The Realization Rate – Why It Matters

Gale Kirsopp
Posted by Gale Kirsopp on Nov 12, 2021 1:00:53 PM

Accounting professionals working with service-based businesses need to understand terminology and rates that are relevant to the specific industries. One rate that is most useful for service-based business is the realization rate.

What is the realization rate?

The realization rate defines what the true realized billing rate is for the work performed.

At our accounting firm, we work with legal firms, so the following example involves an attorney.

An attorney’s standard advertised billable rate is $325/hour. During a given month, the attorney worked 152 hours on client cases. At the end of the month, the total client billing was $41,600.

If the attorney had billed all client time worked, the total monthly client billing would be $325 * 152 or $49,000.

Since the attorney only billed $41,600, we can determine how much of the potential total billing was realized. The amount realized is determined by taking $41,600 and dividing it by $49,000. In this case, the realization rate is only 84.2%. They attorney is only being paid the full billable rate 84.2% of the time.

Realization rates can be calculated by client, by multiple clients, by the entire client base. Or, in the case of a multi-practitioner firm, it can be calculated by practitioner.

How is the realization rate used?

“How is a realization rate going to help my firm?” Every time we introduce the concept of realization rate to our clients, we are asked that very question. How do we use that rate in advisory services?

The realization rate directly affects the profitability of the firm through reduced revenues.

Example 1: If the attorney billed $41,600 and worked 152 hours, the actual billing rate for the month was $269.73 and not the advertised $325.00. If the attorney’s personal goal is to work less, then what happens to their income if they are billing at a lower rate?

Example 2: The attorney worked for 152 hours but did not bill for the full amount of the advertised rate. Why did the attorney only bill $41,600 instead of $49,000? The way that why question is answered can provide insight into expected revenue versus actual revenue.

Consider a different firm with multiple practitioners. By computing realization rates for each attorney, you can compare the rates. Why are the rates different? Again, the way that why question is answered can provide insight.

Topics: Niche Advisory


 

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