This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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There are some settings in XPM you need to get right. In this section we’ll be reviewing the essential settings to ensure your practice is set up to succeed.
To get started, go to ‘Business > Settings > Staff’ in your XPM.
Most people are familiar with billable rates. Even where we may not charge hourly for a staff member's time, ie. quoted or fixed-price agreements (FPA), we still need to apply a billable rate to represent the value of that time. This allows us to calculate our write-ons and write-offs on jobs.
The billable rate entered here is the default billable rate that will be applied when a team member does a time sheet to a billable activity on a job. This will be overridden by:
- Job custom rates (in the job settings)
- Client custom rates (in the client settings)
- Custom task rates (in the staff settings)
- Default staff billable rate.
This operates as a hierarchy. Where no job custom rates exist, XPM will check for a client custom rate. Where no client custom rate exists, XPM will check for a custom task rate. Where none of these are found, XPM will apply the default staff billable rate found for that team member.
As a rule of thumb, our billable rates for each team member should be roughly four times their direct cost rate. Once adjusted for productivity we should be close to the ‘one-third rule’, which means that for every dollar of invoiced value each team member generates, we should return one-third to cover their wages, one-third to cover our overheads, and one-third for profit. This makes a good starting point, but how do we determine what a team member’s billable rate should be?
Here are five considerations:
- Base rates
As discussed above, base rates are a great starting point for setting team members’ billable rates. Once we have calculated the direct cost per hour of someone's time, we can multiply that by four and arrive at something close to what their billable rate should be. Next, we need to ask ourselves if we can sell their time at that rate.
- Market rates
Depending on where you are in the world, there will be a spectrum of rates applied to the type of services you offer. Because more practices are invoicing on the fixed price or quoted-value basis, these rates are rarely published. You want to ask yourself, however, ‘If I were to charge hourly for this person's time, what would a customer pay?’ Typically, the more specialist, niche or rare the services are, the higher the rate the market is willing to pay. This is because it can be difficult to find quality people able to deliver that service.
- Job role
Not everybody is employed to be a billable team member. Administrators would typically have a $0 billable rate as we never charge for their time. Similarly, job managers and directors will not have the same expectations around the volume of billable work they will do, as we hired them to manage and lead our team. Applying the x4 multiple on their base rates won’t work as well because we’re not paying them to be on-the-tools team members, therefore market rates are better to use here. We want the rate for these people to be high enough that we’re not encouraging clients to use their time on the hourly basis except where they may have some specialist skills. Where our job managers and directors are working on client jobs, we want that to be high value, high-impact work with a billable rate to reflect this.
- Skills and experience
Related to market rates above, billable rates should reflect the skills and experience of the people performing these tasks. More senior or experienced team members should command a higher billable rate that reflects the speed and efficiency at which they work and the quality of the work they produce.
Even where we may have a senior team member performing a junior-level task, we should be applying a senior rate to that task to reflect the speed they deliver it and the quality of the work.
- Historical performance
A good guide on whether your billable rates are right is to look at a team member’s historical performance. If they have consistently high write-offs, this could indicate an over-inflated billable rate. We may want to lower this rate until their efficiency and the quality of their work is able to reach a billable rate we can consistently charge without incurring write-offs.
Where a team member has consistently high write-ons, this could indicate that they are highly efficient and effective with their time. They may be working on a higher proportion of fixed-price jobs and consistently delivering under the budgeted value or estimated times, resulting in a write-on. If this is happening consistently, we’re better off increasing their billable rate to reflect this efficiency and effectiveness. This is because we are undervaluing their actual time so if they are ever working on a billable job, we will not be recovering the full value of their work.
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