As a follow-up to last week’s column on determining what to charge, this column will explain a way to determine your hourly rate should you decide to bill using that method. It also provides an indication of how much you will need to bill on a gross basis to meet your income level and cover the expenses.
Determining a minimum hourly or daily rate can be done by using the following parameters:
• Annual chargeable hours—this would be about 60 percent of the total hours you will be working
• How much you need to earn
• What your costs are
• Allowances for uncollectible fees, work done where you are not paid or for below standard or hoped for fees.
The following is an illustration. You can use whatever numbers you decide for yourself. I entered some assumptions to show how the calculation works:
• Chargeable hours for the year: 1,200
• Net desired income: $100,000
• Expenses: $20,000
• Total that should be received: $120,000
• Realization (collections / time charges): 80 percent
• Grossed up billings: $150,000
• Minimum billing per hour: $125 and $875 for a seven-hour day ($150,000 / 1200)
• Cushion to be provided for: 25 percent
• Grossed up revenues based on time charges: $200,000
• Minimum billing rate per hour: $167 and per day $1,167
If the work requires a partner-level person and a lower-level person, and you would be filling both roles, your price should take that into account.
Some people start out taking on “bookkeeping” assignments to keep busy, to get a foot in a door or to provide themselves with needed cash flow. Understanding this, the lowest you can charge using the above illustration is $100 per hour based on the $120,000 total net. Competitively this places an accountant at a disadvantage when compared to a bookkeeper. If added value cannot be justified, then you should pass on this type of work.
Regardless of how you determine your pricing, you will need to generate minimum revenues to meet your income goals. I believe this should give you an idea of how to determine some minimum amounts you will need to collect regardless of your billing method. If you value price and cannot generate sufficient revenue, then you are either working in an ineffective and/or inefficient way, have the wrong clients, or shouldn’t be in your own practice.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.