There are two main billing methods in bookkeeping. Do you know which to use when? If not, read on.
One of the first decisions new bookkeepers must make is whether to charge their clients a flat fee or based on the number of hours they work. Experienced bookkeepers may also want to consider this choice to maximize their revenues and profits.
Hourly Billing
An hourly rate is a fee you charge clients per hour of work completed. An invoice based on an hourly rate reflects the number of hours in a project or cycle multiplied by the hourly rate.
Pros of hourly billing: Under this system, you bill for your worked time. This means you’re assured of receiving compensation for the whole time spent to complete a client’s work. In addition, billing on an hourly basis makes it simple to address changes in work scope. It also gives clients a handy way of comparing proposals from competing bookkeepers. To bill hourly, simply describe the work product, the number of work hours involved, and then multiply hours times the hourly rate and create your invoice.
Billing on an hourly basis also makes it easy to maintain several rates depending on project type. For example, you might have a rate for one-off jobs, one for monthly or quarterly engagements and one for annual relationships. Or your rates might vary based on the nature or complexity of the work.
Cons of hourly billing: The main disadvantage of hourly billing is that it limits your earning potential. If you want to make more money, you have to work more hours. However, at a certain point, your earnings will hit a ceiling. Under an hourly-billing system, clients often adopt a “bean-counting” mentality. They demand proof for every hour you spend working on their account. This forces you to create (or purchase) a time-tracking system and meticulously document your work throughout the day. Documentation isn’t a bad thing per se, since you don’t want to bill on the basis of incorrect hours. Hourly billing could introduce a disincentive for both parties to collaborate fully to improve the quality of bookkeeping delivered. From your perspective, hourly billing eliminates the incentive to work more efficiently in order to make more money. When you do so under an hourly billing system, you punish yourself by reducing your income, not increasing it.
When to use hourly billing: This method makes sense when you’re new to bookkeeping and don’t know how long basic tasks take. This makes it challenging to come up with a fixed rate. Hourly billing is also appropriate for one-time client consultations. For example, you might use hourly billing for clients who only need an answer to a bookkeeping software or other technical question.
Flat-Rate Billing
With flat-rate compensation, you charge a client a set price based on a mutually agreed-upon scope of work. Your fee stays the same regardless of how many hours it takes to complete the job.
Pros of flat-rate billing: The main advantage of flat-rate billing is it simplifies the billing process. You don’t have to track your hours or input data into a time-tracking application. With this method, you’ve already determined your invoice amount based on your estimate of how long you think the work will take, multiplied by your hourly rate. Another advantage is that flat-rate billing allows you to increase your pay by working more efficiently. Becoming more productive, in effect, increases your engagement profit margin. Finally, working on a flat-rate basis allows you to predict better how much revenue you’ll generate each month. For customers, flat-rate billing provides for greater transparency and simplicity. They know what they owe each month, eliminating surprises when your invoices arrive. It also prevents their fee from increasing since you agree to assume the risk of needing to work more hours.
Cons of flat-rate billing: This method requires more precision in the bidding process. To submit a fair quote, you must carefully assess every step in the engagement, how much time you’ll need to complete it and contingencies that might increase your hours. If you fail to consider these factors, you might lock yourself into a fee that doesn’t fully cover your time costs. Conversely, you might end up charging clients too much, which might drive them to a competing bookkeeper. For clients, flat-rate billing makes it challenging to adjust the scope of work mid-way through a project. That will require discarding the prior rate and calculating a new one.
When to use flat-rate billing: This method makes sense when you already know how long your bookkeeping services take to complete. It’s also appropriate when your client base consists mainly of clients using long-term services rather than one-off projects.
Service Tiers
A third option is to bill based on service tiers. This involves developing three or more bookkeeping bundles of increasing value. Then you charge a higher price for each progressively larger bundle. For example, you might offer “Lite,” “Plus” and “Premium” bookkeeping plans designed for clients with increasingly complex needs requiring more of your expertise and time.
Tiered pricing has the following benefits:
- It makes your services more tangible and more accessible for prospects to understand.
- It accelerates the purchase process by minimizing how long it takes for prospects to review your offerings and select the right type and number of services.
- It allows you to begin working for a low-tier client and then upsell to a higher tier at some future point.
- It discourages price shopping since tiered pricing is harder to compare against another bookkeeper’s services and pricing.
- Finally, it allows you to accommodate prospects with different budgets easily.
The Need for Professional Liability Insurance
If you build your billing system correctly, clients will be more willing to give your bookkeeping firm a try. Now you’ll face a different problem: mitigating your lawsuit risks.
Because bookkeepers deal with company financial matters, which are often highly complex and regulated, the risk of making mistakes is high. The penalties for making them can be severe, as well. In general, whenever you negligently handle a transaction, causing a client to lose money, you may be exposed to a liability claim. This creates the need for robust liability insurance.
Having a well-designed billing system and Bookkeeper Professional Liability Insurance is essential for all bookkeepers today. With a career as demanding and stressful as bookkeeping, you don’t need further worries about client litigation. Being fully insured will produce the peace of mind you’ll need to prosper in this rewarding field.
360 Coverage Pros offers professional liability insurance designed specifically for bookkeepers. Our “A” rated coverage features a segment-leading online application that lets you click and bind your coverage to receive instant proof of insurance. Our affordable rates start at just $15.42/month. To learn more, visit our website.
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