Accountants Profit Target Hourly Rate Formula
Learn how to calculate the annual revenue and average hourly billing rate an accounting practice needs to meet its profit target.
This calculation converts a practice profit goal into an average charge-out rate. It accounts for owner pay, operating overheads, available working time, billable utilization, and the proportion of invoiced fees expected to be collected.
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Required Hourly Billing Rate
Where:
First calculate the revenue needed to pay overheads, owner pay, and the target profit. Then divide it by the annual hours expected to produce collected client fees.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| targetProfit - Annual profit target | Profit the practice aims to retain after owner pay and overheads. | currency |
| ownerSalary - Annual owner salary or drawings | Annual amount paid to the owner separately from the profit target. | currency |
| annualOverheads - Annual practice overheads | Annual operating costs such as staff, premises, software, insurance, and marketing. | currency |
| hoursPerWeek - Working hours per week | Typical total hours worked each week before allowing for non-billable time. | hours |
| workingWeeks - Working weeks per year | Planned weeks worked after allowing for leave and other time away from work. | weeks |
| billableUtilization - Billable utilization | Percentage of working time expected to be invoiced to clients. | percent |
| collectionRate - Fee collection rate | Percentage of invoiced fees expected to be collected after write-offs, discounts, and non-payment. | percent |
Step-by-Step Calculation
Calculate annual working hours
This is the total planned time available during the year before adjusting for administration and other non-client work.
annualWorkHours = hoursPerWeek * workingWeeks
Calculate planned billable hours
This reduces total working hours to the portion expected to be chargeable to clients.
plannedBillableHours = annualWorkHours * (billableUtilization / 100)
Adjust for collection performance
This expresses billable capacity after allowing for fees that may be discounted, written off, or not collected.
effectiveCollectedHours = plannedBillableHours * (collectionRate / 100)
Calculate required annual revenue
The practice needs enough fee income to cover all three components.
annualRevenueRequired = targetProfit + ownerSalary + annualOverheads
Calculate the required hourly rate
Divide the annual revenue target by effective collected billable hours to find the average hourly rate needed.
requiredHourlyRate = annualRevenueRequired / effectiveCollectedHours
Calculate the target profit margin
This shows the selected profit target as a share of the required annual revenue.
targetProfitMargin = (targetProfit / annualRevenueRequired) * 100
Example: Established small accounting practice
Annual working hours
40 * 46
1,840 hours
Planned billable hours
1,840 * 0.65
1,196 hours
Effective collected billable hours
1,196 * 0.98
1,172.08 hours
Annual revenue required
100,000 + 80,000 + 120,000
£300,000
Required hourly billing rate
300,000 / 1,172.08
£255.95 per hour
Target profit margin
100,000 / 300,000 * 100
33.3%
Final Result
The practice needs £300,000 in annual revenue and an average hourly billing rate of about £255.95 to meet this target.
Assumptions
- ✓Owner salary or drawings are treated as separate from the desired annual profit.
- ✓Billable utilization includes the effect of administration, business development, training, management, and other non-billable work.
- ✓The collection rate represents the expected share of invoiced fees ultimately received.
- ✓The calculated rate is an average across all collected billable work, rather than a required price for every service.
- ✓Taxes, financing costs, and capital expenditure are excluded unless included in annual overheads.
Limitations
- !Actual revenue can vary with client demand, workflow timing, staff capacity, and service mix.
- !A practice using fixed fees may need to estimate service hours carefully before comparing fees with the hourly benchmark.
- !Collection performance can change after the rate has been set, especially where payment terms or client mix change.
- !The calculation does not assess local market pricing, competition, or the value delivered to a particular client.
- !This is a planning estimate and not financial, tax, or accounting advice.
Common Mistakes to Avoid
Counting owner salary both as a separate input and within annual overheads.
Using total working hours as though every hour can be billed to a client.
Setting utilization too high without allowing time for management, sales, compliance, and client administration.
Ignoring discounts, bad debts, and write-offs when estimating the collection rate.
Comparing the target rate with a quoted rate without considering whether quoted fees include taxes or pass-through costs.
Related Formulas
Frequently Asked Questions
How do you calculate an accountant's required hourly rate?
Add the annual profit target, owner salary or drawings, and annual overheads. Divide that revenue target by annual working hours adjusted for billable utilization and the expected collection rate.
What is effective collected billable time?
It is planned billable time after adjusting for the percentage of invoiced fees expected to be collected. It is used to allow for write-offs, discounts, and unpaid invoices.
Why is owner salary separate from profit?
Separating them lets the calculation show the revenue needed for personal pay and the additional return the practice aims to retain.
Can the formula be used for a fixed-fee accounting practice?
Yes. Use the hourly result as a benchmark, then divide a proposed fixed fee by estimated delivery hours to compare its implied hourly recovery.
What happens if billable utilization falls?
Effective billable capacity decreases, so the required average hourly rate rises if the same revenue and profit targets are retained.
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