Billable Hours

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Many businesses bill by the hour especially in areas like professional services and trades. The two critical areas that impact profitability here are how much you bill per hour and how much non billable downtime your staff incur. First let’s look at billable hours.

Time Analysis:

52 weeks in a year x 40 hours worked per week = 2080 hours

 

Less
4 weeks annual leave:
10 days statutory holidays:
5 days sick/personal days:
Total leave hours:
Nett:
Productivity at 80%:
(ie 20% downtime that is non billable)
160 hours
80 hours
40 hours
280 hours (7 weeks)
1800 hours (45 weeks)
1440 hours (36 weeks)

This is pretty sobering for many business owners. Despite paying their workforce for 52 weeks they effectively only have 36 weeks of billable time! This may vary a bit but is fairly typical for most hourly billing businesses.

In many services businesses who bill staff time by the hour to be profitable, the expectation is that revenue earned from charging staff time should be equal to or greater than 3 times salaries paid.

So this means that someone on a $60,000 salary with 1440 chargeable hours = $41.66 an hour is their effective cost to the business (and this is before any on costs such as ACC, Kiwi Saver etc). If expected revenue is 3 times salary their charge out rate needs to be $41.66 x 3 = $125 hour. This tells us that while we are paying an employee for 2080 hours of work (after holidays, sick leave and downtime), they are billed out for only 1440 hours or 69% of the time.

A similar benchmarking exercise can be done right across the business by taking annual salary costs and multiplying this by 3 to budget the income necessary to be profitable.

A business income statement for a service business would then look like this:

 

Income:
Cost of goods:
Gross profit:
Overheads:
Net operating profit:
$3x (3 times salaries)
$1x (salaries)
$2x (66.7% gross margin)
$1x (for an efficient business)
$1x (targeted profit)

Where possible this exercise should be carried out on a monthly basis broken down by employee and then consolidated for the business. A complication is WIP (work in progress) work that may have been completed but is yet to be billed but despite this analysis being regularly undertaken, you will receive a very useful “snapshot” of how the business is performing and how individual staff are performing against the desired 3 times salary multiple.

This is pretty sobering for many business owners. Despite paying their workforce for 52 weeks they effectively only have 36 weeks of billable time! This may vary a bit but is fairly typical for most hourly billing businesses.

In many services businesses who bill staff time by the hour to be profitable, the expectation is that revenue earned from charging staff time should be equal to or greater than 3 times salaries paid.

So this means that someone on a $60,000 salary with 1440 chargeable hours = $41.66 an hour is their effective cost to the business (and this is before any on costs such as ACC, Kiwi Saver etc). If expected revenue is 3 times salary their charge out rate needs to be $41.66 x 3 = $125 hour. This tells us that while we are paying an employee for 2080 hours of work (after holidays, sick leave and downtime), they are billed out for only 1440 hours or 69% of the time.

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