs, including the operation costs, to the projects, and get net profit directly from each project.

How does it work?

Computing net profit globally

When charging only direct costs to the projects, the profit is called a contribution margin. It’s normal, since operation costs are not paid for yet.

At the end of the project, I compute my contribution margin:

  1. I invoiced $50,000.
  2. Direct costs for the project, including employee work, supplier invoices and contractor costs, are $23,000.
  3. My contribution margin is $27,000.

By adding this contribution margin to that of my other projects, I create a reserve to pay for operation costs. At the end of the quarter, for example, I can total my operation costs and subtract them from my contribution margin, to get my net profit for the period.

  1. I have $103,000 in contribution margin from my projects this quarter.
  2. I have incurred $60,000 in operation costs.
  3. My net profit for the quarter is $43,000.

Charging operation costs to projects

Project direct costs are easy to charge: supplier invoices, expense reports, time sheets and contractor costs are already associated with a project when logging them in Abak. When we want to add operations costs, it gets tricky. How can we decide how much of the operation costs to charge to each project? We’re talking about rent, administrative staff, computers, etc.

The simpler method is to add an extra amount to the hourly cost of resources.

Here’s an example:

  1. My operation costs are $100,000 per year. This includes all costs not charged directly to my projects.
  2. I have 10 employees who work on projects, on average 2,000 hours per year.
  3. My total worked hours for the year is 20,000 hours.
  4. I can divide my operation costs by my worked hours: $100,000 / 20,000 hours = $5.

This $5 is the amount I will add to my hourly costs for all employees that charge to projects. If my employee has an hourly cost of $32, including salary and benefits, then I’ll us a cost rate of $37 per hours to include operation costs. I can do this directly in the employee’s cost rate in Abak, or I can configure a $5 cost mark-up in the employee functions.

With the adjusted hourly costs, I can include my operation costs in my projects. This operation cost mark-up can be computed on a yearly basis by accounting and finance teams.

At the end of the project, I can see my net profit easily:

  1. I invoiced $50,000 for my project.
  2. My costs, including the operation costs mark-up on hours worked, total $37,000.
  3. My net profit is then $13,000.

Good sides, bad sides

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