Accountants Revenue Target Formula
Learn how to calculate the annual revenue, monthly revenue and billable utilisation an accounting practice needs to meet a profit target.
This formula estimates the fee income needed to cover annual operating overheads while retaining a chosen net profit margin. It also compares that target with the billable capacity created by your team size, working time, utilisation and average charge-out rate.
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Target Annual Revenue
Where:
Divide annual overheads by the share of revenue that remains after the target profit margin. If the target margin is 25%, overheads are assumed to use the other 75% of revenue.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| annualOverheads - Annual overheads | Total annual operating costs that the practice must cover from fee income. | currency |
| targetProfitMargin - Target net profit margin | The percentage of revenue intended to remain after the entered overheads. | percent |
| billableStaff - Billable staff | Number of team members whose time can be charged to clients. | people |
| hoursPerWeek - Working hours per person each week | Normal weekly working hours for each billable team member before utilisation is applied. | hours |
| workingWeeks - Working weeks per year | Number of weeks worked after allowing for leave, holidays, training and other time away from normal work. | weeks |
| utilisationRate - Expected billable utilisation | Percentage of available working time expected to be spent on billable client work. | percent |
| averageHourlyRate - Average charge-out rate | Average realised fee per billable hour across the practice's work. | currency |
Step-by-Step Calculation
Calculate available annual hours
Multiply the billable team size by weekly hours and working weeks to find total available working hours before non-billable time.
availableHours = billableStaff * hoursPerWeek * workingWeeks
Estimate annual billable hours
Apply the expected billable utilisation percentage to available annual hours.
annualBillableHours = availableHours * utilisationRate / 100
Calculate revenue capacity
Multiply estimated billable hours by the average charge-out rate to estimate potential annual fee income.
revenueCapacity = annualBillableHours * averageHourlyRate
Calculate the annual revenue target
Calculate the revenue needed for overheads to equal the non-profit share of total revenue.
targetAnnualRevenue = annualOverheads / (1 - targetProfitMargin / 100)
Calculate the monthly revenue target
Spread the annual target evenly across 12 months for a simple monthly benchmark.
targetMonthlyRevenue = targetAnnualRevenue / 12
Calculate required utilisation
Convert the required billable hours into the percentage of available capacity needed to achieve the revenue target.
requiredUtilisation = targetAnnualRevenue / averageHourlyRate / availableHours * 100
Worked example: Four-person accounting practice
Available annual hours
4 * 37.5 * 46
6,900 hours
Target annual revenue
300000 / (1 - 25 / 100)
$400,000
Target monthly revenue
400000 / 12
$33,333.33
Required annual billable hours
400000 / 150
2,666.67 hours
Required billable utilisation
2666.67 / 6900 * 100
38.6%
Final Result
The practice needs estimated annual fee income of $400,000, or about $33,333 per month, to cover $300,000 of overheads and retain a 25% profit margin. This requires about 38.6% billable utilisation at a $150 average hourly rate.
Assumptions
- ✓Annual overheads include all operating costs that the practice expects revenue to cover.
- ✓The entered target profit margin is measured after the entered overheads.
- ✓The average charge-out rate reflects the realised average across billable work, not merely published rates.
- ✓Working weeks and utilisation reflect realistic allowances for leave, administration, training and business development.
- ✓The monthly target is an even annual average rather than a seasonal billing forecast.
Limitations
- !The calculation does not separately model indirect taxes, tax liabilities, bad debts, write-offs or financing costs.
- !A single average hourly rate may not reflect different service lines, client types or fixed-fee engagements.
- !Actual capacity can change with staff turnover, recruitment timing, sickness and workflow delays.
- !Revenue billed, revenue earned and cash collected can differ due to timing and debtor balances.
Common Mistakes to Avoid
Entering gross charge-out rates instead of the average rate actually realised after discounts, write-offs or fixed-fee overruns.
Leaving owner or partner compensation out of overheads while treating the output as a full profit target.
Using 52 working weeks without allowing for annual leave, holidays, training and non-client work.
Confusing expected utilisation with the required utilisation output.
Treating a monthly average as a cash-flow forecast when billing is seasonal.
Using a target profit margin of 100%, which makes the formula invalid because no revenue remains to cover overheads.
Related Formulas
Frequently Asked Questions
What is the revenue target formula for an accounting firm?
Target annual revenue equals annual overheads divided by one minus the target profit margin expressed as a decimal: annualOverheads / (1 - targetProfitMargin / 100).
Why does a 25% profit margin require revenue of four-thirds of overheads?
With a 25% margin, overheads make up the remaining 75% of revenue. Dividing overheads by 0.75 gives the revenue target.
How is required billable utilisation calculated?
The calculator divides required billable hours by total available annual hours, then multiplies by 100.
What does required utilisation above 100% mean?
It means the current team capacity and average rate cannot produce the target revenue within available working time. The inputs need to be reviewed.
Does the revenue target formula include VAT or sales tax?
No. The formula uses the operating revenue and overhead figures entered and does not separately model tax treatment.
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