The Importance of Maintaining Your Average Earn Rate
Pleasingly we have found the continued rise of earn rates within accounting firms throughout Australia. Not too long along such rates would be $100 per hour, $120 per hour, $150 per hour, however depending on the firm’s location, size, services, types of clients and staff, current values are more so around $180 per hour at the low end, proceed up to say $250 per hour, or even beyond, at the higher end.
But before we raise a couple of factors which we need to manage when it comes to earn rates, it would be helpful to understand what we define as ‘earn rate’, irrespective of the type of professional firm. A firm’s earn rate is the rate at which they generate revenue, calculated by dividing the total dollars charged to clients for the services provided by the total CHARGED hours. Importantly, this is prior to invoicing and is not based on worked hours, but charged hours. Another metric that the professions refer to is recovery rate, which is simply the earn rate less write offs, or dollars invoiced and collected divided by the charged hours to clients. Thus, it is representative of the rate at which a firm recovers revenue. Another approach firms also refer to is their average charge rate. A couple of tips here; rather than just an average, it’s better to have a weighted average of these rates. Whilst the firm’s charge rates will certainly drive its earn and recovery rates, they will not necessary have the same values, just depending on how and by who work is completed. Thus, an average charge rate will not necessarily provide an accurate reflection of a firm’s earn rate.
However, there are three current trends within the professions that have the potential to impact upon a firm’s earn rate and therefore its overall revenue:
Outsourcing – with the rise of this approach within firms, we are seeing such processes put in place as a means of reducing and/or controlling costs, as well as in some instances, sourcing additional personnel to complete work. Whilst some firms are finding this quite successful, we just need to be mindful of their potential impact upon the rate at which a firm generates revenue. Given the reduced cost of such personnel, as well as perhaps their experience and the like, we notice most of these type of personnel have lower hourly charge rates. Thus, where a firm records all time on clients’ work and then bills accordingly, there is the potential for the clients’ fees to decrease where a reasonable proportion of their work has been performed by staff in other countries, and this will impact upon revenue.
Pre-set, fixed, agreed or typical fees – where firms don’t utilise hourly rates but leverage off outsourced personnel, it’s imperative to ensure the typical fees being charged for these services remains competitive with market.
Cloud computing/software – firms are definitely experiencing positive results from increased implementation of cloud-based software such as Xero. As greater efficiencies are achieved and the completion of work become more streamlined, there is the potential for firms to become overly generous in passing on those cost benefits to clients or failing to review fees regularly. Eventually this will catch up and become detrimental for a firm.
As will no doubt be obvious, whilst we raise the three trends above, we can see how each is intertwined with the other.
Whilst many firms will elect to pass little of any cost savings associated with the above approaches onto clients, although we are certainly hearing about the fee pressures being experienced by many firms when it comes to compliance services, we also just need to be mindful that fees don’t necessarily need to decline to harm a firm’s earn rate.