The number of billable hours you log each month is a key indicator for any service company.
But it is an area that is crucial to the success of a firm, and one that is often a source of confusion in the professional services industry. So let’s delve into the heart of billable hours and learn how to use them to our advantage.
What, after all, is a billable hour, and how can it be used to our advantage?
For professional service firms, billable hours are their bread and butter. Unlike manufacturing firms, which rely on the sale of tangible goods, or retail businesses, which sell services, professional service firms sell the time they spend on their work.
While it is true that this specificity facilitates certain revenue estimates compared to other business models, it is not without its difficulties. One of the most pervasive concerns the tracking of time allocated to each project, often referred to as billable time. Effective management of this component requires meticulous recording of billable hours. But what exactly do we mean when we talk about billable hours and what is the process for calculating them?
What are billable hours?
Billable hours are the total time you spend on a particular project. These hours are billed to the client at an agreed upon hourly rate. In other words, it is the number of hours that a company can bill its clients for the work it performs on their behalf.
Most service companies – digital agencies, law and accounting firms, consulting firms – use billable hours to bill their clients for the services they provide. By knowing billable hours, they can see how much time employees spend on revenue-generating tasks.
Here is an example of billable hours in the accounting industry.
When an auditor performs an audit of financial statements, he/she records the number of hours worked on the audit and these hours are billed to the client.
There are also non-billable hours, i.e. hours you spend on tasks such as team meetings, email, sales and marketing, business development or administrative work, but we’ll come back to that later.
All billable and non-billable hours are recorded on your timesheets and transmitted to your billing program as soon as you complete a project or are ready to bill your customer.
The importance of controlling billable hours
Tracking billable hours is useful to your business for several reasons. The most obvious reason is that it helps you determine how much to bill clients. Knowing how long it takes you to complete a project helps you set a budget that helps you make money and run a sustainable business.
Tracking billable and non-billable work also gives you insight into which projects and clients are most valuable to your company.
- How much time do you spend with each customer?
- What kind of work does it involve?
- And, above all, what is your profit margin with each customer?
By answering these questions, you will be better able to decide which customers to focus on and which are not worth your time.
When employees don’t properly track their hours, company finances can suffer. A study revealed that companies that do not accurately track billable hours lose up to $50,000 in annual revenue per employee. A billable hours model will help you evaluate employee performance, reduce non-billable hours, and forecast your team’s capacity and revenue.
It’s easy to lose track of the billable hour. You may think you only spend five minutes on a job, but when you look at the clock, it’s an hour! Keeping track of your billable hours will help you keep your finances in order and make sure you charge for every minute of work you do for your clients.
Understand the concept of non-billable hours
Sometimes referred to as « overhead, » non-billable hours refers to all work performed that is not charged directly to the client. These non-billable hours are crucial to maintaining a company’s internal operations. Although they do not directly contribute to turnover, proper management of these hours can positively influence the dynamics of the company.
On a day-to-day basis, non-billable hours include :
- The foresight activities, marketing and other actions aimed at business development, such as participation in networking events.
- Internal meetings not directly involving the customer, including administrative tasks such as timesheet validation.
- continuous training and development of new skills, for example by reading specialized articles, taking online training courses or attending webinars.
It is also important to note that non-billable hours include breaks taken by employees to rest or eat. These activities are not related to the work itself, but are included in the employee’s total work time.
The hidden face of non-billable hours
Non-billable work has its downside. Every time an employee spends time on non-billable tasks, he or she spends less time on billable tasks that generate direct benefits for the company.
Non-billable time can become an especially heavy burden when the company is faced with a client that demands strict adherence to deadlines. It is not uncommon for employees to have to extend their workday or skip lunch breaks to complete their billable work.
In addition, non-billable work inevitably leads to lower profits and higher labor costs. When employees spend most of their time on non-billable activities, it is difficult to grow the company without increasing staff, which increases fixed costs.
However, it is crucial to remember that not meeting billing targets also has the consequence of slowing the company’s growth. If you don’t have enough billable resources to meet the needs of new clients or new project requests, you may have to turn down contracts. This, in turn, slows your growth.
Deciphering the riddle of billable hours: how exactly are they calculated?
Do you find yourself in a bind when it comes to calculating your working hours? For a beginner, this can become a real headache. Here’s some valuable help on how to accurately calculate billable hours.
