“We hate keeping track of time,” the business owner told me, shaking her head. “We really suck at it. But I want to how efficiently our employees are working. I’d also like to see how our billable hours stack up against our competitors. Isn’t there another way than tracking time and labor dollars?”
What I heard was, “Can we please take the shortcut without the incessant chore of recording everyone’s time?”
The answer is yes: sort of. It’s called Revenue per Full Time Employee (FTE), which measures utilization. I’ll show you how to calculate it. But we can’t take the shortcut because you need some context first.
Useful Resources on Job Costing and Time Tracking
Let’s back up a bit. I threw some accounting jargon at you. Not long ago, I wrote about job costing and its importance to a service business. And because a service business basically sells hours, I’ve written before about the importance of time tracking here and here.
For many of our clients, monitoring time is a critical tool in their “understanding my business model” toolbox. Solid time records help the service professional get his/her arms around utilization.
How Well Are Your People Using Their Time?
Utilization means how much of an employee’s time is spent doing billable work and is typically reported in percentages. Rarely is a worker 100% utilized. There are staff meetings, the occasional internal company work, and client time that can’t (or shouldn’t) be billed.
Folks in management and sales often have low to zero utilization rates, since they’re not doing much billable work. But for the worker bees, there’s always a utilization rate. And many service-based business models depend on reaching a specific target to hit their profit and cash flow goals.
In our company, we aim for part-time staff to have a utilization rate of 85% to 90%. To be clear, that means we expect they will spend 85% to 90% of their time performing billable work. The target for our full-time staff is 65% to 75%. These folks typically devote more time to client relationship management as well as internal projects.
Using Utilization as Your Shortcut
Utilization addresses the core concern of my client who wanted a short cut. It measures efficiency. “We pay you for ‘x’ hours per week. How many of those hours did we sell to our clients?”
If you don’t track time consistently, it’s almost impossible to answer that question. In fact, at the individual employee level, it is impossible. But if your business is time tracking challenged, or simply new to this game, don’t despair.
You can use Revenue by FTE. This gives you a glimpse into utilization at the company level. Here’s the simple calculation:
Presto! Companywide utilization at your fingertips.
You want to use gross revenue: income before any adjustments, discounts or expenses. You also need an FTE number. If a part timer works 20 hours per week, she is 0.5 FTE. If a full timer leaves half way through the year, he is also 0.5 FTE. You get the picture. When you divide the dollars by the people, you get a revenue number per full time person.
What Does Your Number Mean?
Okay, so you have a number. Is it good or bad? Hard to say without some context. I suggest you begin by calculating where you sit in the current year and how it stacks up to the past several years. Is your Revenue per FTE increasing or decreasing?
My client also wanted to know how her company measured up with competitors. That benchmark is a little trickier. You may use Google to find all sorts of data for Revenue per FTE for Fortune 500 companies. (Google clocks in at eye-popping $1 million per FTE.)
For companies with revenue between $0.5 million to $10 million, it’s hard to get similar data. I offer my informal survey of our clients, other small business consultants and bankers. This tells me that there’s a range between $75,000 to $100,000 per FTE on the low end, and $250,000 to $300,000 per FTE on the high end. Keep in mind that includes firms in a wide range of industries with a variety of business models.
It’s a Crime Not to Do the Time
With this simple and powerful tool, that frustrated business owner stopped haranguing employees about inputting their time. Instead, she started comparing this year’s performance with the last few. She also was able to calculate what Revenue per FTE she needed to meet this year’s gross revenue, profitability and cash flow goals. This helped her to make some sound decisions on offering new services, raising prices, and staffing.
I’ve become fascinated by this business metric. If you do this calculation for your business, I’d love to know what your number is. In the meantime, keep the cash flow positive.
What Can I Learn Today to Improve Our Financial Performance?
You can hear when an engine is running smoothly—or racing or sputtering. The same is true for the financial drivers of your business.
You just need to know what to listen for. The good news is that your numbers are talking all the time!
Here are the best ideas we can find on how to ask your business for the information you need, to understand what it says, and take action on what you learn.
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What’s on Your Reading List?
- The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It, by Michael E. Gerber
- Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine, by Mike Michalowicz
- Managing by the Numbers: A Commonsense Guide to Understanding and Using Your Company’s Financials, by Chuck Kremer, Ron Rizzuto and John Case