Managing your average bill rate is an excellent way to ensure your company’s profitability. Your rate can be as high as what a client is willing to pay—but finding out how much that should be is the tough part. Creative agencies only get paid for the billable activities their agency performs. Tasks like attending company meetings or admin, are usually non billable activities so you don’t get paid for them even though time was spent. Most smaller, creative agencies tend to not bill enough considering the amount needed to cover agency overhead.
To better determine your ideal average bill rate consider what you believe a client will pay, what your effective costs are, and how much of a return you would like to see on a particular service. When settling on an average bill rate for a project or service, we recommend adopting a sliding scale where your prices are subject to change based on different variables. These variables may include the length of a contract or the size of a client’s company. For example, if you have a month-long contract with a client for a one-off project, you may want to charge them a higher rate than you would for a new client who may become a long-term customer and ultimately bring in more revenue. While a good rule of thumb is to try not to charge a fee that will amount to less than your break-even rate, you can choose to do so in instances that do not require you to operate at a loss for the long-term.
What Your Average and Standard Bill Rates Say About Your Business
If your average bill rate and your standard bill rate differ by more than 10 percent to where you have to perform write-downs or write-ups continually, you’re probably experiencing issues with your business operations and should investigate the situation further. It’s also essential to keep in mind that, in this instance, we’re not referring to a bad debt situation where your team completes work for a client, and the client then neglects to pay you. Instead, we’re talking about what you expected to bill a client and what you actually charged them.
If you have to perform a write-down, your average bill rate is a lot less than your standard bill rate. To address this issue, we suggest looking to see whether there’s a gap in communication between your project manager and your sales or development team. A gap in communication between these two parties can easily result in your sales team selling your service at a lower rate than will cover the amount of work and costs associated with it. If you consistently have to perform write-downs, you may also be experiencing difficulties regarding project management. A project may be going over its scope, or your team chose to incorporate additional services without billing forward. These situations mean more hours are spent on a project than was initially estimated while your team earns the same revenue. Your team should try to maintain excellent communication and understand the scope of projects from their inception to avoid continuously running into this issue.
If you find that your average bill rate is higher than your standard bill rate, you probably have to do a write-up. Although write-ups may seem like indicators that things are going well, they really point to other problems within your business. Having to perform write-ups regularly can indicate that you’re not charging enough for your services, which means you might want to consider offering more quotes or trying to land bigger deals. Numerous write-ups can also point to a capacity management issue. You may not be leveraging your current employees properly to ensure that they’re all always working to bring in more revenue. Leaving your top players on the bench, so to speak, can ultimately eat into your gross profit margin.
How to Maintain Your Desired Bill Rate by Using It as a Guide
Being transparent with your project managers about your average bill rate will help you maintain that rate by allowing them to use it as a guide to track the progress of the projects they’re overseeing. Project managers can use the average bill rate as a guide by monitoring the number of hours spent on a project and comparing that amount of time to the total number of hours used to calculate the average bill rate. For example, if it was determined before the start of a $200,000 project that it would take 2,000 hours to complete it, once the team hits 1,000 hours, the project manager can assess the team’s progress. If they find that their team has worked 1,000 hours but are only a quarter of the way through the project, the project manager knows their team is behind on the project and have only earned $50,000 as opposed to $100,000. From there, the project manager can address the issue by first determining its cause, whether it be that they underestimated the number of hours it would take to complete the project or that they’ve discovered inefficiencies in the workflow. Then, the project manager can correct the issue by charging the client a higher fee or streamlining the work process.
While calculating your average bill rate and using it as a guide are both helpful actions, ensuring that your team is on the same page regarding pricing and the amount of time spent delivering a service is essential. Doing so will help you avoid write-downs and write-ups while keeping your business in the black.
Summit CPA Group is a distributed virtual CFO firm with a non-traditional approach to accounting. Their amazing team of CPAs and accountants provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States—many of which are remote companies as well. The Summit team fully understands the accounting, bookkeeping, cash flow management, and business tax nuances that come with being distributed, and they love helping clients overcome these challenges through their own experience and expertise.