Professional service providers, such as law firms, freelancers, consulting firms, and creative agencies sell the time they spend working for clients. That means, they get paid for the time they work. If you find yourself in a situation that requires billable hours, it’s crucial to understand how they work.
Most importantly, it’s essential to learn how to track billable hours to ensure accurate billing. In this post, we look at these and more to help you make the most of your time and get paid accordingly.
What Are Billable Hours?
Simply put, billable hours refers to any time you spend working on a client’s project. The hours are charged or billed to a client based on an agreed hourly rate. In other words, these are hours you spend on tasks for which you receive compensation. Therefore, for your time to be billable, the work must be client-related.
The type of tasks considered billable vary from one industry to another. Here’s a good example of billable hours from an accounting firm. When you hire an auditor to perform an audit on your company’s finances, they record how long they spend on the audit and bill these hours to you (the client).
Other industries that bill by the hour include:
- Advertising agencies
- Freelance creatives, such as writers and designers
- Web developers
- Public relation firms
Getting a good grasp of billable time is a key metric to understanding your business’ profits. You also get to see how much time your employees spend on revenue-generating work.
If this is how you earn your income, it’s important that you agree beforehand on some parameters with your client. These include the rate charged per hour, estimated billable time, and what should be considered billable or non-billable. That way, there won’t be any disagreements when it comes to payment.
All billable hours are recorded in your time tracking app or manual timesheets, depending on how you work. You’ll then proceed to create an invoice and send it to your client.
Examples of Billable Time
In any business, there are two types of tasks: billable and non-billable. As mentioned, you and your client will agree on which tasks are billable or non-billable.
For example, based on the contract, a client might decide to pay for client-related meetings before signing a contract, while another client may consider it non-billable time. Likewise, time spent creating the contract or an invoice may or may not be considered billable.
So, what are some of the main activities that might be considered billable:
- Engaging in project planning
- Attending meetings and responding to emails
- Performing client-requested project revisions
- Conducting research for a client before beginning the actual work
- Meeting with clients to define timelines and set milestones
Billable Vs. Non-Billable Time. What’s the Difference?
In the course of doing business, some of your work will undoubtedly be non-billable. But that doesn’t mean it’s a bad thing. In fact, doing non-billable work increases your chances of gaining more clients.
Non-billable hours or overheads can be described as time spent on non-client-specific tasks or activities. That means any work you perform for yourself, your business, or your team, that’s not related to a client.
Time spent on these tasks wouldn’t count towards your billable time. Some examples of non-billable tasks include:
- Employee training
- Team building events
- Administrative work, such as invoicing
- Attending meetings and responding to emails unrelated to the client’s project
- Breaking for lunch
- Attending networking events and other activities related to developing your business
- Learning new skills
This report by Statista gives more examples of non-billable time.
Why Is It Important to Track Billable Hours?
Billable time is a direct metric of your employees’ productivity. The higher the billable time, the higher the productivity. But to ensure your or your employees’ efforts are compensated, you must track billable time.
Let’s get into more details on some of the benefits of tracking billable hours.
Provides visibility of task progress
By tracking billable hours, you understand how long tasks take to complete, which tasks take longer, and which ones require more resources. You’ll see which tasks require employees to work overtime and if more hours reflect on the profits.
On top of that, you can spot what’s causing teams to spend too much time on specific projects or activities.
Provides a benchmark for future task estimations
The time tracking software you use to track billable hours provides valuable data that’s crucial to your business. For instance, it becomes easier to make accurate task estimations and determine the resources required for the job.
Apart from knowing exactly how much time teams will require to deliver a project, you can also determine the budget for the project.
Helps you determine the cost-effectiveness of a project
Tracking billable time can help you figure out how much time and resources are required to complete a specific project. As a result, you get insights into how you can make future projects more cost-effective.
You’ll also have a baseline to look at when selecting clients to work with.
Enable smooth planning and accurate billing
The last thing you want as a business owner is payment conflicts with your clients. By tracking billable time, you can share with the client all the activities that went into the project, including the total number of hours.
Doing so eliminates the risks of misunderstandings when it comes to billing. What’s more, you are guaranteed to always get accurate payments for work done.
Saves time that could’ve been wasted making calculations
The advantage of using a time tracking tool to record billable hours is that you don’t need to do any calculations once you complete the project. You can generate reports based on the data you want and invoice it directly to your client.
If the client has any questions, you can share the data so they can double-check to verify that the billable hours are accurate.
How to Calculate Billable Hours
The good news is that calculating billable hours is a straightforward process that can be accomplished in a few steps:
1. Decide on the base hourly rate
The first step to calculating billable time is to come up with an hourly rate. You’ll want to do thorough research so you can offer a rate that’s similar to what other businesses in the same line of work are offering. A rate that’s too high can turn away potential clients.
The best approach to determine your rate is to set a target annual salary that you’d like to earn. Then, divide that number by the average work hours in a year, which is approximately 2,087 hours (assuming it’s a full-time job).
