Profit is no longer amount that is left over

Profit is no longer amount that is left over

It’s simple, be nimble – Part 5

For measuring the performance, management often relies on the equation:

Fees – cost = profit

This equation highlights the fact that profit is an amount that is left over after subtraction of the actual cost incurred from the fees . I call it a passive approach.

Whereas the methodology of Management By Billing Rates” (Hereinafter called MBBR) discussed in the previous article focuses on profit embedded in the billing rate to arrive at the limit on the costs to be incurred. Now this limit on cost is expressed in the form of time to be spent by the person, which is easier to track and control.

And such a control on the time will result in achieving the desired profit for every assignment with maybe some unavoidable deviations. Thus where every assignment results in desired profit, achievement of sufficient profit of the firm will happen automatically.

Thus the approach of MBBR brings greater certainty in the process of making profit.

And therefore, profit is no longer an amount that is left over, but the cost is. If one follows the MBBR seriously, it certainly can bring about a radical change in the way the firms are managed.

Peter Drucker’s famous warning “you can’t improve it if you can’t measure it” need not be ignored by professionals anymore. Professional firms now have a powerful measure “billing rates” based on set of assumptions, to set the goal of profit and achieve it too.

More practical examples discussed in later part of the series will convince the readers the utility and power of this approach in real life situations .

5 tips for smart billing rates:

1.    Some firms include overheads in determining cost per hour for a person .In my view , time spent for rendering the service would be the same for the purpose of cost as well as revenue, hence costs which vary with time being spent i.e. direct cost only should be considered for cost per hour. Thus including, overheads or indirect cost (which do not vary with reference to time spent for rendering service), in person’s cost per hour would be wrong. In any case our methodology takes the indirect costs into account in the price determination.

2.    The billing rates as per MBBR methodology can be further adjusted to take care of periods of low activity affecting utilization of full capacity.

3.    If the firm is already using some billing rates, the MBBR methodology can be used to confirm whether the rates being followed would give them sufficient profit or not and then adjust the billing rates accordingly.

4.    The billing rates can be adjusted upwards in different proportions for different levels of employees, or they can be adjusted for special skills or knowledge of particular employees.

5.    The billing rates can be adjusted upwards to cover up billing at lower rates for some services due to historical reasons or otherwise for any other uncertainty.

MBBR will work only, if there is focus on productivity and proper system to collect the data in time. (Discussed later)

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