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Analyzing Employee Utilization Rates to Drive Profitability for Professional Services Firms

Analyzing Employee Utilization Rates to Drive Profitability for Professional Services Firms

How utilized are your employees? What percent of their time is being spent working on projects that are not billable to the client? How much is that costing your company in productive capacity? If you do not know the answer to these questions, you could be missing out on potential revenue benefits.

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 assess how much to invoice clients accounts
  • Decide what to pay their employees
  • Determine if they are over or understaffed

Calculating Employee Utilization Rates

The resource utilization rate is a balanced 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%.

Billable Hours / Eligible Working Hours = Utilization Rate

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 productivity 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.

Monthly Salary x Time Spent on G&A (%) = Employee Cost

If this general and administrative time is benefiting the company then it may be worthwhile. Otherwise, this time could be used for other work, clients, or spent attending networking and other events to help grow the productive capacity of 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 employee utilization rate from 60% to 80%, you could generate an additional $25,020 of revenue per month.

Higher Utilization = Increased Profitability

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 metrics 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 utilization percentage information, the company decided to make personnel changes in the month of March that would increase their profitability. This included letting go of an underperforming non-billable sales associate. They also replaced a billable-time employee with consistently low utilization with a new billable employee whose skills capacity 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.

Read another case study: Unknown employee utilization causing unknown or inaccurate client profitability.

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 key metrics 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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Do you know your numbers?

Reducing Your Cost Structure

Reducing Your Cost Structure

 

“It’s not what you pay a man, but what he costs you that counts.” —Will Rogers

Good business leaders understand that having insight and control over the company costs is vital. Low overhead and a surplus of cash is a recipe for a financially successful business, but when an unforeseen global pandemic steals customers away from your business model, what is your response?

If you are like J.Crew, Neiman Marcus, or Souplantation, the solution is to cut employees loose, shut your doors, and hope that the financial aid from the federal government is enough to pay your essentials bills until the mess dies down.

However, if you are a smarter leader with an insightful team by your side, you can reduce your cost structure and keep your business alive during the midst of it all.

We want to take some time to be that insightful team for you. Below, we highlight the key ways you can proactively reduce and control overhead rather than making severe deep cuts.

During the uncertainty of this current economic environment, there is no better time to address leaning your company. Taking an intellectual dive into the inner workings of your company using the following ideas is one way to evaluate what is working and what is not.

Idea 1: Speak With Lenders

Fostering a better relationship with each of your lenders is one of the first steps we recommend taking during this time. A simple phone call to your banks, credit unions, and other money lenders will help to keep lines of communication open.

Not only that, but it will help you establish a relationship of trust if you initiation the call. When you have the lender on the phone, also be sure to ask about some of the following:

  • A detailed review of the terms for all your business loan agreements and lines of credit
  • The option of refinancing debt to extend terms and reduce payments
  • Ask about reducing interest rates on loans and credit cards
  • Try requesting a credit line increase for credit cards
  • Consider negotiating a way to pay only interest on the debt if finances become too tight

You don’t know what the lenders will say until you ask, so try and negotiate the best terms for your business and see what options are presented to you.

Idea 2: Seek Financial Aid

The federal government has been rolling out a variety of financial aid packages for businesses to choose from during the COVID-19 pandemic.

The three large government options available include PPP, EIDL, and Main Street Lending program.

The Paycheck Protection Program stems from the CARES Act as a way for business owners to help pay employee salaries, benefits, company bills, and make other vital financial payments to keep afloat.

Read More: What Should Your Next Steps Be When Applying for the PPP?

The Economic Injury Disaster Loan Program is part of the Small Business Administration’s federal assistance for the private sector. It can provide up to $2 million to small or private businesses and non-profit organizations regardless of whether the applicant sustained physical damage from the pandemic.

The Main Street Lending Program is the newest program announced by the federal reserve and was specifically established for small and mid-sized businesses that were financially stable before the coronavirus pandemic. Roughly $600 billion of aid is accessible for these companies.

Read More: Your Guide To The Main Street Lending Program

Another option is to seek private grants from big organizations. Please do some research on grants.gov or reach out to our team for a few suggestions.

Idea 3: Review Your Contracts

This might be one of the easier ideas on our list! With that, you should make efforts to understand how your business is using the space you are in and how it might need to expand or trim in the future.

If your lease is nearing its end, consider this as an ideal time to renegotiate on the original terms. Some options include subleasing the space, taking over a new and less expensive commercial real estate location, or taking advantage of a shorter-term lease from your landlord.

