Selling time is a different business model
An agency, law firm, consultancy or engineering practice does not have inventory or a gross margin in the conventional sense. Its capacity is hours, those hours expire whether used or not, and profitability is determined almost entirely by how many get billed and at what effective rate.
Two ratios capture this, and firms that track them make noticeably better decisions about hiring, pricing and which clients to keep.
Utilisation: how much of your capacity is billable
Billable hours divided by available hours. If a consultant has 1,800 available hours in a year and bills 1,260, utilisation is 70 percent.
Target ranges vary. Junior delivery staff often sit between 75 and 85 percent. Senior people carrying business development and management responsibility run lower, frequently 50 to 65, and that is correct rather than a problem. The error is applying one target to everyone, which pushes senior staff to bill at the expense of the work that generates the pipeline.
It matters how you define available hours. Including holiday and training in the denominator produces a lower but more honest number. Whichever you choose, hold it constant, because changing the definition makes the trend meaningless.
Realisation: how much of billed time becomes money
This is the one firms more often neglect, and it usually explains more of the variance.
Realisation measures what you actually collect against what the time was theoretically worth at standard rates. Time can leak at three points: hours worked but not recorded, hours recorded but written off before invoicing, and invoices discounted or never collected.
A firm at 90 percent utilisation and 70 percent realisation is working extremely hard for considerably less than it thinks. In practice, that combination usually points to scope creep absorbed rather than billed, or to work habitually written down because someone feels uncomfortable charging for it.
The combination is what matters
Effective rate is standard rate multiplied by realisation. A firm billing 250 an hour at 72 percent realisation has an effective rate of 180. Multiply that by utilised hours and you have the actual revenue capacity of each person, which is the number that should drive hiring decisions and pricing.
Reading the patterns
- High utilisation, low realisation. Underpricing or unmanaged scope. The work is happening and not being paid for.
- Low utilisation, high realisation. Pricing is fine; you need more pipeline or you are overstaffed.
- Both low. Usually a delivery or sales problem rather than a pricing one.
- Both high and still unprofitable. Look at overhead and at non-billable staff ratio.
Client-level profitability
Aggregate ratios conceal the distribution. Most firms that measure profitability by client discover a small number of relationships that consume disproportionate senior time, generate heavy write-offs, and lose money, often while being regarded internally as important accounts because the revenue number looks large.
You cannot see this without time recorded against clients and overhead allocated on a defensible basis. Once visible, the options are repricing, rescoping or exiting, and all three are easier conversations with evidence attached.
Getting the data
None of this works without consistent time recording, including on fixed-fee work where people often stop tracking. Fixed-fee engagements still consume hours, and without recording them you cannot tell whether the fixed fee was a good deal. Weekly entry rather than month-end reconstruction is the practical difference between data you can use and data you cannot.
TallyWise provides this as part of our professional services accounting. Book a call to talk through your situation.
