October 2008

Are you measuring up? 

You must measure as you go and know what your benchmarks or goals are.  When measurement occurs, there is increased awareness and ability to make adjustments.  It is important to keep track of:

• Billable time:  As a minimum number of hours and dollars.
• Utilization:  The percent of billable time vs. total time spent.
• Gross billings:  What you are billing as measured against your breakeven number.  Note that billings will not match the dollar value of time spent.  This is because there are lump sum contracts in which you are billing a percent complete, rather than time spent.  This is the secret to making money for lump sum contracts are designed to be completed in less time than the dollar amount calls for.
• Project or assignment profitability:  Are you meeting the time and money budget for each project, as measured against the contract amount?
• Overhead:  How much does it take to keep the doors open?  Much of this is fixed.  Use care in discretionary spending.
• Backlog:  How much work, in terms of billing, do you have remaining amounts to be billed?  Project this out over the likely months the project has remaining.  Don’t be surprised if there is a severe drop off when you go out 5 or 6 months.  This is normal.
• Accounts receivable:  Are your clients paying on time?  If not, you must get after this.  Delayed can impact your cash flow.
• Cash flow:  The actual amount of money coming into your practice.

Keeping tract on a monthly basis is usually sufficient.   For the individual practitioner this is easy, but does require a bit of discipline to stay current.  During the tight times you may need to monitor more closely.  It is essential that you measure your progress against your projected scenario.

Focusing on one of the items above, few measurements is more important than billable time.  When measured against total time, the factor is termed utilization.  This, of course, is the time spent actually working for paying clients.  One of the key measures – not the only – consulting firms must keep track of, is the percentage of billing time versus total time on the job. 

It is difficult to set standards that apply to all situations, for the variables include overhead (for those working at home this is low); the number of working staff (opposed to those that are merely overhead, such as your accounting staff; the fees (usually either lump sum or time and materials) and the billing multiple (the billing rate vs. actual salary paid).

For larger firms that have a balance of various types of staff, the breakeven percentage of billable time vs. total time is in the 60% to 65% range.  This is a generalization, for you must determine this for your own operation.

The breakeven utilization is determined by knowing the total number of dollars to cover expenses.   You then calculate the billing rates of the entire staff.  This is the dollar per hour you charge for services – for the entire billing staff.  By dividing this into the total dollars, you get an approximation of the number of hours required.  These hours compared against the total hours available will give you a %.  This then must be refined for all of the positions who will be billing.  The production staff is expected to bill in the 90%+ range, while the principle will have a lower utilization, because of time spend on non-billable activities, i.e. marketing and practice management.

A quick over-simplified example:

You are a sole practitioner:

          You set up a monthly budget:

          Salary:          $10,000

          Overhead:     $  8,000

          Profit (10%): $  2,000

          Total:            $20,000

Your hourly billing rate is $200.

$20,000 divided by $200 is 100 hours.  This is the minimum number of hours you need to bill to achieve your breakeven of $20,000.

On an average month you have 4.2 – 40 hour weeks = 168 hours.

Utilization is 100 billing hours divided by 168 total hours = 59.5%, say 60%.

The concept is simple, but it can be more complex when there are multiple individuals at various target utilizations and billing rates.

But it is imperative to measure this, so you can determine if you are generating the revenue.  But don’t let this alone be your gage.  You can be billing 100% of your time, but if the project budget has been used up, it doesn’t matter if your utilization is high.  So utilization must be viewed in context, but it must be measured.

The first step for the individual or small firm is to keep accurate tract of where your time is going.  It is very easy to spend time on your business, without getting your business done.  Your business is one of serving clients and this must be at the forefront of all activities.

Some tools for tracking time:

You can set up your own spreadsheet in which days are listed across the top and projects down the left side, then merely filling in time spent on all activities, including overhead and marketing.

There are numerous time tracking tools available;

For PC’s check out www.traxtime.com for $39.

For Mac’s look into “On the Job”  at http://stuntsoftware.com/onthejob/ for $25.

I don’t use these personally, as I have my own system, but these come recommended.