This article written by Steven T. Erickson CPA, CVA Consultant-Advisor to Professional Service Firms.
In these days of personnel shortages, high labor costs and the resulting price-cost squeeze, you might want to take some of your own good advice to maximize the profitability of your firm.
Gross revenue measures (realization percentage, billed rate per hour, etc.) are not the most useful tools to manage your practice when rapidly escalating personnel costs can’t be passed on to the client. Instead, measure the contribution margin per hour provided to the firm on an individual, engagement, department or firm-wide basis. This will show whether you are efficiently allocating your scarce resources.
Start by determining the contribution margin per hour for the entire firm. Compute this by multiplying the total budgeted charge hours by the individual hourly rates less any expected write-downs. Next, compute the variable cost of each employee and subtract from the estimated net revenues computed. An example of this computation follows:
Average Contribution Per Hour $325,000/6,600=$49.24
We now have a tool to use as a measure as we staff engagements and perform services during the year. To refine expectations further, compute the budgeted contribution margin on a departmental and individual level. Armed with the budgeted expectations, you can define engagement staffing policies to limit the downward migration of the actual contribution margin per hour.
Cherry Picking Staff May Harm Profits
I have practiced public accounting for more than 28 years and have watched as requests are made for staff when scheduling work. Some managers and partners like to “cherry pick” staff in an effort to make their jobs a little easier. At times these requests may not take into account the best interests of the firm. Armed with the expected contribution margin per hour for the department, you can compare the proposed schedule with the firm’s financial plan.
If the contribution margin per hour for a specific engagement is lower than the planned departmental average, ask why. If possible, have personnel rescheduled so the engagement will meet the departmental and firm goals. Significant improvement in profitability will take place once everyone in the firm thinks in terms of the contribution margin per hour rather than the realized rate per hour.