Ask the owner of a time-and-materials firm how the business makes money and the answer is usually short. It comes down to the hours you can bill against the hours you pay people for. That is right. Most of the margin sits in that ratio, and yet most firms of this size cannot produce it monthly without a spreadsheet someone rebuilds by hand.
What utilization measures
Billable utilization is billable hours divided by available hours, for a person, a team or the whole firm, over a period.
Available hours need a careful definition. Start with paid hours from payroll. Take out paid holidays and leave, because nobody can bill a day they were not working. What remains is the time the firm paid for and could, in principle, have billed.
Billable hours should be hours you actually invoiced, or will invoice, at the agreed rate. Hours worked on a client project but written off are not billable in any sense that pays the payroll.
Where the data already sits
Most firms past their first few hires already have the three pieces.
The timesheet tool holds hours by person, client and project, and whether each entry is billable.
Payroll, often Gusto, holds hours paid by person and pay period, with holidays and paid leave usually coded separately.
QuickBooks holds the invoices, so it tells you what was actually billed and at what rate.
The work is joining them. Map people across the three systems, line up the periods, and agree once how each kind of hour is classified. After that the calculation is arithmetic.
Read it alongside realized rate
Utilization on its own can mislead. A consultant who is fully utilized on work billed at half the standard rate is busy, not profitable.
Track realized rate next to it: billed revenue divided by billable hours. Utilization tells you how much of the paid time was sold. Realized rate tells you what it was sold for. Together they explain the margin. Apart, each can look healthy while the business is not.
| High realized rate | Low realized rate | |
|---|---|---|
| High utilization | Healthy | Busy at the wrong price |
| Low utilization | Good work, not enough of it | The problem month |
Reporting it monthly
Calculate it at the same point each month, after the timesheets for the month are approved and before invoices go out. Show it by person and by team, against the previous three months, so a trend shows up before it becomes a bad quarter.
Separate people whose role is not mainly billable. Leaders, sales and operations staff should not be in the same average as consultants, or the firm's number will look worse than the delivery team's really is.
If you run several entities, as many services firms do with one company per office or region, consolidate before you compare. Utilization by entity is useful. A firm-wide number built from entities that bill each other is not.
What utilization will not tell you
It will not tell you whether a project is profitable. A project can run at high utilization and still lose money if it overruns a fixed fee or a not-to-exceed cap. That needs project budgets and burn tracking, which we cover in project accounting in QuickBooks Online.
It will not tell you about capacity either. A firm at full utilization with a growing pipeline needs to hire ahead of the work. The number shows that you are full, not when you will run out of room.
Frequently asked questions
What is billable utilization?
Billable utilization is the share of paid working hours that were billed to clients. It is calculated as billable hours divided by available hours, where available hours are paid hours less holidays and paid leave.
How do you calculate utilization rate from QuickBooks and Gusto?
Take paid hours by person from Gusto, remove holidays and paid leave, and take billable hours from your timesheet tool, checked against what QuickBooks shows as invoiced. Divide billable by available for each person, then roll up by team.
What is the difference between utilization and realized rate?
Utilization measures how much of the paid time was billed. Realized rate measures the revenue earned per billable hour. A firm needs both, because high utilization at a low rate can still produce poor margins.
Should non-billable staff be included in utilization?
Report them separately. Including leaders, sales and operations staff in the same average makes the delivery team's utilization look lower than it is and hides where the real gap sits.
Where CFOLogic fits
We set up the mapping between timesheets, payroll and the books once, then produce utilization and realized rate every month as part of the close. Navigator, our software, reads QuickBooks and operations data together and shows labor as a share of revenue without a spreadsheet, so leadership can see the trend between monthly reviews.