Define Effective Billing Rate: The amount of money you end up with after dividing your total revenue by total working hours.
Doesn't sound too tricky?
But... the tricky part is the "total working hours" part. It's tricky because you're likely working a lot of non-billable hours just to keep the consultancy alive. Admin work, emails, correspondence, internal computers and networks, meetings, etc. Since those hours are non-billable, you're effectively getting paid to work them from your consulting fees. In other words, your consulting gigs pay for all the little in-house jobs you have to do. The effective billing rate includes all those non-billable hours.
"This got so hard, we needed an app like ST"
After watching this video scroll down to learn more.
Things that can make calculating effective billing rate tricky
Calculating effective billing rate is easy. Just divide revenue by hours. But that can get tricky when billing rates for each consultant are different, and when you just want to see the rates for a given time period.
"It's all the project rates that complicate things"
Billing rates for each consultant
Most consultancies charge different rates for each consultant, or at least different rates for the roles that take on each project. You could have dozens of rates to factor into the calculation. Joe bills $110 per hour. Alison bills out at $280 per hour. And Buzz pulls down $130. Plus, they all billed different hours. Now what's your effective billing rate? Not so easy is it? And the more consultants you have, the more complicated it gets.
Effective billing rate for a given date range
Actually, you almost always want to know your effective billing rate for a given date range. Rarely do you want the rate for the entire time your company has been in business. In other words, all time. You normally want to see rates for last week, last month, last quarter, or last year. The rate for each week or month almost always changes. It depends upon the number of billable hours, and the rates your charged. Those hours almost always change.
A consultant's utilization percentage is the number of working hours verses scheduled hours. The company usually has to pay salaries for every scheduled hour. And they only get client revenue for billable hours. But whether the hours are billable or non-billable, the employee is considered "utilized" when they are working.
"We had too many non-paying secondary jobs"
Billable verses non-billable percentage
It's probably obvious by now that the higher your billable percentage rate, the higher your effective billing rate will be. But only if the utilization rate is also high. You could have a 95% billable percentage, but only be utilized for 10 hours a week. In this case, the effective billing rate is pretty low because you're paying for all those unused scheduled hours. The few billable hours this person gets each week is diluted by all the non-billable hours where they are not utilized.
So there are a lot of factors to consider when running a consultancy. Mostly you just have to keep people billing client hours, and not sitting around doing too many non-strategic in-house jobs.
Figure 1: Utilization and Rates Report
"I'm glad we found a solution"
Video text: You’re a consultant, right? Do you know your effective billing rate? Or are you afraid to go there? Don’t be. Your effective billing rate is easy to calculate. Standard Time® does it automatically.You can too. Just divide your revenue by total working hours. Done. That’s your effective billing rate. Want to compute it for last month? Or last year? Or for a certain job?
Then you need Standard Time. Download it here.
Run your numbers and celebrate!