This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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Staff Return on Investment (ROI)
Staff ROI gives us insight into how profitable a staff member is for our practice. Staff ROI is expressed as a percentage, and is calculated by taking the full amount of revenue a staff member has generated in a period, divided by their cost. When we are looking at how much we should be paying our billable staff member, ROI is an excellent indicator.
Staff ROI can be increased by increasing productivity or reducing write-offs. Both of these actions will increase the revenue generated by the staff member, which lifts ROI. The other factor of ROI is the cost, and this is why it is important to understand our costing method. We want to view our staff ROI based on their direct cost, not a burdened cost which includes overheads. This is because an increase in business overhead cost will increase the staff burdened-based rates, which would reduce staff ROI. This is an unfair way to look at staff performance because staff have no influence on the overheads in the practice.
If a staff member is making enough money to cover their own salary, we would say that they have an ROI of 100%. This is because the amount of money they generated in the period is the same as their cost.
Let’s look at an example:
Travis is on a $60,000 salary, which is $5,000 per month. If Travis generates $5,000 of revenue in a month, his ROI would be $5,000/$5,000, which is 100% when expressed as a percentage. If Travis made $10,000 for the month, his ROI would be 200%.
We want our billable staff aiming to be sitting around 300% ROI. This is because we allocate the first 100% for their salary, the second 100% for company overheads and the third 100% for company profit. This follows the ‘third, third, third’ rule that is often thrown around the accounting industry. How do we achieve a 300% ROI?
We’ll take a look at that now.
Let’s start with what we pay our staff. This should be approximately 25% of their billable rate, not a third of the billable rate as commonly thought. This is because we have not accounted for non-productive time. Rose is on a salary of $104,000 per annum, which works out to be $50 per hour. We would therefore set her billable rate to be $200 per hour. We expect Rose to be 75% productive, and incur no write-offs on her work.
If Rose works 100 hours, we would expect 75 of them would be billable. This is because her target productivity is 75%. 75 hours at a billable rate of $200 per hour is $15,000. Assuming there are no write-offs on this, the revenue Rose generates is $15,000. We pay Rose $5,000 for her 100 hours, and she generated $15,000 of revenue, which is a 300% ROI.
As a rule of thumb, someone's billable rate should be four times their wage rate. Assuming 75% productivity with no write-offs, a 300% ROI will be achieved. Staff only have two ways to improve their ROI, they can increase their productivity or reduce their write-offs. Both of these levers will increase ROI. The other way to increase ROI is to increase the billable rates, which increases overall billable value, and therefore revenue increase. This does not always work, however, because a higher billable rate can also lead to higher write-offs, so you arrive back at the same ROI.
Calculating staff ROI accurately in XPM has a few steps. First calculate revenue by staff using ‘Staff Billable Value’ and ‘Staff Write-offs’ for the period. Take this figure and divide it by the ‘Direct Cost’ of each staff member. It is important to ensure you are using the direct cost and not the burdened cost that includes overheads. Staff ROI is readily available in Link Reporting in the Team Performance and Individual Performance reports. You can help your team succeed by providing them the information they need at www.linkreporting.com
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