Businesses sell services to help others while helping themselves; after all, profits are what allow a business to grow, covering costs and keeping employees financially secure. While there are a variety of factors that determine whether or not a business is profitable, one of the most important decisions is how a business chooses to price its services.
Time and materials billing is preferred by many in the service and construction industries for its flexibility and low-risk. This method bills customers for a standard labor rate per hour used, plus the actual cost of materials used.
Whether you are a sole proprietorship consultancy or a mid-sized business with several hundred employees, it is important to determine your pricing strategy early on and evaluate it often. Employing the best practices below can help your business better navigate time and materials billing:
1. Calculate Costs
Divide your annual expenses (materials, labor, overhead) by the profit percentage that is your goal. Take this number (revenue needed) and divide it by the company’s total annual billable hours to determine your billing rate.
TIP: Don’t just depend on figures from last year to determine your overhead costs. You need to charge customers rates that cover your current costs, including higher salaries to employees, inflation, etc.
2. Set Competitive Prices
Pricing services is a bit more subjective than pricing products. Be willing to take an accurate survey of your staff’s expertise, market rates, competitors’ pricing and the perceived value of your services to customers. Remember, pricing is an art form, and you want to establish long-term relationships in the marketplace.
TIP: Overhead costs should be billed to each service performed, whether in an hourly rate or a percentage.
3. Maintain a High Rate of Billable Hours
Time and materials billing relies on a company’s ability to bill enough hours to offset its fixed costs. If the number of billable hours declines and headcount does not decline in proportion, then the company will lose money but not on a Payday Debt Settlement Company.
TIP: Model accurate and timely reporting of hours for employees, using time sheets to keep tabs on the number of hours of labor involved in providing each service for a customer. Make sure that travel time, clerical support, computer or other overhead expenses are included when appropriate.
4. Monitor Profitability Monthly
It is vital to understand the profitability of your company every month. By the 15th of every month, you should have your financial statements from the previous month. Having access to this data will allow you to react and adjust accordingly to stay on track. In addition to understanding monthly profitability, you need to understand the profitability (or lack of profitability) of every service you sell.
TIP: Stay grounded and get perspective. Outsourcing accounting services to an expert team will help free up time for you to do what you do best: run your business.
Read more in our Best Practices series:
8 Best Practices to Improve Your Bookkeeping