Billable hours are what determines your utilization rate. Your utilization rate determines your gross revenue.  These three things will ultimately determine how much you can pay yourself and future staff.  This two part article identifies the issues you need to consider in terms of the relationship between salary, utilization, and billable hours.  

The percentage of your total hours worked that are actual billable hours is your utilization rate.  When you know your utilization rate you can begin to set a sustainable hourly rate.

In general, you can expect your billable hours to be, at a maximum, 75% of your total hours worked.  Now don’t get too excited about that 75% utilization rate because not all the revenue generated from your billable hours goes to the bottom line.  

At $75 per hour, which sounds like a darn good hourly rate, 2,000 working hours per year is more like 1,500 billable hours a year.  This translates to $112,500 a year in consulting revenue, which sounds awesome.  You think you’ll work from home and keep your overhead low and enjoy a huge income.  Right? Wrong.

When you look only at billable hours and your hourly rate you overlook your future needs as your business grows.  Scalability is the issue.  Think about a consumer grade PC. Think about a tiny server with a minimal amount of RAM. Think about a server that maxes out at 512 MBs of RAM. What happens when you add more applications and you want to grow? You need more capacity.  It’s the same with your business.

As you get busy with more sweet spot clients, you’re going to need to bring in help. Even if you plan your business on just being yourself indefinitely and you’re thinking, ‘I’m not planning on ever hiring employees,’ you still need to understand what comes next.  

It’s called triple billing.  The basic premise is that the revenue from your billable hours, is divided into three. 

  • One third goes to sales management:  commissions, referral fees, “schmoozing” time, sales follow-ups, sales calls, etc…
  • The second third of your billable hour revenue goes to administrative and management items:   taxes, insurance, fringe benefits, R&D, training certification, and all the other overhead.
  • That leaves one third for your salary and the salary you are able to pay contractors or staff.  
So a $75 per hour rate at 1,500 billable hours works out to $37,500 for salary payment.  Not so lucrative a prospect anymore when put in a realistic perspective.

Bottom Line on Billable Hours
The number of billable hours available to you will largely determine your overall revenue.  You need to take your calculations much further than that though, in order to figure out what type of hourly rate you should charge in order to pay yourself, and others, a decent yearly salary.

In this article, you’ve been introduced to Billable Hours. To learn more about how you can improve your knowledge about Billable Hours, just click here now to get access to a free one-hour audio training program on 5 Easy Ways to Grow Your Computer Consulting Business.