The smart money series: 5 ways you’re wasting money

money and savingsRunning a profitable business is as much about bringing in revenues as it is about controlling costs.  In service businesses, costs can get out of control in several areas where we don’t always pay enough attention. Here are five areas of concern that can have a big impact on your bottom line.

  1. Paper invoicing: mailing a piece of paper to a client costs more than one would think. There’s the cost of the paper, envelope and stamp, of course, but also the cost of the employee who is preparing the invoices to be mailed. Let’s look how the cost of paper billing stacks up, at 500 invoices per year:
    Paper: 5$
    Stamps: 0,61$ each, 305$ total
    Envelopes, 23$
    Employee time, 1 hour per month at 20$/h, 240$
    Total: 573$ per year, for 500 invoices
  2. Uncontrolled non-billables: these are less visible but not less costly. It’s the time the administrative personnel spends on a client file, the support technician helping the client fix a computer issue, the expenses we incur because of the client, but that we cannot bill, for example a visit on the client site with the technical expert and the account manager. Let’s look at the impact of a non-billable site visit:
    Travel time: 2 hours
    Meeting time: 3 hours
    Employee cost: 10 hours total, at a cost of 30$/hour, 300$
    Lunch with the client: 60$
    Mileage: 80$
    Total: 440$ in additional costs
  3. Non-reported billables: these are billable items that employees or consultants forget to report. For example, a 15-minute call taken while driving, or a couple of hours done at night from home for fix a problem for the client. Often, we simply forget to put these billable items on our timesheet. Yet, that is lost revenue for the business. At a billable rate of 120$ per hour, a couple of hours a month of non-reported billables represents 2 880$ in lost revenue.
  4. Non-billed billables: In this case, the time sheets and expenses were logged by the team, but somehow they didn’t make it into the invoice. Sometimes it’s because the billable items were reported late, after that month’s bill was sent, for example. Other times, it’s because the items were simply forgotten. Just like non-reported billables, non-billed billables stack up fast: 2 hours a month of non-billed billable hours, at 120$ per hours, and up costing 2880$ a year in lost revenue – plus you’ve paid the employee for the work, which at 30$ per hour amounts to 720$ in additional costs.
  5. Manual record keeping and invoicing: While Excel and Word a great office tools, they do not scale very well. Keeping time sheets, expense reports and invoicing records in Excel, then creating each invoice individually in Word and Excel from this data is not only a great source of errors, it’s also time-consuming. At Abak, our clients generally used to take twice as much time invoicing manually as they do now invoicing with Abak. These time savings help your business be more productive, and would delay the hiring of additional administrative staff.

What about you? Where do you see money being wasted in businesses?

The billable hour: the long term vision

Les consultants

In the consulting world, it can be tempting to maximize the revenues on a project – to bill as many hours as we can on that project. But should we not think about maximizing the revenues from a client instead?

Let’s think this through: if I bill as much as I can on one project, I may end up with a client who’s unhappy with the cost and delays on that project. I may have high revenues from that project, but I may very well never do business with that client again.

If I concentrate on completing my project within reasonable delays and with a reasonable cost, then I may end up with a client who’s happy and gives me more contracts. It’s a lot easier to keep clients happy, then to find new clients, both in terms of time and resources.

Billable time: how much is your time worth?

Snorkeler at John Pennekamp Coral Reef State Park near Key Largo. At the Time of This Picture, Water Clarity Was Good, But Experienced Divers Say Clarity Is Far Less Than It Was 20 Years Ago Because of Dredging and Filling Operations by Land Developers.

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 like 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, our previous job, or the competition. While those are worthy benchmarks to gage our pricing against, they may not be the best factors to use in 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? It’s naive to assume 100% of work time is billable time. Previous years can give a good idea of how many billable hours can be expected by a person and 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 that cost us 500 000$ per year in wages.
  • Office rent, equipment and administrative expenses cost us 60 000$ per year.
  • We aim for 15% before-tax profit, which amounts to 98 823 $

Our revenues should be at least 560 000$ per year (to break even), 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 about 70% of their hours, which is 28 hours per week per consultant.
  • We estimate that each consultant will work about 48 weeks per year, leaving 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?
  • Are you 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

Woman aircraft worker, Vega Aircraft Corporation, Burbank, Calif. Shown checking electrical assemblies (LOC)It seems in manufacturing, business managers are used to having metrics like product line profitability, expected revenue from sales, breakeven points, and the like. In professional services 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 name that changes.

Manufacturing Professional Services
Productivity
How much product was made.
Work in process
How many billable hours were worked.
Income by product line
How much profit was generated by sales of each product line.
Project/Client profitability
How much profit was generated by resources working on each project or for each client.
Budget control
How much spending is planned to produce each product line.
Budget control
How much work is expected to be done for each project.
Revenue by product line
How much revenue was brought in by sales of each product line.
Revenue by resource
How much revenue is generated by each person employed by the business.
Production line scheduling
Which product is planned for production, how much production time is available.
Resource utilization
Planned project assignments for each person employed by the business.

Resource Assignations: Who’s Doing What?

Row of Postal Clerks Processing MailScheduling resources for projects can easily become a nightmare. If a new client signs on with the business, it’s imperative that the manager be able to tell that client when the work will begin, and who is going to be in charge.

Resource assignment reports provide exactly that information. They show which resource is booked on which project, when they become available, and for how long. This is especially useful for resources that are in high demand, usually those that bring in the highest revenue.

Project Planned hours Sun
1
Mon
2
Tue
3
Wed
4
Thu
5
Fri
6
Sat
7
Sun
8
Mon
9
Tue
10
Resource A
Project A 40 8 8 8 8 8
Project B 16 8 8
Project C 0
Resource B
Project A 8 4 4
Project B 8 4 4
Project C 40 8 8 8 8 8
Resource C
Project A 0
Project B 48 8 8 8 4 4 8 8
Project C 0
Total 160   24 24 24 20 20     24 24

From the table above, we can see that Resource C is available for half-days on the 5th and the 6th. If we had a request for work, we could book Resource C for those two half-days. The table also shows that Resource A is working primarily on Project A.

Revenue By Resource: Who’s Bringing In The Money?

Negro bus-boy dishwashers, Investment Pharmacy, Washington, ...In a business where time is the product and its value is based on the people in the team, it’s important to know how much revenue is created by each team member. It can be used as a performance objective given to the resources or department leaders. It can also be used as a critical business metric.

Revenue by resource is the sales figures for each team member. From this information, after subtracting the cost rate, one can get gross profit margins for each team member.

Knowing how much revenue is created by each team member is essential. Without this information, it becomes impossible to prioritize resource assignment and evaluate team performance.

Resource Work Billable Non-Billable Revenue
Resource A 40 40 0 4000.00
Resource B 65 40 25 4000.00
Resource C 56 20 36 2000.00
Resource D 60 0 60 0.00
Resource E 50 35 15 3500.00
Total 271 135 136 13 500.00

As we can see in the table above, the resource bringing in the most revenue is not the one working the most hours, but the one with the highest proportion of billable hours.