Idea 4: Boost Incentives

Now more than ever, your customers have a reason to zip up their wallets and pour over their credit card billing statements. The best thing you can do to ensure your services are billed continuously is to show their value. If your customers understand why they need your products or services, then you are appealing to the financial side of their rationale.

Once you feel you have established a customer relationship based on trust and necessity, consider rewarding or incentivizing them by discounting early payments, offering special pricing on new product launches, or giving coupons to loyal customers.

You can expect that each of your customers is struggling in their own way, and so your overall goal is to ensure they feel valued and that you are continually providing real value. Take this time to look beyond the numbers and understand your customer’s business strategy and how you can further support them in reaching their goals. Need more help in this area? Call our team of experts for even more advice.

Idea 5: Look Beyond The Obvious

Unfortunately, one of the first places scared leaders will choose to cut back is by way of their employees. We don’t believe this action is the ideal way to reduce your cost structure.

Layoffs are harmful to the remaining employee’s morale and productivity. They are working in fear rather than working to continue the mission of the company.

While there are times when addressing your labor force is a crucial factor for your business’ survival, it is crucial to look beyond that channel at the beginning. Before heading down the path of layoffs, consider these other roads first:

-a reduction to working hours
-furloughs
-decrease or eliminate bonuses and performance pay

Consider modifying the benefits and compensation plans as a way to minimize costs. Ultimately, many of these considerations will positively or negatively impact your business. Think through your plan and communicate your strategy with your other business leaders before taking action.

Final Thoughts

With the right information, leadership, and choices, reducing your business’s cost structure doesn’t have to be incredibly painful. The best outcome is when you can lean out, keep your incredible team, and envision a successful future.

Remember, communication is essential during this time. Answer all the questions, quell all the fears, boost everyone’s morale, and be as proactive and transparent as possible.

If you are looking for more ideas on how to trim down the excess costs of your company and how to recession-proof your business, you can read one of our most successful blogs linked below.

Read More: How to Proactively Recession-Proof Your Business During COVID-19

Call us for help taking these ideas and putting them into action. Our team of experts has helped countless businesses trim down their costs and can answer any questions you have about this process.

 

Determining Profitability Within Your Business: Analyzing Profits by Employee, Product and Customer

Determining Profitability Within Your Business: Analyzing Profits by Employee, Product and Customer

Profitability is an essential ingredient to the long term viability of a business; however, there is more than one way to look at profitability. We often ask business owners not just about the profit of their business, but the profit within the business.

Profitability is often the universal scorecard for the periodic success of any business. It is the answer to “How much money did we make this month/year?” However, what is often overlooked is the components of that profitability. A deeper understanding can not only lead to improved overall results, but also allow a business owner to have more confidence in decision making and enhance the quality of budgets and projections.

There are three primary categories of profitability within a business:

  • Profitability by Employee (most common in service-based businesses)
  • Profitability by Product or Service
  • Profitability by Customer

Of course, the components are different depending on the type of business and there can be analyses of profitability by business segment as well.

Below we will walk through each in more detail and also provide a few examples.

Determining Profitability by Employee

Let’s use the example of a service business, perhaps a marketing agency that generates revenue by billing hourly work performed by its staff. It would be of value to the business owner to know the profitability of its employees.

If reviewing monthly, we would calculate the revenue generated from billings related to that employee, and then apply that against the costs related to the employee. That cost would include salary, but also bonuses, workers compensation, insurance and payroll taxes, as those are all direct costs related to the employee. Using that information, a matrix can be created to show the profitability of each employee within the company.

So let’s say two employees that perform largely the same function are generating much different profitability on a monthly basis. What could cause that? Well, there could be multiple answers, but below are the two most common:

  1. Employee utilization. Utilization refers to how much time that employee is billing the clients relative to the total amount of hours in a month. If one employee is billable 60% of the time, and another is billable 85% of the time, profitability could vary significantly between the two employees. Analyzing utilization rates by employee will help a business owner determine the optimal utilization rate for each staff position.
  2. Mismatch of bill rate to pay. The variation in profitability may be because the company is paying an employee too much relative to the bill rate they are charging to the customer.

Read more: Analyzing Employee Utilization to Drive Profitability for Professional Services Firms

Determining Profitability by Product or Service

Many companies produce or distribute more than one type of product or service. For example, a manufacturing company may produce three different products lines. In those situations, it is essential to understand the profitability of each individual product line—not just overall company revenue.

