How utilized are your employees? What percentage of their time is being spent working on projects that are not billable to the client? How much is that costing your company? If you do not know the answer to these questions, you could be missing out on potential revenue.
For service-based organizations, analyzing employee utilization is imperative. Knowing where and how employees are spending their time enables professional services firms to:
- Appropriately set their rates
- Properly asses how much to invoice clients
- Decide what to pay their employees
- Determine if they are over or understaffed
Calculating Employee Utilization Rates
The utilization rate is the relationship between billable hours and working hours available and is a key metric of employee productivity.
For example, if there are 168 eligible working hours in the month of May and Penny spends 100.80 hours on billable client projects then Penny’s utilization rate is 60%.
Now let’s say that Penny’s annual salary is $50,000, or $4,167 per month. In the month of May, she spends the remaining 40% of her time on business development efforts (10%) and general and administrative (G&A) tasks (30%). That would mean the company is paying Penny $1,250 in May to work on non-revenue generating processes.
If this general and administrative time is benefiting the company then it may be worthwhile. Otherwise, this time could be used for other clients or spent attending networking and other events to help grow the business.
If Penny were to increase her utilization from 60% to 80%, her general and administrative employee cost would decrease to $417 per month – increasing efficiencies AND generating additional revenue.
Improving Employee Utilization Increases Profitability
From a revenue perspective, let’s assume that clients are billed at an hourly rate of $150. At 60% utilization the company is making $15,120 in May; however, 80% utilization would bring in $20,160, or $5,040 of additional revenue. Furthermore, if you have 5 employees who can each increase their utilization from 60% to 80%, you could generate an additional $25,020 of revenue per month.
Using Utilization Rates to Guide Business Decisions, A Case Study
Earlier this year, Signature Analytics was hired by a professional services firm in San Diego to provide outsourced accounting services. In addition to performing monthly accounting maintenance and bookkeeping services (preparing financial statements, balance sheets, income statements, cash flow statements, etc.), we put together a Utilization Summary Report so the client would have visibility into their employee utilization rates month over month.
The report revealed that in the month of January the company’s average utilization rate for billable employees was 60% resulting in a $95k loss for the month. In February, average utilization was 63% indicating a consistent low utilization rate for the company. To show how utilization rates impacted the bottom line, we also compiled an “if-then” summary report which revealed that increasing average utilization to 75% would generate a profit of $130k for the month.
Using this information, the company decided to make personnel changes in the month of March that would increase their profitability. This included letting go an underperforming non-billable sales associate. They also replaced a billable employee with consistently low utilization with a new billable employee whose skills could be better utilized by the company. Additionally, the firm set personal billable utilization goals for every employee to help encourage the staff to improve productivity and maximize billable projects and hours.
Following the changes, average employee utilization increased to 76%, resulting in a profit increase of $230k for the month of March.
Improve Your Firm’s Utilization
At Signature Analytics, we have helped several professional services firms use utilization rates to make key strategic decisions that drive profitability. Preparing utilization summary reports and “if-then” analyses are one way we enable our clients to visualize the effect of increased utilization rates. We are also able to show the company cost for unbilled general & administrative time by applying utilization rates to salaries and separating these wages on the financial statements. Furthermore, we have helped clients implement time tracking systems – which is the first step in determining utilization rates – and assisted with the development of company policies to ensure time is accurately entered by employees.
Want to learn more about using utilization rates to drive profitability for your firm? Contact us for a free consultation.
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