Here’s How To Track Billable Hours & Increase Profitability

Are you struggling to keep track of your time and billable hours? Billable hours are the driving factor behind the profitability of any service business, whether productized or not.

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Yet, many business owners tend not to track their billable hours properly or underestimate them.

U.S. businesses lose approximately $50,000 each year due to hidden billable time spent on client emails. With a daily timesheet instead of a weekly one, companies can recover up to $52,000 per employee per year.

The reality of billable hours is that knowing how to keep track of them is a trial-and-error process. To make it easier for you, I’ve compiled a 8-step process detailing exactly how to monitor your billable hours.

Billable hours vs. non-billable hours

Billable hours are hours that can be directly attributed to a specific project and charged to a particular client. In other words, they’re hours invested on certain tasks or assignments that directly contribute to a project.

They also encompass hours spent working with the clients.

Some activities that can be deemed as billable hours include:

• Client communication and meetings
• Conducting research
• Content creation
• Brainstorming for a client’s project
• Working on client revisions

Non-billable hours are all the other hours spent running your business or working on tasks that are not directly related to a specific project.

"Non-billable hours are all the other hours spent running your business or working on tasks that are not directly related to a specific project."

They’re important because they contribute to the overall success of the business but aren’t related to a single project. Therefore, you can’t charge these hours to a particular client.

Some examples of non-billable hours include:

• Recruiting
• Training
• Bookkeeping
• Administrative tasks
• Internal meetings
• Pitching proposals
• Marketing your business

How to calculate billable hours

If your business model involves billing your clients on an hourly basis, you’ll need to pay close attention to how and where you invest your time. And the best way to do that is to meticulously keep track of your billable hours.

This will allow you to bill your clients accordingly, optimize your time, and maximize your net profit.

Here’s how to calculate your billable hours:

• Set your hourly rate.
• Track your billable hours and record them. As discussed before, billable hours are all hours spent on assignments that directly relate to a project. Depending on the size of your team and whether you charge different hourly rates for different clients, you can either track all the hours spent on activities and then separate billable hours from non-billable hours or only record billable hours.
• Add up your daily, weekly, or monthly billable hours.
• Multiply them by your hourly rate.
• Add any applicable additional fees or taxes to your clients’ invoices.

Now, as an extra tip, once you’ve calculated your billable hours, use the utilization rate as a reference to better assess your profitability as a business.

The utilization rate is the total amount of your employee’s time that is billable.

"The average annual utilization rate for your production team should be over 85%, and it should be around 75% for the overall team."

While this figure differs between agencies, the average annual utilization rate for your production team should be over 85% (according to Productive.io). And it should be around 75% for the overall team. Note that if your average utilization rate is under 60%, you might struggle to achieve healthy margins and profitability.

Pros and cons of billable hours

Have you ever had a client asking you to just provide them with an overall figure? Or a client asking you whether you really need that many hours to complete the project?

While charging your clients hourly has many advantages, the approach also has some major drawbacks that could compromise your relationship with existing or potential clients. So, to help you decide what’s best for your business, I’ve detailed below the pros and cons of using the billable hour method.

Pros of billable hours

• Using billable hours gives your clients better visibility on how their money is spent
• This method allows you to be compensated for any overtime or additional hours required
• Billable hours also enable you to easily adjust your budget based on project changes and evolution
• Billing your clients hourly means that there is less chance of you underestimating the cost of a project

Cons of billable hours

• Clients tend to avoid uncertainty and might prefer a fixed-price project
• Knowing that the client is closely monitoring how the team spends each hour can add additional pressure on everyone and create stress
• If your team works fast and is particularly productive you might end up earning less money than you would have by using a fixed price

How to keep track of billable hours easily

Accurately tracking billable hours is critical to ensure your business’s profitability. As a result, you’ll need to select the right tool for you and your team to track billable hours effectively.

There are two different ways to track them:

1. You can either do it manually using tools such as Excel, or;
2. Automate the process by leveraging a free billable hours tracker.

Method #1: How to track billable hours in Excel

If you don’t want to use a time tracking app, and as your workload increases, you’ll need to track your billable hours using a centralized document such as a dedicated Excel spreadsheet. 