To do this, we take the price charged to the customer for each product and deduct the costs attributed to creating that product. Those costs should include raw materials, personnel, packaging, etc. However, it is not always possible to determine unique costs, such as freight, labor, and the cost of using machinery. In those cases, allocations have to be used. For example, if Widget A takes 6 hours to be manufactured and Widget B takes 2 hours to be manufactured, and employees work 8 hour shifts, we could apply 75% of that employee’s labor cost to Widget A and 25% to Widget B.

Profitability by product or service can be particularly eye opening for a business. Let’s assume a business had three product lines and was selling what it thought was high quantities of each. That business could even be profitable as a whole. But consider if one of those three products was actually losing money. The business could potentially forfeit a significant portion of sales and still generate more to the bottom line. Now, there are times when one product is sold as a loss leader to aid in the sales of other products. That can be a great strategy, but the business owner should know profitability by product or service to best determine the right sales mix for the business.

Case Study: How a profit margin analysis enabled a rapidly growing brewery to increase their overall margins and profits by 15%.

Determining Profitability by Customer

For any business that sells products and services, an evaluation of profitability by customer can be performed. We would perform an analysis of the revenue generated for each customer and then deduct from that all costs directly attributed to providing products and services to that customer. That could include labor, materials, shipping, travel, and anything else that was directly tied to that particular sale.

The results of this analysis are often surprising as many businesses actually lose money on some customers. This goes to the misguided notion that any sale is a good sale. By ceasing to work with certain customers, companies can actually improve overall profitability. At a minimum, it invites a discussion around pricing for products and services provided and/or a deeper look at costs required to produce those products and services. For example, if a business is running very lean from a cost standpoint, it simply may have to charge more for its products to some, if not all, of its customers.

There is often an opportunity in costs as well. Especially in businesses with material competition, the ability to change prices can be limited, which makes cost control even more important. Is the labor force working at capacity? Can materials be purchased cheaper from suppliers? How significant are shipping costs to the business? Those are all questions at the heart of cost control in an effort to improve margins in the business.

We Can Help

Putting this kind of information in the hands of the business owner, operations team and the sales force can be instrumental in creating a better pricing strategy, sales mix and cost management that can lead to an improved bottom line. These tools could be a major catalyst for long-term success, and should be in the tool-box of every business owner. Contact us today to learn more or to schedule a free consultation.

Is An Unlimited Vacation Policy Right For Your Business?

Is An Unlimited Vacation Policy Right For Your Business?

[gap height=”15″]Unlimited vacation policies (also known as discretionary time off or unlimited PTO policies) have become increasingly popular as companies are constantly looking for new ways to attract and retain high quality employees. Companies such as Netflix and Virgin have led the way by adopting and implementing unlimited vacation policies which remove the restrictions of a set number of days (vacation, sick, etc.) an employee can take paid time off from work.

Could an Unlimited Vacation Policy Work For Your Company?

pto-policyUnlimited time off policies can benefit both employees and the bottom line, but is it the right fit for your business?

Before adopting an unlimited vacation policy, your company should weigh the benefits and pitfalls listed below. Furthermore, it’s important for a company to determine if such a policy would be a good cultural fit as well. The graphic to the right is from the Society for Human Resource Management (SHRM) and includes some great tips for deciding if an unlimited vacation policy is right for your company.

Benefits

  • Empowers your employees by giving them the flexibility to create their own schedule and sends the message that you trust them to manage their own tasks and responsibilities.
  • Can give your company a competitive edge when recruiting and attracting top-talent.
  • Can result in less administrative work for the company as it relates to tracking time-off requests and vacation accrual balances.
  • The lack of vacation accrual means you do not have to report a liability on your books and you can potentially avoid large PTO accrual payouts when employees leave the company.

Pitfalls

  • Employees may be covered by State Disability Insurance and/or the Paid Family Leave Act, which would allow the employee to take paid leave, if eligible. This could lead to abusive activity against the company’s policy to the disadvantage of the company.
  • If you convert to an unlimited vacation policy from another type of PTO policy, you may need to pay out your employees their accrued PTO to-date. This could be a heavy cash flow hardship for the company and should be considered before making a policy change.
  • Each state has different laws and regulations regarding accrued vacation that may make unlimited vacation policies unlawful. These should be looked at prior to implementing a new policy.

Implementing an Unlimited Vacation Policy

Before determining whether your company should adopt an unlimited vacation policy, the current PTO policy, size of the company, and future of the company should all be considered. If you do decide to make the switch, we strongly suggest consulting your legal counsel to assist in writing and creating your policy to avoid any legal woes in the transition.

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