Firms often under or over value utilization metrics simply by incorrectly assuming the number of hours in each month or year, but it doesn't have to be this way.
Don't you remember the old "proof" about why there is really no available time to go to school? The proof piled assumption on top of assumption in a clever bit of double counting and misdirection to convince eager and gullible young readers that after accounting for weekends, holidays, summer, and sleep, there wasn't any time left for school. The same idea can apply to your accounting practice, if you let it.
You'll often see firms setting their annual utilization baseline denominator at 2,080 hours (52 weeks times 40 hours per week), and then assuming that each month has 1/12th of the total, or 173.33 hours per month. What's more is firms will fix their utilization baseline at 168 or even 160 hours per month (21 days or 20 days times 8 hours, respectively), regardless of the month.
No practice can afford to have underutilized assets on the books indefinitely.
Unrealistic utilization expectations means that a practice may not ever achieve projected productivity or profitability results. Professional services firms that rely on realization and utilization to make sense of their financials, and whether or not prospective projects will be profitable, need a more precise approach.
Let's consider the 2016 calendar year, and assume a standard eight-hour workday.
There are 366 days in 2016 â it's a leap year â and 10 federal holidays. Factoring in weekends, that leaves 252 workdays. With 252 days at eight hours per day, that means 2,016 hours. Already we're less than a 2,080 baseline amount. If your firm has international offices, the standard workday may be less than eight hours or have more statutory holidays. That further reduces the accuracy and relevance of a 2,080-hour utilization denominator.
Many companies also offer holidays beyond what the U.S. government mandates. For example, some treat the day after Thanksgiving as a holiday and it's not uncommon to offer employees an extra half-day on Christmas Eve and New Year's Eve. That's another two days.
So now we're down from 252 to 250 days and an even 2,000 hours. This round number makes the annual math easy, but don't forget those hours are not evenly distributed throughout the year.
Let's look at March 2016 in more detail: March starts on a Tuesday, ends on a Thursday, and stretches across nearly five full weeks. There are no federal holidays in March, so that's a whopping 23-day work month, or 184 hours. If your firm uses a uniform monthly amount of 168 hours per month, a staffer who works every day will end up with a 110 percent utilization calculation. In fact, using the 168-hour uniform monthly assumption, the staffer could miss two entire days, and still end up with 100 percent utilization.
Managers evaluating March results would congratulate themselves on an outstanding utilization number, but it's not accurate because the denominator was wrong in the first place.
Let's look at a different example and see how a uniform month skews utilization in the opposite direction. January 2016 starts on a Friday and ends on a Sunday. That would be 21 workdays, or 168 hours. But New Year's Day is a federal holiday, and so is the birthday of Martin Luther King Jr. on Monday, Jan. 18. So there are really 19 days, or 152 hours, in January. A staffer who works all 19 available workdays and has 152 hours has roughly 90 percent utilization using a 168-hour uniform month, but was really 100 percent utilized when you consider that specific month.
Here's the lesson: Your utilization reporting will be more accurate and utilization calculations truer if you take into account actual available working hours by month. Consider time and expense entry and resource scheduling software that automates this process and allows partners to define calendars more precisely. Measuring utilization accurately results in a better match between your forecast information and actual results which means better financial reporting and, hopefully, better profitability.
About the author:
William Cornfield, CPA, MBA, is president and founder of WSG Systems Corp., manufacturer of Empire SUITE, a business management and automation software for accounting firms and other professional services organizations.
William Cornfield, CPA, is president and CEO of WSG Systems, an accounting and resource management solutions provider. He regularly consults with senior management of WSG’s clients regarding all aspects of their professional services organizations.