Practice Performance Reporting with Xero Practice Manager: Practice Average Hourly Rate

This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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Practice average hourly rate

Now that you’ve measured how productive your practice is, and how effective you are at turning billable time into invoiced value; you’re ready to measure your practice’s average hourly rate. Practice average hourly rate is a magical number because it is a function of service pricing, productivity and write-offs. If we get this mix right, our average hourly rate increases. Average hourly rate gives us a single value to monitor these three drivers of practice performance.

Practice average hourly rate is a relatively simple yet powerful equation. It can be defined for a specific period as:

Practice revenue / total practice time (excluding leave)

The beauty of knowing this number for your practice is that it can’t be faked and it can’t be fudged. We also need to be aware that making a change to one driver may also cause an equal and opposite effect to another, thus creating no overall change to the practice’s average hourly rate.

Here are a few examples:

• Working longer hours or doing more billable time by itself will not improve your practice’s average hourly rate.
• Having the right mix of billable to admin and management staff by itself will not improve your practice’s average hourly rate.
• Training or hiring staff to deliver higher-value services by itself will not improve your practice’s average hourly rate.
• Increasing your billable rates or pricing your fixed-price engagements higher by itself will not improve our practice’s average hourly rate.

The only way to improve your practice’s average hourly rate is by small and continuous tuning and re-tuning of all of the above factors simultaneously. This is the art of practice management.

Your practice’s average hourly rate can be defined for a specific period as:

Practice revenue / total practice time (excluding leave)

It is tempting to measure your practice revenue as the invoiced value generated within a specific period. This can be easily viewed in Xero or via a custom report in XPM. While invoiced value can be a good approximation for longer periods of time (years), it fails to take into account the invoiced value of disbursements (like Xero subscriptions) that may be built into your engagements. These can be significant and often lead to practices over-inflating their practice average hourly rate.

The monthly invoiced value of services within your practice is also very lumpy, and can be heavily influenced in any given month by the value of deposits or final invoices in that month. This makes movements in your practice average hourly rate difficult to interpret. The best reason for not using your monthly invoiced value to measure your practice revenue is that while it might be easy to measure, we are unable to view the drivers of this (service pricing, productivity and write‑ons/write-offs), so we are powerless to improve it.

Instead, we want to measure our practice revenue for a period the same we way measure our staff performance:

Billable Value of Time
+Write-ons
_ Write-offs

= Practice Revenue

We want to measure our practice average hourly rate as a collection of staff, not as a collection of jobs, as this removes the influence of on-charged disbursements that otherwise artificially inflate our practice average hourly rate.

To measure your practice average hourly rate using XPM, build a Time Productivity report using the report builder. This exact report was covered earlier in this chapter when we looked at practice productivity.

Here is how it is built:

Report type: Time Productivity

Fields to display on report (in order):

• [Staff] Name
• [Client] Client
• [Job] Job Summary
• [Task] Name + Label
• [Time Productivity] Billable Time
• [Time Productivity] Non-billable Time
• [Time Productivity] Total Time

Criteria for the report:

• [Time Productivity] Date – is on or after {the start date you want to report on}
• [Time Productivity] Date – is on or before {the end date you want to report on}
• [Task] Name – excludes {Leave}

Rows are: Grouped and subtotalled by the first field

Use this report to subtotal the billable value created for all of your staff within a specific period, as well as your total billable and non-billable time (excluding leave). Now we need to adjust this for the write-ons and write-offs incurred in the period. In a new tab, create a new custom report to discover your write-offs for the period.

Here is how it is built:

Report type: WIP Ledger

Fields to display on report (in order):

• [Ledger] Staff
• [Client] Client
• [Job] Job Summary
• [Ledger] Ledger Type
• [Ledger] Description
• [Ledger] Time (Totalled)
• [Ledger] Billable Amount (Totalled)
• [Ledger] Invoiced Amount (Totalled)
• [Ledger] Amount (Totalled)

Criteria for the report:

• [Ledger] Invoice Date – is on or after {the start date you want to report on}
• [Ledger] Invoice Date – is on or before {the end date you want to report on}

Rows are: Grouped and subtotalled by the first field

It’s important to note here that we have chosen the ledger invoice date, rather than the ledger date. That is because write-offs are recognised when they are invoiced, not when the ledger entry is made. To get an accurate picture of what your write-ups were for a period, you must use the ledger invoice date.

You should have two reports in front of you: one Time Productivity report and one WIP Ledger report. Add the billable value of time from the time report, to the net write-offs shown in the WIP report, to arrive at your practice revenue for the period. Divide this by the total time (excluding leave) for the period and you will arrive at your practice average hourly rate for the period.

Here is an example:

Billable value of time........................................ $200,000

Net write-offs...................................................... $16,000

Practice revenue............................................... $184,000

Total time (excluding leave)......................... 1,400 hours

Practice average hourly rate.............................. $131.43

Repeat this process for each month and you will notice a slowly moving trend in your practice average hourly rate that you can start to do something about. You can begin to analyse how you price your services, your billable rates, productivity, write-ons and write-offs to improve the effectiveness of your entire practice.

The above process for measuring the average hourly rate for your practice is a good starting point, but it doesn’t allow us to easily see how this number might be changing over time, and most importantly why. Link Reporting allows you to drill into the drivers of your average hourly rate, making it by far the easiest way to improve it.

Inside Link Reporting, run a Practice Performance report. This report allows you to easily monitor your practice average hourly rate, and how it changes over time. The report also displays all the drivers of your average hourly rate, including practice productivity, practice write-ons and write‑offs, with the ability to drill down to the individual time sheet entries that contributed to these. This depth of reporting will make it easy to improve your practice average hourly rate. You can help your team succeed by providing them the information they need at www.linkreporting.com

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