What is a realization rate?

Definition

A realization rate is billed or collected dollars divided by standard billable value. On the books, this is a billing metric, not a ledger account and not the hours that were available.

A bookkeeping shop uses it to ask how much of standard billable value made it onto invoices and into cash. The answer is a percent built from actual dollars over the dollars those hours could have carried at the posted rate.

It is a period reading of value kept. It is not the share of available hours that were billable.

Stay with that share of value when you read it. Whether the team was busy is a later question.

Where it shows up

P&L: Related to billed value against standard billable value.

Balance Sheet: Related to receivables that may not all collect.

Cash flow: Related to the cash that actually arrives.

See also: Billable Hours · Utilization Rate · Invoice

When you look at your Income Statement, you will not see a printed realization line. You see revenue at the amount actually billed, not at the standard value the hours could have carried.

When the figure is high, most of the standard value made it onto invoices. When it is low, write-downs, discounts, or unbilled time ate a large share of the standard value.

The Balance Sheet holds accounts receivable for amounts billed and not yet collected. A high receivable balance can still collect poorly if clients pay slowly or not at all.

On the Statement of Cash Flows, collections are the cash events. This percent asks how much of the standard value those collections represent.

Gross margin on the P&L can look thin when this percent is low. The shop still paid for the hours; it just did not bill or collect the full standard value.

How it works

The shop starts with standard billable value for the period. That is billed hours times the standard rate, before discounts or write-downs.

It then takes the amount actually invoiced, or the amount actually collected, depending on how the shop reads the rate. Some shops stop at invoiced value; others keep going to cash.

Divide the actual amount by the standard amount. Ten thousand dollars billed on twelve thousand dollars of standard value is about 83 percent.

Stay with the dollar value when you read this percent. A busy week of hours does not raise this rate if those hours were written down.

Do not treat billed and collected as the same numerator. Billed value can sit in receivables; collected value is the cash that arrived.

Cost of services still holds the labor that delivered the work. A low percent means that labor was paid while a slice of standard fees never reached the P&L.

The timesheet supports the standard value. The invoice file supports the billed value; the bank supports the collected value.

After the month closes, standard value is compared with billed or collected value. The gap is write-downs, unbilled time, or amounts that did not collect.

A courtesy write-down on one job lowers this percent without changing how busy the team was. The hours were still worked; the standard value was not kept.

Example

Harbor Books is a bookkeeping shop. The team worked hours whose standard value is $12,000 at the posted rate.

The shop billed $10,000 of that value after a courtesy discount on one file. Divide: $10,000 divided by $12,000 is about 83 percent.

That 83 percent is not how busy the team was. It is the share of standard value that made it onto invoices.

If the shop later collected only $9,000 of the $10,000 billed, a cash reading of the rate would be $9,000 divided by $12,000, or 75 percent. The billed reading stayed 83 percent; the collected reading fell.

If the shop billed the full $12,000, the rate would be 100 percent at the invoice step. Collection could still land lower if a client never paid.

The shop does not post a line that says 83 percent. The books already hold the revenue, the receivables, and the collections; you divide.

Common mix-ups

Realization rate is not the same as utilization rate. Utilization asks how much of available time was billable; this page asks how much of billable value was invoiced and collected.

Realization rate is not the same as billable hours. Billable hours are the time that can be charged; this page is the share of that time's value that was kept.

Realization rate is not cash on its own. An 83 percent billed reading can still sit in receivables while the collected reading is lower.

Related terms

• Billable Hours: Hours worked that can be charged to a client.
• Utilization Rate: The share of available hours that are billable.
• Effective Hourly Rate: Revenue collected divided by total hours worked.
• Invoice: The document that bills a customer and creates a receivable.
• Write-Off: Removing a balance from the books when it will not be collected or paid.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• 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.