This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
Get a copy for your desk at www.linkedpractice.com
Average hourly rate is the best metric for determining the performance of a job or client. The average hourly rate is calculated by taking the total invoiced value on the job and dividing it by the total time put to that job. If the job has an overrun, the time will continue to increase on the job, which drives the average hourly rate down. Whereas if we finish the job quicker than expected, the average hourly rate will increase because there are less hours to divide the invoiced total by.
Let’s look at an example.
Say we have a job that we invoiced $5,000 for. If we put 20 hours to this job, we would say our average hourly rate is $250 per hour. This is a very profitable job. If we put 30 hours to the same job, our average hourly rate would drop to $166 per hour. We have an idea what our staff hourly rates are, so we view our average hourly rate with these rates in mind. If our minimum charge-out rate in the practice is $125 per hour and we see a job that has an average hourly rate of less than $100, we know it has gone way over budget.
It is important to keep in mind that our average hourly rates on jobs will be much higher than at a staff or practice level. This is because our staff and our practice has non-billable time, which drives our average hourly rate down, whereas jobs are looking purely at total revenue divided by total billable hours. We therefore need to adjust our expectations with this in mind. We can compare jobs with jobs, but we should not compare our jobs with our staff or our practice.
A great way to review the performance of your clients is to run a Client Profitability report in Link Reporting grouped by ‘Client Group’. Then sort high to low on the average hourly rate. You will see your most profitable clients at the top of the list, and your least profitable at the bottom. You can then expand each client to see the jobs that make up that average hourly rate, then expand those jobs to see the tasks and costs. To further investigate any figure in the report, simply click on it to drill down to a time sheet report for that task.
This is a great report to run on a monthly basis, but even more importantly at financial year end when you are getting ready to re-engage all your clients for the upcoming financial year. Review the average hourly rates, the write-offs and the profit amounts for each client group to see which clients need to have their fees lifted. This report can also be exported to Excel so you can easily put notes against each client before finalising their proposals in Practice Ignition. You can help your team succeed by providing them the information they need at www.linkreporting.com
Enjoy this article? Buy the book.
Need help setting up, fixing up, or getting up to speed on Xero Practice Manager?
We can help at www.linkedpractice.com