Let’s in this article explore how you can improve your firms job margin. Most recent inter firm surveys looking at year end 2022 results evidence that margins have fallen or at best been flat. So, in this issue we take a look at another important profitability KPI – your Revenue Per Hour (RPH). We highlight a number of strategies that will help you sharpen the pencil and, as a consequence, improve your margin and add profit to your bottom line.
Calculating your firm’s RPH
This KPI is simple to calculate but not as easy to determine based on the traditional profit and loss account. To calculate your RPH – take your last year’s fee revenue and divide the chargeable hours that created that revenue. Then calculate what it was 3 years ago, 2 years and one year ago. Now look at your current budget and calculate your projected RPH. You should now have 4 numbers and from these you will be able to assess the quantum and direction of your margin. See the table below.
I know from experience when attending practice management conferences that discussions take place regarding charge rates and realisation rates. These are all well and good, but I am going to suggest that RPH is a real number whereas charge rates are largely aspirational created based on personnel experience, number of expected charge hours and their hourly costs. Realisation is the result of comparing actual revenue with total time on for those revenues.
| Period | Fee Income | Chargeable Hours | RPH |
|---|---|---|---|
| Three years ago | |||
| Two years ago | |||
| Last year to date | |||
| Future forecast |
RPH – what does it mean?
So, armed with these numbers you are probably interested in (1) what it tells you and (2) what to do to improve the number. The first four numbers will, most likely, show that over time your actual financial performance is ebbing somewhat.
Consider:
- Has your RPH kept pace with charge rate increases?
- Or with inflation?
- What has been and is the impact of Covid?
- Maybe some charge hours you are unable to fully recover?
- Do you have jobs realising less than 85% of charge time?
- Do you have pro bono work where maybe a charge could be introduced or increased?
- Do you have some work that is being under priced?
- Are [some] partners realising much less than average?, Finally
- If reducing, what is your thinking as to why?
How NOT to increase your RPH
If people don’t charge all their client hours then clearly RPH will most likely increase. Previous articles have highlighted the importance of accounting for all client time. NO accountancy business is registered as a charity. But when people say, “I can’t possibly charge that to ….” they are doing precisely that – donating time to clients. And yet, we all understand that ‘time is money’. “Yes, but we cannot charge for it,” you might hear from one of your team. But it is massively important to know the full retail cost of serving clients. Then armed with that information you may at least be motivated to having a pricing conversation with the client. If a partner is not charging time, then maybe there are others who aren’t either. And that results in your retail costing system being inaccurate and disrespected. Remember, the time on the clock does not equal the fee.
Key action: Make sure that all client hours are fully accounted for
Four steps to increase your RPH
There are way more than four but for the purposes of this article I include a few suggestions for improving your RPH. You may have identifies others in the above checklist of questions.
- Increase your price
Increase your price for this year’s work by five per cent over and above the rate of inflation. Why is the profession is so fixated on this year’s price being the same as the previous year after adjusting for inflation? “But clients won’t stand for that increase” someone said at a recent online practice management workshop. “O really, who says so”? I replied. This person had not recognised that no job from year to year is ever the same. Like when you go for a meal the menu items differ and so the price varies.
Change factors include, but are not limited to:
- Your client’s business may have grown
- There may be reconciliations to look at that have not previously featured
- The client may have bought or sold a business, moved premises or hired more staff
Key Point: Success here starts with your up-front client conversations and your engagement letter. Meet with the client and during your conversations prepare the client for the possibility of price variations.
- Charge rates
Similarly, increase your charge rates by 5 per cent over and above the rate of inflation. Add in stretch to your firm’s revenue management. Okay, this might result in your realisation rate decreasing slightly but it should increase your RPH.
- Client caused extras
When your car is serviced at a dealership the service reception manager has their mechanics already to identify any necessary additional remedial work before they start your service. And having told you what needs fixing they will then tell you the price. Same with the builder and their extras. Same with the restaurant. But not so with the accountant where standard practice is to do the work and think about the price later.
The remedy. Starts with your client conversation and the engagement letter and let them know that you will draw their attention when you come across any client caused problems. And have your staff ready to quote a fixed price. Telling them that it will be based on hours is a big no-no. Why? What have you bought in the last year that you did not, in advance, know the price for? It is good and best business practice to advise prices up front. Leave it until when the job is being signed off and you are unlikely to gain the recovery your work deserves.
- Having more than one charge rate
Do you have more than one charge rate? If you don’t, you should. Why? Good question. Buy a plain vanilla ice cream and you will pay one price. Choose one of those flavoured ice creams and you might pay a little more. Add in one of those chocolate flakes and you will certainly pay more. Similarly, much of your work may well be what we could view as plain vanilla work. This includes the preparation of financial statements, the audit, the tax return and so on. These are what some people (not me) call grudge services. I refer to them as compliance. But, ‘grudge’ kind of tells it how clients see it in that these are services they have to have as opposed to want. Let’s face it, has any client ever said to you, “I loved that audit so much, how soon could you come back to do another?!”
Possible formula for your higher charge rate
Business advisory, regular planned advisory meetings, management accounting, wealth advice, valuations, estate planning, M&A and tax consulting. These are just a few of the services that justify and deserve a premium rate. They are valued added services. If you don’t have a higher rate then create one now. A good starting point is your current hourly rate + 25%…or more. Then set your sights on charging a minimum of 100 hours in the next year at this second tier rate.
Well, I trust that this serves as an interesting and profitable exercise. Do contact me if you care to share your insights and the results of your RPH review.
