So why is hourly billing considered antiquated? It has a few disadvantages (we cover those in detail a little later on). There are also many alternatives to hourly billing, which we'll get into below.
How does hourly billing work?
So, yes, hourly billing is slightly old-fashioned. If it's not for you, we won't take too much offense if you decide to skip ahead to our two other pricing models just below.
Hourly billing is the easiest to implement and to calculate:
Hours worked x Hourly rate = $ Fee
In terms of the overall quotation, billing, and invoice process, it generally looks like this:
The agreed-upon hourly rate (you might also give a rough estimate of hours)
Completed work and recorded time
Total time x hourly rate = fee
You choose whether to invoice the total fee or write some off based on pre-agreed hours.
This process has some challenges and disadvantages, which we'll run through next.
One thing's for sure: you'll need to track the number of hours spent on each project, which you can quickly achieve by using time and billing software for accountants. Once you've monitored the hours spent on each project, you then charge your clients at the end of a particular cycle, which might be weekly or monthly.
The problem with hourly billing
Does your accounting firm bill by the hour? You're not the only one. As we've mentioned, there are still many accounting & bookkeeping firms that use this pricing model. However, many others have made the informed decision to transition to a fixed fee or value pricing billing approach.
We say 'informed decision' because there are a few problems with an hourly billing approach.
One of the problems with hourly rates is that it takes up valuable time and can limit productivity. You might not have this problem if you use good time and billing software, but up-keeping time and billing can consume 7% to 10% of a firm's gross revenue. That's a lot of time spent tracking time.
Another big issue with hourly billing is that clients may not perceive it as fair. In their mind, when you choose to bill by the hour, they feel they may be rewarding inefficiency. The longer it takes, the more you can charge. They don't know how much it will cost them until afterward, making it harder to plan and budget. Sure, you could give them an estimate, but then you risk having to charge more or write time off.
The final issue with hourly billing is that it has low perceived value, making it hard for your clients to look at it any other way than as an expense.
2. Fixed fee billing
What is fixed fee billing for accounting firms?
Fixed fee billing is a pricing model used by many accounting & bookkeeping firms with which they charge their clients a fixed rate – no matter how much time has been spent on the project.
This pricing model typically involves offering fixed fees and implementing them for services in packages, allowing prospective clients to select the option suitable for them. If you're charging for recurring services, this pricing method for accounting services can be ideal.
With fixed-fee billing, you'll have the option to bill your clients either before or afterward. You'll also be able to set the bill as a one-time fee or one that recurs regularly.
How does fixed fee billing work?
Typically, to put in place a fixed fee billing process, you have a 'menu' of prices for different services or fixed fee packages containing multiple services.
It might also be the case that some of your fixed-fee services are variable, i.e. the amount can change based on volume. For example, you might have a fixed fee for payroll, which scales up based on the number of team members you're running payroll for.
Agreeing to a fixed fee with your clients upfront has a couple of advantages, including:
You know precisely what the 'budget' is for each job, and it's in your best interests to work as efficiently as possible to make the fixed fee as profitable as possible
Your clients have the peace of mind that they won't receive any surprise bills
In terms of the overall process, it generally looks like this:
Services & fixed fees agreed on upfront with the client
If services are recurring monthly, these are invoiced upfront at the beginning of each month
Payment is then collected each month for that invoice (this entire process can be automated using apps like GoProposal and Practice Ignition to save time)
If services are one-off, these can be invoiced upfront or afterward
The challenges with fixed fee billing
There are a few challenges with fixed fee billing regarding pricing accounting services.
The first of these is that fixed fee billing can at first seem difficult to implement if you're just moving across from hourly billing.
How do you choose your prices? How do you price fixed fee services so that they're profitable? How do you bundle these services together into fixed-fee packages?
Finding answers to these questions can be difficult if you're doing it for the first time. For more information on calculating fixed fee prices, check out this article about setting fixed fee prices.
The second challenge with fixed-fee pricing is that regardless of the...
expenses you incur for the resources you've used
or the amount of time taken to complete the project
...you're always going to earn the same fee at the end of the cycle.
To put it another way, if you use fixed-fee billing, you have to work hard to improve operational efficiency to make the fees as profitable as possible.
Will this be the case for all of your clients? Possibly not. It's worth remembering that some will be over and some will be under, although they might average out over time. The only way to truly get this "right" is with experience and tracking.
The final challenge here is that you're potentially leaving money on the table with fixed-fee pricing. Would specific clients pay more than others for the same service? Probably. This is where value pricing comes in...
3. Value pricing
What is value pricing for accounting firms?
Value pricing means charging your clients depending on the value your clients see in a service. This differs from fixed billing as your clients might be willing to pay more for a particular service than other clients based on their perceived value.
Choosing to go for a value pricing option typically means that the amount you charge each client is likely to vary.
For example, let's use monthly bookkeeping as an example. The amount you charge one client for monthly bookkeeping will be different for another client (even if the scope is the same). This can make some jobs extremely profitable compared to the hourly billing and fixed-fee pricing approaches.
Another issue with value pricing is that it's challenging to systemize it and make it consistent across your firm. As your firm grows, you might want some of your team members to start getting involved with prospect & pricing meetings. With hourly billing and fixed-fee pricing, it's pretty easy for them to get up to speed with this. Whereas value pricing will be much harder for them to learn and implement.
Pricing accounting services: the key takeaways
Pricing accounting services can feel like a subject-matter minefield at times. Here are some key things to consider when implementing a new pricing strategy or updating your existing approach:
There is no right or wrong way to do it - only what works for your firm
Brush up on some of the key pricing models above to make an informed decision
If you're going with fixed or value pricing, look to standardize your services and create packages
Have conversations with your staff and some prospective clients before rolling out your new prices, and
Consistently deliver exceptional services to justify the fees you have set
With the right pricing strategy, you'll soon feel more confident when pricing your services (and hopefully notice an increase in profitability as well!).