Billing Capacity Calculation - part of your planning
Knowing the billing capacity of your small business is an important part of work planning. It's quite a simple calculation, and it's a good way to determine how much work you need, and whether you have too much to handle.
Imagine you're in a service business and you have 3 employees and about $36,500 in contracted labor already won, but not started. Do you have enough work for everyone for the time being? Do you need more work? Do you need more employees?
If you perform a quick billing capacity calculation, you can find out where you're at. The results of this simple calculation will help you determine how to behave in order to satisfy customer needs to get work done, and your need to stay busy with gainful employment for your crew.
For purposes of the calculation, let's assume that you spend half of your time working and half of your time running the business. Your 3 employees all work full-time. When you work, your billing rate is $44 per hour. Your employees all bill out at $35 per hour. A work week is typically 40 hours.
You'll work 80 hours a month at $44 per hour to bring in $3,520. Your 3 employees will all work 160 hours a month at $35 per hour to bring in a total of $16,800. Together, your monthly billing capacity is $20,320.
If you divide $20,320 into $36,500, it shows that you have a little less than two months of work lined up for you and your crew. If the typical lead time is several weeks to a couple months to land another contract, then I'd say it's time to get out there and rustle up more work.
In another scenario, let's say you happen into get yourself lined up with $87,000 in contract work. Would you panic and tell some of your customers that you can't handle their projects? Do you hire more people? Using the billing capacity calculation, it shows that you have a little more than 4 months worth of work lined up.
With 4 months worth of work, you're looking good. If the schedule for completing the work stretches over 6 months, then you know that you need another 2 months worth of work to make a full 6 months of work for you and your crew.
Annual Workload and Labor on Contract
Using the billing capacity calculation, you can quickly ballpark an annual figure for the amount of work you need to bring in. The total contracted labor for a year would be $243,840. So, that tells you that bringing in about $250,000 in labor for the year would be a good target to shoot for.
Knowing this figure should help you judge how many small jobs at $10,000 a piece you'll need to win, and how many big jobs in the $75,000 range you'll need to snag to keep you and your crew busy throughout the year.
Using a billing capacity calculation, you'll be better informed about how much work you need, and how much you can handle. Too much work is always a good problem to have. What you want to avoid is "running off a cliff" by running out of work. Knowing your billing capacity will allow you to judge just how much business development you'll need to do in parallel with your contract work to "keep the pipeline full."
This is only one tool that you can use to help assess where you are in terms of contract work. There are other factors to consider such as the pace of your marketplace, the type of business you're in, the customers you have, and special time constraints for completing each job. Knowing these things will help you schedule your work so demands on your crew are relatively steady and everyone is happy - your customers, your crew, and you.
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