This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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Average hourly rate. This is the best metric to understand your overall practice performance, job performance, team performance and staff performance. This metric works so well because it considers both productivity and write-ups as drivers of metric, and cannot be manipulated by subjective inputs such as cost. Average hourly rate is calculated by taking the total amount of revenue generated, divided by the total number of hours worked. The total hours include both billable and non-billable time.
Let’s look at an example:
Say Jack has a billable rate of $200 per hour. For the month of June he did 120 billable hours and 40 non-billable hours, a total of 160 hours for the month. Jack’s billable time was $24,000, but he incurred $5,000 of write-offs in the period from a few jobs that he completed. This drops his revenue for the period down to $19,000. To get Jack’s average hourly rate for June, we divide $19,000 by 160 hours, which gives us $118.75.
For the month of June, we can say that Jack’s productivity was 75%, his write-offs were 20% and his average hourly rate is $118.75. To lift Jack’s average hourly rate we want to focus on reducing his write-offs, so we would investigate the $5,000 of write-offs to see if they are spread across all jobs or if there were one or two jobs that took a big write-off. If it is across all jobs, this indicates that Jack is not working efficiently enough to justify his billable rate, whereas if it is just one or two jobs, it indicates we have some client fees that are too low and need to be lifted.
The longer the period we look at, the more accurate average hourly rate we get. This is because the write-offs can be higher in one month or lower in another and this gets smoothed out as we increase the period we are looking at.
If we can focus on one thing in our practice, it is lifting our average hourly rate. We do this by helping our staff to lift their productivity and reduce their write-offs, as these two are the drivers they can control. The other driver of average hourly rate is something that is controlled at a practice level. It is the billable rate.
Increasing someone's billable rate will also lift their average hourly rate for the time and cost work they do, as long as it does not trigger the associated write-offs. For example, if we lift someone's billable rate from $200 to $220, if we end up writing off $20 per hour, the net impact of this lift would be nil.
When a staff member is consistently getting write-ups on their jobs, rather than write-offs, it indicates their billable rate is too low. We can then justify lifting their billable rate, which is generally accompanied by an increase in salary – the incentive for the staff. If our staff become more productive and more efficient, they are making the practice more money, so we can afford to pay them more. This is a win for both the staff member and the practice.
The Team Performance report in Link Reporting allows you to view your average hourly rate at a staff member level, for any period you select. This can be rolled up to a grouping level such as team or role, then rolled up again to the practice level. If you work with your staff to help them lift their average hourly rate, it increases the average hourly rate of the practice overall.
The average full-time staff member works 1,920 hours each year, assuming four weeks of paid leave. If we can increase the average hourly rate for that staff member by just $10, that is $19,200 additional profit for the practice. This can be achieved with a small lift in productivity, or a small drop in write-offs. You can help your team succeed by providing them the information they need at www.linkreporting.com
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