A professional services business must be well-versed in chargeability if it wants to reach its targets and maximize profits. Chargeability is a metric that measures how much of an employee’s time is billable to clients, or “chargeable”. This ratio is critical for any firm as it provides insight into the amount of revenue that can be generated and the profitability of its staff. Note that we use the words “can be” generated because not every chargeable hour is a “billed” hour. To understand the difference, check out our previous blog on billability.
To better understand the concept of chargeability, it is important to know what it is and how it is calculated. It is also important to know the expected chargeability of staff and the impact of missing these targets.
This is because improving chargeability in your business can have a major impact on your revenues and profitability.
What is chargeability?
Chargeability essentially boils down to the amount of time an employee spends working on billable projects, in comparison to the total hours worked. For example, if an accountant works 40 hours a week and spends 20 of those hours on billable work, then their chargeability rate is 50%. This metric can be used to monitor staff performance and ensure that employees are spending an adequate amount of time on billable projects. Additionally, it can be used to estimate revenue and the profitability of a professional services firm, as chargeability is directly linked to the number of billable hours an employee has.
In the example above, if the accountant has a billing rate of $200 per hour, then her expected billings for the week are $4,000 ($200 x 20 hours.)
As you can see from the above example, the objective is to maximize the amount of time your staff can bill for and recover from each job. Given that staff costs are fixed (i.e., you still pay staff whether they do chargeable work or not), you can ensure that you are optimizing efficiency and maximizing profits by maximizing chargeability.
It is therefore essential for professional services firms to understand the expected chargeability of their staff, as it impacts profitability and revenue. When staff is not meeting their targets, it will lead to a decrease in overall financial performance. In addition, low chargeability rates can indicate that employees are not utilizing their time efficiently or they are not being properly allocated to chargeable work. To ensure that employees are meeting their chargeability targets, firms should regularly monitor and track this metric and investigate causes of variances from the targets. They can also use this data to adjust workloads as needed or provide additional training to underperforming staff.
Finally, businesses should be constantly looking for ways to increase chargeability by analyzing the current processes and workflows.
What is the impact of missing the chargeability targets?
If a professional services firm is not reaching the expected chargeability of its staff, this can have a significant impact on the overall revenue and profitability. For example, if an accountant has a chargeability target of 75% but only achieves 65%, then that could lead to a loss of 10% in billable hours and revenue.
To put this into numbers that we understand better. If that accountant works 160 hours a month and charges $200 per hour, then 10% means a loss of $3,200 in potential revenue. We wrote an article about the impact of each % of missed chargeability for a small business and read it here.
That is why it is important to understand the cause of missed targets and adjust as needed to ensure that future goals are met.
Utilize Capacity Planning Tools
Utilizing capacity planning tools allows a business to manage resources more efficiently and accurately. This ensures that all employees are allocated the right amount of work given their availability and relevant skills. This improves chargeability as well as billability, employee morale, avoids overwork, and leads to more accurate project estimations. A good capacity planning/project management tool will also include information on which staff members have a higher charge rate for certain, higher value, tasks, allowing businesses to maximize billable hours across their entire workforce.
Optimize Your Resource Allocation Processes
To maximize chargeability, businesses should review and optimize their resource allocation process. This involves careful consideration of job type, employee skill sets, and working hours. With the right resource management tool in place, businesses can easily identify productive employees and prioritize work accordingly to ensure maximum profitability. Additionally, optimizing the way resources are allocated across a team can help reduce the costs associated with underutilized or unproductive staff members.
Reporting to Improve Resource Chargeability
Resource management tools will also have reports to help businesses more efficiently identify over and underutilized employees. These visual tools also provide insights into how workloads are divided among teams, departments, and individuals, providing business leaders with the information necessary to create a balanced workload for all members of their staff. If necessary, they will also show when your business needs to hire contractors or freelancers to augment the current team.
Teambuilding
One simple but often overlooked way to maximize capacity is to have a happy/healthy workforce. Businesses should focus on creating employee engagement through team-building activities and regular feedback. When employees feel appreciated for their work and have meaningful work opportunities, they feel safer and motivated to go the extra mile to exceed expectations.
In conclusion, chargeability is an invaluable metric for professional services businesses as it provides insight into staff performance, profitability, and revenue. When chargeability targets are not met, it can have a major impact on the financial performance of a firm. To maximize profit and ensure success, firms should track their chargeability metrics and take action when goals are missed.
