Your charge rates create a powerful anchor to the price you seek for your services – follow these simple steps and power up your profit. You will be amazed how your bottom line will increase if you follow these step.
In the first of these two articles we looked at a range of matters relating to value pricing, time recording and the connection and reconciliation between these different pricing approaches. My conclusion was that regardless of how you price it surely makes sense to capture the hours expended on an engagement. How else can you capture the retail cost of performing a service?
Look at the annual cost of your partner and staff team, including any additional costs such as social security, pension costs and so on. Then divide this by your expected productive hours. The result? Probably a significant number. If, you disagree with me, and that does not make either of us wrong, then the remainder of this article probably offers little by way of value. However, it is my clear and proven understanding that the majority of medium and large firms continue to maintain time recording systems. How so? Well, IPA, the leading provider of sought after benchmarking reports continue to report on firms chargeable hours. So, moving on…
Who should have a charge rate?
The obvious answer is anyone who is engaged in the delivery of the firm’s professional services. However, some firms recognise that there are others who make a contribution to client service. For example you may engage staff for internal purposes such as human resources and marketing that may also provide advice and services to clients. When managing my own accountancy business I trained a member of the admin. team to book in client records and the time taken was about 20 minutes on average. I saw this as a direct cost and not an overhead. During the pandemic firms are reporting a range of activities undertaken for clients. These all create value, even if you judge that a cost cannot always be passed on to clients. Remember, as discussed in earlier articles, that a well-managed firm usually generates a return of 85% of captured time.
Key Point: Are there any members of your team that need to be awarded with a charge rate? This can enhance their sense of value to the firm.
How many charge rates per person?
During more than thirty years of lecturing I have oft asked this question, “How many of you have more than one charge rate?” Empirical evidence from these events informs me that less than 50% replied to confirm that they have more than one rate. That in itself is yet another management inconsistency…and a missed opportunity.
Ice cream pricing lesson
Imagine you are out one day and you decide to purchase an ice cream cone. You opt for one that is plain vanilla. Your companion, perhaps decides they would like to have one of those ice creams with the chocolate flake adorning the top of the cone. That will of course attract a higher price. But for this higher price they will, of course, receive more. You see my point? The reality is that some of your work is equivalent to the plain vanilla ice cream. Perhaps the finalisation of financial statements fall into this category? Or the audit maybe?
But, some of your advice delivers greater value. For example; advising on wealth planning, business planning, mergers and acquisitions, problem solving, funding, exit and succession planning and so on. Your ‘retail costing’ system should rightly reflect the higher value service. So, your second higher charge rate should, as advised in an earlier article be 15-20% higher than your base rate. And then set out a target total of hours that you seek to achieve at this higher rate.
Key Fact: Less than half of firm owners have more than one charge rate, yet does not some of their work has much greater value?
Now onto your billing rate multiple calculation review
My experience over the decades of consulting is that rarely have I found a firm who have rate consistency. After reading this article I strongly recommend that you carry out the exercise I describe in the following paragraphs.
The starting point is to take a spreadsheet and enter all staff members names in column A and their salary in ‘B’. Then add in the direct employment costs that apply in your country (Columns ‘C’ and ‘D’. These will include any costs for social security, health insurance, pension costs and so on. Total these costs – let’s assume that this is column ‘E’.
In column ‘F’ you should record the expected billable hours for each staff person.
In column ‘G’ you should enter the current charge rate.
In column ‘H’ you should calculate the chargeable time (F*G)
In column ‘I’ you can then calculate the current BRM.
In column ‘J’ you should enter your target BRM. Here you should enter your target billing rate multiple (BRM). This may well vary dependent on the type of work undertaken. For example, outsourced client accounting services may well attract a lower rate than those involved in the preparation of financial statements. The rate for auditors may then be higher as will that for your tax team. And then there are the partners.
Here, is my view of the hierarchy of BRM’s.
(Partial list)
- Client accounting services
- Financial statement – preparation of accounts
- Audit team
- Tax and business advisory teams
- Partners
Key Action: Review your BRM’s and ensure alignment. Download my FREE BRM pre-populated calculator now.
This leaves you to answer the question as to what your BRM’s be. As a guideline I find far more firms working to a base rate of 4 than I did ten years ago. So, here is a possible approach. Take a BRM of 4 for 2 or maybe 3. Reduce the BRM for the lower BRM categories and increase for the higher rates.
In column ‘K’ you should calculate your target annual chargeable time (E*J)
In column ‘L’ you will now see your hourly charge rates, and then
In column M you can round up to your final hourly billing rate
The Good News: To make this a whole lot easier download my pre-populated data input spreadsheet NOW.
Results
- Firstly, this is NOT about reducing charge rates.
- Secondly, use this as an opportunity to introduce uniformity into your BRM’s for each category of team member.
- Finally, you are likely to find that some team members rates increase – maybe even significantly. The increase is most likely down to (1) catch up where their rate was below that of others, and (2) increase as a result of your new charge rate structures.
Here is what you might find, and I stress, might:
- The lowest charge rate is between 5-8 times that of partner rates
- Manager rates are likely to be 60-70% that of partners
Finally, another test. Make sure that partners recoverable time is greater than their profit share. The principal here being that they take home a minimum of 100%, or more, of their time on.
Key Result: Complete this review and some of your charge out rates will increase – as will your profits. If you have any questions, do please let me know – mark@marklloydbottom.com
