4 methods for calculating your company's billing rate
Are you aware of the billing rate within your company and have you communicated clear expectations to your employees regarding what it should be?
The billing rate is an important indicator for measuring resource utilisation and can be used both at the individual level and company level. But how do you calculate the billing rate? There are several methods, which we will teach you in this article.
First and foremost: Understanding the billing rate
The billing rate is a key indicator that shows what proportion of employees' working hours are spent on billable client work. It is measured in percentage and can be used at the company level, departmental level, and individual level.
Billing rate is an important KPI when you need to measure the resource utilisation of the business: A high billing rate indicates that a large portion of resources is used on income-generating work, whilst a low billing rate suggests that time is spent on non-productive activities.
Taking steps to improve the billing rate will usually result in increased profitability for your business.
Which method of calculating the billing rate is best for you?
There are several levels you can choose from when calculating the billing rate. Which method you should choose depends on the goals and needs of your business, and how much data you have available. Some methods, for example, rely on being able to gather data on holidays and other absences.
Consider the purpose of monitoring the billing rate, and choose a method accordingly. Purposes can include:
- Monitoring the financial situation of the company.
- Following up on individual performances.
- Encouraging income-generating work among employees.
- A combination.
What's most important when measuring billing rate is that everyone in the business has a common understanding of the chosen calculation method. Otherwise, you risk measuring different things and getting different results.
Method 1: The simplest way to calculate the billing rate
If you want a quick overview of the billing rate in your company, the calculation can be quite simple.
Find the number of billable hours and divide it by the total number of hours worked in the company.
This is a direct method to assess efficiency. It gives you immediate insight into what proportion of working hours contribute to direct income. This method is the simplest, but also the least accurate, and does not account for holidays or other absences.
Method 2: Taking agreed working hours into account
This method considers the number of working hours employees are contractually obliged to over a year and is therefore more accurate for calculating the billing rate in the business.
From a managerial or executive standpoint, this method is recommended as it is directly correlated with the financial aspects of the company.
Find the number of agreed working hours, which is the total number of hours the employees are collectively supposed to work over the year. Deduct holidays. Then take the number of billable hours and divide it by that figure.
Method 3: The fairest approach
While Method 2 only has an economic perspective, Method 3 takes into account absences that employees often cannot control themselves.
First, determine the number of agreed work hours in the company, and then deduct holidays and absence time. Lastly, take the number of billable hours and divide it by the figure you obtained.
Method 4: Encouraging specific non-billable activities
A final method for calculating the billing rate takes into account certain categories of internal time in the business (non-billable time). This is a method you use if you want to incentivise certain types of internal time among employees. For instance sales meetings or professional development.
Such activity takes work away from directly income-generating work, but in certain cases, you might want to prioritise internal projects. Add the desired internal time to the billable hours in the calculation.
To measure this billing rate, take the number of billable hours in the company, and add the desired amount of internal time. Then take the figure for agreed hours and deduct holidays and absence time. Finally, divide the first number by the last number.
What valuable insights can we gain from the billing rate?
Calculating the billing rate provides useful insight into how time is used in the company.
A poor billing rate can reveal unnecessary use of non-billable time. What tasks are the employees involved in during the hours that are not directly generating income?
A low billing rate may suggest that there isn't enough work to keep employees busy. In such cases, it's important to consider what actions need to be taken: Should the company focus on increasing sales or maybe consider reducing staff?
A low billing rate can also indicate poor planning. Employees might be allocated to projects that do not align with their skills or expertise, resulting in wasted time and resources. Excessive downtime or lengthy commutes can also contribute to a poor billing rate.
It is crucial to validate the figures against the organisation and understand why they are as they are. Are the figures indicating a low level of billable hours or are there potential registration errors? Engage in conversations with employees to clarify whether they have a clear understanding of how to accurately register their time. Implement a comprehensive timekeeping policy that clearly outlines the process for registering time and identifying billable work. This will help ensure accurate measurements and provide clarity on what activities can be billed.
Conclusion and further thoughts
When selecting a method to calculate the billing rate, it is crucial to take into account the objectives and requirements of your business. Don't hesitate to explore multiple methods. Choose the methods that align with your specific goals for the calculation.
Make sure that everyone involved in the business has a common understanding of the calculation method you have chosen so that everyone is aware of what is being measured.
Remember that the billing rate is only part of the equation and that you also need to have control over project finances to ensure efficient economic operation. Feel free to download our guide to project profitability to learn even more about this.