How do you know if your business is performing optimally? Between working on client engagements, drumming up new business, and completing administrative tasks, most accountants are too busy to sit back and assess how they are doing. That’s where analytics come into play.
Analytics are metrics calculated from data that your organization generates. These metrics help you measure your business performance and stack it up against various benchmarks. Your firm’s metrics can be compared to prior periods, budget targets, or industry standards.
There are many metrics out there, and it may be difficult to know which ones you should focus on. This article highlights the most important accounting analytics, what they mean, and how they can help you improve the profitability and efficiency of your business. Additionally, this article highlights how having software with robust Reporting & Analytics can bring your firm to the next level quickly.
It seems simple, but one of the surest indicators of profitability for an accounting firm is the ability to complete work that can be billed to their clients. As all accountants know, there are tasks throughout the day that are not billable, such as obtaining continuing professional education credits and time spent acquiring new clients. Making sure your schedule is not weighted too heavily to non-income producing activities is key to realizing profits.
Utilization rate is a common key performance indicator (KPI) that indicates the percentage of total employee hours worked that can be attributed to a client. It is calculated by taking billable hours worked divided by total hours worked. A higher utilization rate is usually better, so long as those hours are actually invoiced to the client.
Tracking and analyzing billable hours requires collecting lots of time and billing data. Doing this manually would require a lot of effort and could lead to mistakes. Instead, consider an Accounting Practice Management Software that integrates with a time entry module to automatically generate reports. These reports will summarize billable hours by employee, by job code, and by client. Utilization rate comparisons can then be made to benchmarks such as previous years, averages, and industry standards. You can track if you are on budget for each engagement by comparing billable hours worked so far to targets.
Even though you are tracking billable hours by client, not all of those hours can be invoiced to your clients. As an example, assume you have a compilation client and in their proposal, you quoted six hours to complete the engagement. A relatively new accountant in your firm worked on the job and it took them eight hours to complete the work. In order to keep the client happy and honor your quote, you can only bill them for the six hours.
This is where the realization rate comes into play. Realization rate is the percentage of billable hours worked that can actually be invoiced to the client. It is calculated by taking hours billed divided by hours worked. In the example above, the realization rate would be 75% (six divided by eight).
Realization rate is an extremely important profitability metric for accounting firms. A low realization rate means your firm is working hours that are not earning revenue. This is both inefficient and unprofitable.
Similar to the utilization rate, a comprehensive software package can help you calculate the realization rate and compare it to various benchmarks while eliminating the time and effort that would be needed if calculated manually.
This metric analyzes how much profit you are making off each client. Profitability is expressed as a percentage or margin rate. It is calculated by taking revenue earned from the client less costs. Client profitability is an important metric because it gives you insight into which clients are making you the most money. For example, you may have two clients with identical fees. However, one client may be more complicated and your employees spend additional hours to complete their engagement. After factoring in all the additional time, you barely break even on the more complicated client. Having insight like this allows you to make smart decisions for your firm, including when to cut ties with unprofitable clients.
The biggest resource for your firm is your employees. They are your biggest expense in terms of salary and benefits, but also your largest driver of revenue. When employees are utilized correctly, they can be the catalyst that optimizes your firm’s profitability. However, a few laggards can sabotage the whole firm’s financial performance.
Robust time and billing entry and reporting can help you determine how your team is doing and if they are meeting their benchmarks. Having this insight will allow you to make key personnel decisions. These decisions include promotions for effective employees, shifting around workload to better accommodate skillsets, or leaning into additional training for employees that may be falling behind.
Conclusion
The analytics mentioned above will help your business thrive in the long run. The devil is in the details, which can be difficult and time-consuming to pull together manually. Leveraging an Accounting Practice Management System will automate many of the calculations. This will allow you to focus on the results and make strategic decisions that will help guide your organization to success.