It's math time
If you care about things like:
If you’re paying your technical team members too much or too little,
Who are your most profitable team members and who is a drain on your resources; and
If there is someone on your team that needs extra support or training;
Then you’ll want to grab a Peach Tranquility tea and an almond croissant and listen up because today I want to talk about something that is very CPA-ish.
And, today's topic is especially relevant if you work with independent contractors or employees that you’d consider technical team members and sometimes wonder if you’re getting an “ROI” on their time.
That's right - we are talking about REALIZATION RATES!! 🎉🎉
Otherwise known as that rate/ratio that tells the story of what's actually going on when your top line revenue grows this year, but your shareholder draw has to be less.
SO, let’s talk.
How do you calculate the Realization Rate of a team member?
Well first, you’ll have to gather some info, friend:
A = Total billable hours the team member worked last month (or quarter)
B = Team member’s charge-out rate (for example, if you pay your team member $50/hr, it’s likely that their charge-out rate is $100 to $150/hr)
C = Total $$ amount you were able to bill of the team member’s time last month (or quarter)
Next, get out that cell phone calc and let's get math-y:
C
-------------------------
(A x B)
For example, if you have a team member who worked 100 billable hours in February, has a charge-out rate of $225/hr, and you were able to bill $19,000 of her time, her Realization Rate was 84.4% or $19,000/($225/hr x 100hrs).
As you can see, when you do this calc, you’ll get a decimal number (aka percentage) and you may wonder, wth do I do with this info?
Well, look at it and get curious.
📈 Did it go up or down as compared to prior months? (hint: do this calc monthly - you’re looking for trends)
🤔 Is it high or low for your industry? Check out your industry-specific info using your NAICS code with Stats Can or buy a $1,200 IBIS report.
🧮 Does the number make sense given the technical expertise of your team member? For example, I’d expect a Realization Rate of 80-90% for someone in the world of finance who was hired as a junior-ish team member. Anything higher means you might have a superstar on your hands and you may have to adjust their comp asap. Anything lower means you might need to help that team member with better time budgeting, help them re-prioritize their workload or give them extra training.
And if you’re like - “Tanya, I don’t have time for this kind of number crunching each month/quarter. Plus, I’ve got 8 team members. This seems like a lot,”…
I'll be honest and say that I can’t take you any further -- aka your profitability won’t significantly improve and you’ll be giving people raises willy-nilly -- until you set up a system or plan to track your team’s Realization Rate.
However, if you’re reading this and you’re like…. TANYA I NEED MORE OF THESE FANCY-DANCY RATIOS IN MY LIFE BECAUSE I WANT MY BIZ TO BE MORE PROFITABLE, perf :)
On Friday, I'll be releasing details of a brand new way to work with me and my team that is geared towards people who want to start their own path to $500k - $1M in revenue, but have previously felt like my full 7-Fig CEO program was out of their price range.
Stay tuned, friends… 🤔🤔
Take care and talk soon,
Tanya