What is an effective hourly rate?

Definition

An effective hourly rate is collected cash divided by every hour worked in the period. On the books, this is a cash-per-hour reading, not a ledger account you debit.

A one-person bookkeeper uses it to see what each hour actually brought in, including hours that never went on a bill. The cash in the numerator is revenue that collected, not billed amounts still open.

It is not a Balance Sheet line. The books already hold collected revenue and the hours file; this reading restates them as a rate.

Stay with collected revenue against all hours when you read it. The all-in hourly cost of the person belongs on a different page.

Where it shows up

P&L: Related to collected revenue against all hours worked.

Cash flow: Related to the cash in that numerator.

See also: Billable Hours · Realization Rate · Fully Burdened Labor Rate

When you look at your Income Statement, you will not see a line titled this rate. You will see revenue for what was billed, and you still need collected cash and total hours to finish the reading.

When the rate is high, each hour of the month produced more collected revenue. When it is low, collections were thin, hours were heavy, or both.

The Balance Sheet does not hold this metric. Unpaid bills can sit in accounts receivable while this rate waits on cash.

On the Statement of Cash Flows, collected revenue is the cash in the numerator. Billed revenue that has not collected does not belong in this reading.

Some shops put this rate beside pricing on a management report. List price is what you ask; this page is what you actually collected per hour worked.

How it works

Start with revenue collected in the period. That is cash in from client work, not billed amounts still sitting unpaid.

Count total hours worked in the same window. Include billable hours, internal time, and unused time, because all of those hours were worked.

Divide collected revenue by total hours. A bookkeeper who collected $12,000 on 160 hours reads $75 an hour.

Stay with collected cash in the numerator. Using billed revenue inflates the rate when bills are still open.

Stay with total hours in the denominator. Using only hours that can be charged inflates the rate by ignoring internal and unused time.

The timesheet is the source for the hours. Payroll may confirm the 160 hours were paid, but the time file is what you divide by.

Cost of services is the wage cost of delivering the work. This rate is the other side of the hour: cash in, not cost out.

Gross margin can be read after you know this rate, because leftover needs both collected revenue and the cost of the hours. This page stays on cash per hour, not on the leftover percent.

Keep the deposit log and the timesheet behind the math. Anyone asking why the month read $75 should see $12,000 collected against 160 hours.

Do not treat this rate as the cost of employing the person. Cost per hour, including taxes and benefits, is a different page.

Example

Mara keeps books as a one-person shop. She collected $12,000 in the month and worked 160 hours.

Divide: $12,000 by 160 equals $75 an hour. That $75 is collected revenue against every hour she worked.

If she billed $12,000 but collected only $9,000, the rate is $9,000 by 160, or about $56 an hour. The billed figure is not this reading.

If she collected $12,000 and worked 200 hours, the rate is $60 an hour. Cash in did not change; hours did.

If 40 of those 160 hours were internal and never billed, they still sit in the denominator. The rate is still $75, because this page divides by all hours, not only hours that can be charged.

If her list price is $150 an hour, that is pricing, not this rate. The effective figure is $75 because collected cash was spread across every hour she worked.

She does not post a line that says this rate. Collected cash and the timesheet already hold the two numbers; you divide.

Common mix-ups

This rate is not the same as the fully burdened labor rate. That rate is the all-in hourly cost of the person; this page is collected revenue per hour worked.

This rate is not the same as a utilization rate. A utilization rate is the share of available hours that were billable; this page divides collected cash by every hour worked.

This rate is not the list price. List price is what you ask; $75 is what the month actually collected per hour.

Related terms

• Billable Hours: Hours worked that can be charged to a client.
• Realization Rate: The share of billable value that actually gets invoiced and collected.
• Utilization Rate: The share of available hours that are billable.
• Fully Burdened Labor Rate: The all-in hourly cost of an employee including burden.
• Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Timesheet: The record of hours worked, used to drive payroll and job costing.
• Pricing: The set price charged to customers for a product or service.