Now, after finding out what your hourly rate is, you can raise or lower it slightly, depending on what competitors are offering, among other factors.
2. Track billable hours in real time
Ensure your teams log every second spent on a client project. They can easily do so via an automated time tracking system that automatically captures time spent on each task accurately.
Real-time recording of work hours eliminates the risk of errors associated with manual time logs. Plus, you won’t have to waste time adding them up manually since the tool does that for you.
3. Calculate all billable hours for each project
Once you complete a project or task, review your time log to find out how much time you spent working on various projects.
4. Record hours based on the project
Tracking billable hours by project not only makes you more organized but also ensures that you know which client to invoice for work done. Furthermore, it’s easier to track how much time you’re spending on each project per billing cycle.
5. Create a detailed invoice for billing
The last step is to create an invoice that you’ll send to your client. An automated app makes it easier to generate invoices. If you don’t have access to such a tool, you can use an invoice template or spreadsheet to create an invoice manually.
Your invoice should contain your address, and contact information, as well as all billable tasks and their corresponding hourly rates. In addition, include the bank information, payment terms, and deadlines as per the contract.
A tool like Traqq makes this process even simpler, thanks to the detailed reports. At the end of the billing cycle, you can generate a report and export all your time entries to Excel, so you can make the appropriate adjustments.
How to Increase Billable Time
If you review how you spend your workday, chances are there are a few things you can improve to maximize your billable hours. And as a small business owner or freelancer, every minute added is an opportunity to earn more money.
Below, you’ll find useful tips to implement to increase your billable hours, and hence profits:
Identify and eliminate distractions
Did you know that self-interruption happens 44 percent of the time? That is, employees often tend to intentionally abandon their tasks to perform something else. In most cases, social media is the leading cause of these distractions.
One research found that employees are interrupted once every 11 minutes by WhatsApp messages, tweets, and Facebook notifications. So, if you’re wondering why your non-billable time is higher than billable time, you might want to check how much time you’re spending on social media.
The solution to maximizing your billable hours and increasing productivity is to remove any kind of distractions during working hours.
A study shows that the average Brit spends 218 minutes a day procrastinating. That accumulates to around 55 days lost every year. In another survey, 88 percent of the workforce admitted to procrastinating at least one hour every day.
Given that the internet is the number one reason for the increasing levels of procrastination, you need to find an effective way to tackle it. Start by installing browser extensions that limit how much time you spend on time-wasting websites.
Some apps completely block you from accessing certain websites, including social media sites during working hours. You may also want to put your smartphone on silent to reduce the temptation to procrastinate.
Automate or delegate non-billable tasks
While non-billable work plays a vital role in the success of your business, it can waste precious time that can be redirected to more productive work. By automating non-billable tasks, like creating invoices, performing administrative work, and writing reports, you’ll spend minimal time on non-billable work and more time on billable work.
Alternatively, you can hire someone else to do non-billable tasks for you. That way, you’ll gain sufficient time to focus on the core issues that will help develop your business.
Track billable and non-billable hours
It’s not enough to track billable time. Non-billable activities can take up much of your time, leaving you little time to do work that actually matters. Therefore, consider tracking non-billable hours as well so you can identify and cut down the time you’re wasting.
With that in mind, remember to incorporate breaks into your schedule to get enough rest throughout your workdays. Not only does doing so tremendously reduce the chances of suffering from burnout, but it also helps prevent procrastination due to exhaustion.
Set goals for your billable hours
Goals help us remain focused on hitting our targets. When you set goals for the number of hours you want to record each day or week, you’ll be inspired to work harder to accomplish these goals.
In the process, you increase your billable hours and, hence, your income. Take advantage of online timesheet systems to track your progress to see how close you’re to achieving your goals.
Review your work regularly
It’s one thing to track your time and another to ensure efficiency. It’s only by reviewing your progress over time that you can discover issues causing time and resource wastage. When you review your and your team’s work weekly or monthly, you can pinpoint factors that need improving.
The data you harvest from tracking billable hours gives you insights into the inner workings of your work processes. In turn, you can devise strategies to improve efficiency and productivity for you and your teams to ensure success.
FAQs About Billable Hours
What are billable hours?
Billable hours refer to any time you or your team spends on a client’s project. It doesn’t matter which kind of task it is, so long as it’s a service that requires compensation. The most common industries where billable hours are commonly used include law firms, consulting firms, web developers, and creatives.
How do you calculate billable hours?
To calculate billable hours:
- Set an hourly rate for your work
- Decide what’s billable and what’s not
- Invest in time tracking software to accurately log work hours
- Record hours by project
- Create a detailed invoice to bill clients
How can I track billable hours?
The best method to track billable hours is to invest in a time tracking tool like Traqq. The tool automatically records your work activities, including those conducted offline. You can then generate reports based on the period and data you want to analyze or view.
How can I increase billable hours?
- Implement real-time tracking
- Track every activity that’s billable
- Track non-billable time
- Delegate or automate non-billable work