Pricing models in accounting firms – enhance your business with contract invoicing

Updating pricing models is more relevant than ever for accounting firms today. One reason for this is the increased efficiency brought about by digitalization and the rise of artificial intelligence. Automation reduces the time spent on administrative tasks, and fewer billable hours also means lower invoicing, especially in the accounting industry, where hourly rate invoicing is common. Thus, accounting firms cannot increase their sales simply by improving efficiency — at least not through honest means.

In the accounting industry, a variety of pricing models are used, many of which stem from traditional practices. In this blog, we will explore some of the most common models and explain why transitioning to contract-based invoicing benefits your accounting business.

Read more: AI in business: How artificial intelligence enhances the future of PSA software?

Hourly rate invoicing

Hourly rate invoicing is a common invoicing method in accounting firms and the service industry. By using hourly rates, accounting firms can, at least in principle, invoice clients based on the actual amount of work performed. This way they avoid the risk of underestimating the workload.

The challenge with hourly rate invoicing is that clients are always invoiced retrospectively. This will lead to delays in cash flow and effectively means that the accounting firm is financing its clients. Additionally, hourly rate invoicing diminishes the incentive to leverage modern technology and automation to increase efficiency. For example, if your firm adopts electronic bank statements, the bookkeeper’s working time is cut in half as a result. At the same time, your billing is also halved — unless you choose to falsely invoice your clients under the outdated practice.

The biggest issues with hourly rates are related to time tracking without regard for productivity. This means that clients end up paying more for a slow or less competent bookkeeper than for a skilled and efficient one.

Export invoicing

Export invoicing is a model in which the client pays the accounting firm a set fee for each transaction or record posted to the accounting system. This type of invoicing is typically used alongside hourly rate invoicing.

The advantage of export invoicing is that clients are invoiced according to the actual work performed, which is fair and transparent from the client’s perspective. The downside, similar to hourly rates, is that invoicing occurs retrospectively, slowing down cash flow.

Contract invoicing

Contract invoicing is a model in which the accounting firm and the client agree in advance on the price and invoicing interval (e.g., monthly) for a specific service package. This model is based on a fixed price or a pre-determined invoicing criterion, meaning it is not dependent on the number of individual hours worked.

Contract-based invoicing is used in conjunction with hourly rate and export invoicing in accounting firms. Although it is currently less common than hourly rate invoicing, its popularity is growing. A fixed price smooths out the monthly costs of services, enables more accurate budgeting, and facilitates cash flow management. In a fixed pricing model, it is important to define what the fixed price includes to ensure that additional work is invoiced separately.

Improve profitability through a pricing model change

Based on our experience, the best invoicing method for accounting firms is contract-based invoicing, supplemented by hourly rate invoicing for additional work and investigations. In contract invoicing, it’s important to invoice for the work of the contract period during that period and for additional or investigative work in the following month’s contract invoice. This way you can significantly speed up your cash flow.

From the client’s perspective, this approach is also easy to understand, as it establishes a clear and logical invoicing rhythm. Clients pay for services in the month they are used, similar to familiar consumer models like popular streaming services such as Netflix or Spotify.

Get familiar with different pricing models and their pros and cons by downloading our extensive Pricing guide for accounting firms!

Although updating the pricing model may seem labor-intensive, it is worthwhile. Accounting firms that have changed their pricing model have successfully improved profitability. The majority of clients also understand the change in pricing model, recognizing that the accounting firm must evolve its business in a changing market.

Tracking profitability is essential for your accounting firm to succeed and achieve sustainable growth. The most commonly used basic reports in accounting industry are customer and employee profitability reports. With these reports you can gain detailed insights into invoicing, time spent, margin, and average hourly rate invoicing. With a high-quality PSA software, you can monitor client profitability in real-time.

Read more: Improve your accounting firm’s profitability with these two reports