- First, determine the hourly rate you have agreed upon, which usually corresponds to a standard in your industry.
- Set a course for accounting your billable hours. You have the option to time and record all hours spent on the project in parallel, and then separate billable hours from non-billable hours. Another option is to take into account only the billable hours, without taking into account the non-billable hours.
- Add up all your billable hours (a count that can be daily, weekly or monthly).
- It’s time to multiply your billable hours by your billing rate.
To take the pulse of your profitability, take your billable utilization rate as a reference. This index is the total billable hours of workers, expressed as a percentage of their total working time. This rate fluctuates by industry and trade.
How can project managers benefit from the law firm methodology for billable hours?
There is no doubt that the system of billable and non-billable hours is deeply entrenched in the legal world. In practice, many law firms require their counsel to keep detailed records of their hours in order to determine exactly how many billable and non-billable hours they have accrued.
Typically, these firms set their lawyers billable hour targets – also used as a measure for awarding bonuses – which can range from 1,700 to 2,300 hours per year. Each firm uses these billable hours as a barometer for assessing its legal fees.
Law firms also use the tool to track attorneys’ billable hours and monitor :
- Inactivity periods of lawyers
- Sick leave
- Personal permission
- Family emergencies.
Since billable hours are used as a benchmark for pricing, this method of working is preferred by law firms. Billable hour tables simplify the process of tracking billable hours for law firms, reducing their workload in terms of manually calculating billable hours.
With law firm management software, legal professionals can meet their billable hours goals while keeping an eye on non-billable hours. Partners and staff can see at a glance how much time is spent on billable and non-billable tasks.
How important is it to calculate billable hours?
Taking billable hours into account in your management can bring you a list of advantages. Here are some of them:
Optimize the evaluation of your projects
Analyzing the time spent on each project and the tasks that have particularly mobilized you is an essential tool to better evaluate your business prospects: you will be able to isolate the clients or assignments that devour most of your time and adjust your rates accordingly.
To accurately establish cost-effectiveness
Counting billable hours is undoubtedly the number one tool a project manager needs to quantify the profitability of a company or assignment. The concept of billable hours is obvious: all things being equal, the more hours billed, the more the company’s coffers are filled.
More accurate billing
By keeping track of billable and non-billable hours, you can be sure that your invoices are more accurate and free of assumptions about the time spent on the job. In this way, your remuneration will correspond exactly to the value of your work.
Your billing will be even more accurate if you know exactly how much time you spend with each client. You will avoid overcharging your clients simply because you know exactly how much time is spent on each case. As an immediate consequence, you will develop a relationship of trust with your clients that will translate into future potential clients.
You will also be able to develop more accurate estimates and budgets. Historical time data from previous projects helps provide more accurate estimates when bidding for new contracts or ongoing projects that change in scope.
Optimize your performance
Tracking billable hours also gives companies the opportunity to measure the efficiency of their team. Employees must record the time they spend on each client file or project in order to bill the correct hours. This tracking allows for evaluation of usage.
By keeping track of the hours billed for a project, it is much easier to measure a team’s performance and know whether or not it is exceeding expectations.
You’ll know exactly how many hours each team member spends on a particular project, so you can determine if they could be faster or more efficient. This data can be used to pay your team members more fairly when you bill clients by the hour.
Finally, on a personal level, keeping a record of time spent on billable work will be invaluable when it comes time to ask for a raise or promotion, as you can base your requests on this data.
Improve the management of your teams
Keeping track of your team’s schedule gives you a clearer picture of their activity. You will be able to anticipate and distribute tasks before your team is exhausted, because you will know if they are overloaded. You will be able to see if your employees spend more time on non-billable hours than billable hours, so you can take corrective action.
Tracking billable hours allows you and your team to accurately quantify the time spent on each task. You can then identify areas of improvement for you and your team, and maximize your earning potential.
The art of controlling billable time to optimize financial performance
The hourly billing method frequently used by law firms has become a benchmark model for firms seeking to bill their services fairly and accurately. Optimizing profits is only possible when billable time is properly controlled. Here is a selection of strategies:
Complete supervision of the work
It is advisable to set up a real-time monitoring system instead of manually recording hours. This method will allow you to identify employees who are too lax in their attitude towards work, as well as those who work overtime, thus accumulating too many hours. In addition, you will be able to monitor the progress of the project and optimize its profitability.
