Should Your CPA or Accounting Firm Choose Value Billing or Time and Billing?
More than a few authors and reviewers in recent years seem to be minimizing the importance of tracking time for billing. Calling it “myopic and prosaic,” they promote value billing as a replacement. However, my experience as a former partner in two successful CPA firms has taught me that both value and time based billing are indispensable.
Value billing is not a new idea, but the terminology oversimplifies the fee setting and invoicing process if viewed as a complete replacement for time tracking. After all, what determines and sets the limits on value?
Importance of Tracking Time
Keeping track of your time helps to verify that you are billing correctly. It reveals the correlation between the cost of the service provided and the fees charged. Ignore recorded time, but only if you value bill and pay your staff based on a percentage of fees collected. However, most firms can’t operate using that paradigm. Salaries represent a fixed obligation paid regardless of realization and collections. Therefore, it becomes critical that the billing process consider the cost of staff time.
Relevant determinants of value for value billing in conjunction with time tracking consist of the following:
Other local firms in your area may charge fees that are lower or higher than what you charge. Clients guided solely by price may leave your firm for another when fees are the only consideration. Effective time and billing software provides information and assurance on the appropriateness of billed services and when firm management needs improvement.
There is no replacement for professional competence in the determination of fees and competence is one of the key factors that ensures quality service. Unfortunately, competence may not be recognized by unsophisticated clients. Competence is also required as a business professional to ensure proper management of your cost structure and revenue realization.
- Confidence and Self-Esteem
There are times when clients should go away. Unless you are certain of yourself and confident in your services you will be afraid to bill for the true value of your services and most likely place an inordinate amount of significance on what the competition is doing. Symptoms of this problem are revealed by the amount of work in progress that remains unbilled on a firm’s pre-billing report. Many CPAs and accountants are either unwilling or would prefer to avoid conflict. Many hope to resolve any conflict over the value of services at some more convenient and future date. Be assured that a more convenient future date usually never arrives. Good self-esteem ensures that fees are billed in a timely fashion while the memory of the service is still fresh in the client’s mind and facts are clear to assist in the resolution of any conflicts.
- Your Client Relationship
Good performance generates trust and confidence over time. The well-informed practitioner is in a position to provide clients with a higher level of service. Good practice management software can put you in the position where your clients will want to pay you more. Have you ever received a bonus check from one of your clients?
- Ability to Listen
Listening to your client helps you to properly identify and understand their needs. Allow for ”white space” in conversations with clients instead of showing off knowledge. As a result, clients have the necessary time to respond and feel satisfied they have been heard. Many times clients need a good financial psychologist more than just a numbers cruncher.
- Labor and Billing Costs per Hour
Some firms work staff to death to compensate for low invoice realization rates (the ratio of the amounts invoiced to recorded chargeable time). This is self-defeating since it leads to low morale and cannot create prosperity and abundance in the long run. Knowledge of hourly labor costs and billing rates assists practitioners in formulating the delivered cost of services to the client. This knowledge should impact billing decisions just as a profit and loss statement affects earnings per share and the value of a stock.
The following graph depicts the ratio of chargeable time, based on hourly rates, to amounts realized on invoiced services. It compares realization and chargeable time by partner for each staff person over a one year period. Staff performance is further broken down by billing partner. The first staff “Fritz Landon” at left shows invoiced realization for partner “FOL” higher than gross chargeable time. The opposite is true for staff “Jay Pernell” and partner “POW”.
Consequently, a properly maintained time and billing software assists the practitioner in analyzing the recovered cost of services.
The slight variations suggest a peaceful coexistence between billing and the recorded time at standard rates. Are the variations attributable to staff performance or the result of well-organized clients?