The True Cost of Writing Off Billable Work

Frustrated by the realization percentage your firm is achieving? Is the practice of writing off a significant portion of your billed work leaving you chasing your tail?

Here’s why I think measuring and targeting realization percentage is a BAD idea.

The traditional practice model is fundamentally flawed for maximum performance.

Most firms are either:

1. “time X rate – write off = Price” (time-based billing in arrears)
2. “Implied (internal to team) price = dollars budgeted to team member”
3. “Fixed (external to client) price = dollars budgeted to team member”

Then, they measure the realization percentage of the team members' work. So, if $5,000 was the implied or fixed price and the team member came in at $5,750, you write off $750 or achieve 87% realization. You might feel better saying you realized 87%, but you’ve just written off 13% of your potential revenue.

For a $3M net firm with 87% realization, that’s a gross revenue of $3,450,000. You wrote off $450K. In some states, that’s a house or a garage of luxury cars!

Here's a bigger issue: Managing price and scope of work in any one of these three ways encourages team members not to log their time. My research, based on a survey of 3,000 accountants, indicates that 15% of client work doesn’t get recorded in the time-tracking system. This means the team is effectively writing off work before you even have a chance to review it.

And some firms even target a write-off/realization percentage! That $5,000 job is ok at $5,750 because the realization target was 85%…winning??

No, no…losing!

All? three approaches promote inefficiencies, delays, incorrect pricing, a low average hourly rate, job hoarding, low profits, an oversized team, poor morale, stress, and overworked Partners.

There has to be a better way. And there is…

1. Price the job based on the value it provides to the client, rather than hours multiplied by rate. We offer training and resources to help you with this approach.
2. Have the client approve the price and scope of the work.
3. Select an arbitrary hours budget for the job.
4. Brainstorm with the team on how to increase efficiency for the job and lock in the maximum hours. We provide training and systems to support this process.
5. Measure Time Under Budget (TUB) and Average Hourly Rate (AHR).
6. Calculate AHR as an output number, not an input number.
7. Conduct a post-job brainstorming session to identify ways to improve efficiency for future jobs.
8. Sell the new capacity at a higher margin.

Rinse and repeat.

Reward and applaud team members for completing jobs in less time, not more. This will increase your realization rate from 87% to over 100%. Soon, you won't need to worry about realization rates at all. Instead, focus on steadily climbing your Average Hourly Rate (AHR).

Every firm we coach eliminates net write-offs and improves AHR. It's your choice: continue losing value equivalent to a house or luxury car, or start buying houses and luxury cars.

PS. Whenever you're ready...here are 3 ways we can help you improve your Accounting firm.

1. Download books, benchmark reports and other tools to help you – Download here.

2. Learn from other firms who have already ‘done it’... Click here to view.

3. Apply to be coached by us in our Mastermind program. For firms $1M - $10M in size who want to work significantly less and earn significantly more. We guarantee the results! If you'd like to explore if this will work for you simply – Apply here.