You should also classify unbilled hours. Some of these hours contribute to improving project performance and therefore need to be controlled. If too many non-billable hours are required for a particular project, you risk incurring losses. In this case, you may need to renegotiate the terms of the contract with the client or add the non-billable hours to the invoice, explaining why these hours need to be paid for.
It is advisable to keep a separate record of the hours worked on each project, even if they belong to the same client. It is also a good idea to record projects separately to help you identify those that take up too much of your time, those that are profitable, and those that need to be reviewed to improve their profitability.
Set billable time objectives
Each day, or each week, set a target for the volume of billable hours you wish to record. This target should be in line with the time you have available each week and the number of clients or projects you are working on. You can use tools like Teambook to monitor the progress of your goals and make sure they are met.
Specify your invoices
A detailed invoice is always preferable to an approximate one. Your client will have a better understanding of the volume of work required to complete the project.
By setting up a high-performance automated billing system, you can ensure that your invoices are consistent and that none are forgotten. Communicate with your clients the schedule for sending invoices. While monthly invoices are the norm, for projects that require more resources you can agree with your client on a bi-weekly schedule.
Conduct periodic reviews
Take stock of what you or your team has achieved on a weekly or at least monthly basis, especially if there is a wide disparity between projects or clients. Reviewing your progress can help you highlight any difficulties in tracking your and your team’s hours.
Time tracking can be easily managed and once you get the hang of it, you’ll see how beneficial it can be. Time tracking software such as Teambook will be a great help in keeping track of billable hours more efficiently and accurately.
Strategies to increase your billable hours
Eliminating distractions is a sure-fire way to increase the hours you can bill. Start by muting social media notifications and postponing reading emails until the end of the day. This will maximize your billable time.
An effective strategy is to delegate secondary tasks, such as answering emails, running errands, updating files, making photocopies and other less important tasks to less experienced staff. This gives you the opportunity to focus on the core of the project at hand and maximize billable time.
Finally, sometimes customers ask you to justify certain billable hours, even if they have been used for their indirect benefit. To avoid this problem, demonstrate transparency by providing exhaustive descriptions of each line billed, specifying how these hours worked have been useful to the customer.
In the face of empirical evidence, it is not easy to argue: if you can prove that you worked 40 hours instead of the agreed 35, your client will probably be inclined to add the extra 5 hours.
Establish clear billing limits
It’s a fact that the dividing line between billable and non-billable tasks can sometimes seem a little blurry. But there’s a simple trick. If a task, while not billable at first glance, can help complete the project more quickly or efficiently, that time can be added to the billable hours. Be sure to make this point clear to the client so they sign the check in full knowledge of the facts.
When you invest time and resources in training your staff so that they have the necessary knowledge to carry out the project effectively, this is non-billable time that the client must be aware of so that they understand the cost.
Use of time tracking software such as Teambook
Typically, companies that place importance on tracking billable hours use an online timesheet solution. This allows employees to easily record the actual time they spend working during a given week.
Tracking software like Teambook can be a real asset to the billing process and the overall well-being of your company. Teambook is a resource management tool with a time tracking module that will help you save time and money.
The software manages time tracking through user-friendly interfaces designed to help you and your team record billable and non-billable hours efficiently. Teambook’s billable time tracking software ensures optimal data centralization and protection. A more secure alternative to cumbersome paper or Excel spreadsheets.
Final considerations
The most crucial element in professional services firms is time. Effective tracking of calculated hours in terms of billing and non-billing is essential for this type of organization; it is the only way to ensure that every productive minute is compensated.
Without the right tool, keeping track of project expenses when it comes to invoicing can quickly become a real obstacle course. A large number of professionals realize, to their chagrin, that they have actually worked for less than what they should have been paid if they had conscientiously tracked the time spent on each project. Hence the undeniable value of good time management…. capitalizing on time tracking tools.
Proper management of your billable hours will give you, your project managers and your clients a clear picture of the productive time consumed throughout the year on a particular project. With a time tracking tool that includes a billable hours calculator, it will be much easier to scrupulously monitor potentially billable hours and ensure that you are paid according to your commitment.
Take a decisive step towards optimizing your team’s billable hours with Teambook’s resource management software. It gives you control over your billable and non-billable hours, as well as other essential facets of managing your project’s resources. Why not try a free version with us right now?
