How familiar is this situation? Your manager tells you not to spend too much time on a client’s account and you completely exceed the amount of time budgeted? What, according to your manager, should have only taken a few hours ended up taking the majority of the day. It’s not like you were sitting at your desk day dreaming or surfing the web, you were simply putting in the required amount of time to do your job properly; review prior year workpapers, double check the math, make a list of open items, etc. You now fear the worst – your manager berating you on the amount of time you charged to the client.
‘Eating’ time is a simple concept, you record less time on a job than what it actually took to complete. There are several reasons as to why you would do this, but it is usually because you don’t want to upset your manager or the partner in charge. Be that as it may, if you are eating your time you should stop now!
You’re Hurting Yourself and The Firm
In public accounting time is money and money is everything. For most firms everything you do will be based on how many hours you bill. It boils down to this; if you are not billing then you are not making money.
Because of this, one would expect billable hours to be the main criteria in performance reviews. Three common time metrics are billable hours, realization and utilization.
- Billable Hours is the total number of hours of work performed on a specific project, regardless of the total number of hours actually billed to the client.
- Realization Rate is the percentage of time that is actually billed to a client vs what was billable. For example, if it took 10 hours to complete a project but only 8 hours was billed to the client then the realization rate is 80%.
- Utilization Rate is the percentage of an employee’s total time spent that is billable. For example, if an employee works 40 hours a week but only has 30 hours of billable time then the utilization rate is 75% for the week.
So what looks better, having a low realization rate or a high utilization rate? Should I record all the time I work on a job or should I eat my time to save the budget? To answer this question let’s look two examples.
Rachel the Realization Queen
Rachel is an accountant who ensures that all her jobs have high realization rates. She spends the minimum time required on a job and makes sure she keeps things moving. If she is going over budget she will eat her time for ‘non-billable’ work like reviewing prior year workpapers, tax research, meetings with partners, etc. On average she bills 30 hours a week for a 40 hour work week; giving her a utilization rate of 75%. Assuming the extra hours worked during busy season are negated by vacations and holidays, Rachel bills 1,560 hours per year (40 hours a week x 52 weeks per year x 75%).
Bill the Budget Buster
Bill, like Rachel, is an accountant but bills all of his time.Whether it is talking to a client on the phone, meeting with a partner about a project, or managing his fantasy football team, Bill is always billing: he doesn’t look at the budget, nor particularly cares, and will take as long as necessary to do a good job. If Bill works 40 hours in a week then he makes sure he’s billing 40 hours for that week. On average Bill has 35 billable hours per week with a total of 1,820 hours per year (35 billable hours x 52 weeks).
Assuming Rachel and Bill are at the same level and have an hourly billable rate of $200 we would expect a total of $312,000 (1,560 billable hours x $200) and $364,000 (1,820 billable hours x $200) in potential billing, respectively. Let’s say all of Rachel’s time (1,560 hours) is billed because she makes sure to stay within the budget and an equivalent time (1,560 hours) for Bill has a 100% realization as well. However, the extra 260 hours (1,820 – 1,560) only has a realization rate of 50%. This means that half of these hours could not be billed to the client. However, Bill made the company $26,000 more than Rachel.
What it All Means
The only difference between Bill and Rachel was just one billable hour per day which was a $26,000 difference. A firm with 20 employees just like Bill means that the firm would have an extra $520,000 per year. So it is obvious in this example that you should never ‘eat’ your time.
However, if you are a partner at a firm and you know just 1 missed billable hour per employee per day could shrink your bottom line, why would you base your pricing primarily on billable hours? Additionally, if time is being cut on a budgeted job every year then why track hours at all? This is why value pricing, discussed here, is being used as an alternative method to traditional time-based billing. Removing billed hours as a pricing mechanism potentially eliminates the problem with unreported time and creates value for the client and more profits for the firm.