This will prevent you from losing your notepad or sticky notes and help you accurately monitor the time spent on specific tasks. It will also allow you to share with the team and ensure everyone uses the same spreadsheet.

Wondering how to track billable hours in Excel efficiently?

Here are a few steps to help you create the perfect Excel template for your billable hours:

• Freeze the first row on your document and pick a color for it.
• For each column, write 6 titles in this order: date worked, time in, time out, total hours worked, gross pay, and additional information.
• Create a separate box and input the hourly rate.
• You can then format each column and add a formula to automatically calculate the time worked. You can also automate the gross pay calculation by using an Excel formula.

If you want to create your own time log, there are plenty of YouTube tutorials showing viewers how to come up with this type of timesheet template.

And there are also many free downloadable billable hours Excel templates available on the internet for you and your team to use. Try this weekly timesheet from TimeDoctor, I found it useful during my research.

Method #2: Use time tracking software

Cerebro - Track time in relation to tasks

Cerebro is a project planning management tool that allows businesses and managers to assign and closely monitor tasks for specific projects. And one of the tool’s features enables companies to estimate workload, define a timeframe, and set a deadline for each task. The free version allows you to set up five users on the app.

ClickUp - Project management with integrated time tracking

ClickUp is a project management app with a native time tracking functionality. The feature enables teams to easily track, estimate and report time on every single assignment. Users will need to create a task, tag a client, define whether it is a billable or non-billable task, and start tracking their work in real-time. 

The free plan allows teams of up to five users to work on an unlimited number of tasks.

Connecteam - For more advanced workflow management

Connecteam is a workflow management app that was developed to help improve project planning and increase employees’ engagement. The app offers a real-time clock option so that employees can easily track their time and billable hours. The feature is free and can be used by up to 200 employees per organization.

Toggl Track - Flexible standalone time tracking

Toggl Track has been specifically designed to help users track billable hours accurately while saving time. This collaborative tool allows everyone in the team to see how time is spent on a project and to report billable hours. Here are some of the best free features:

• Auto-tracker - automatically suggests time entries
• Manual time tracking
• Pomodoro timer
• Calendar Integration where your events automatically become time entries

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All these tools offer a free plan and will help you to track your time efficiently.

However, the free versions all come with limitations. To help you choose the best free billable hours tracker, I’d recommend that you keep the criteria below in mind:

• How many users (team members) will you need to set up on the tool?
• Do you need advanced features? Are these included in the free or paid versions?

And as a word of advice, confirm first that your team is comfortable with time tracking before signing up for one of these tools. You don't want to shell out money for things your team doesn't agree with.

7 Simple steps to track your billable hours

Step #1: Set the invoicing schedule

Having a solid invoicing system in place will help you stay consistent and avoid missing any invoices. It’ll give you clarity on outstanding invoices and allow you to send reminders.

When working with a client on a project, make sure to clearly state when you’ll be invoicing them.

The standard is to invoice clients monthly. However, if a project involves a lot of work and requires many resources, you can also choose to invoice bi-weekly.

Step #2: Create a distinct time log

As previously mentioned, using a time log, may it be on Excel or time tracking apps, will help you accurately track your billable and non-billable hours. Some of the main reasons why creating a distinct time log is critical to increasing your business’s profitability include:

• Identifying inefficiencies and unprofitable clients and adjusting accordingly
• Assessing time spent on each task and billing appropriately, maximizing your earnings
• Centralizing time tracking
• Providing clients with full visibility
• Ensuring a healthy balance between non-billable tasks and billable tasks

Step #3: Track hours by project and client

Ever heard of the adage, ‘’the devil is in the details’’?

This couldn’t be more true when it comes to time tracking. Not only do you need to create a time log to track your billable time, but you’ll also need to organize it properly to maximize its efficiency.

Therefore, as best practice, record your billable hours by project and tag the corresponding client. This will help you monitor how much time you’re investing on each client’s project.

And it will also enable you to identify inefficiencies and required adjustments.

Step #4: Always track tasks in real-time

Have you ever been so focused on a task that you can’t remember when you started working on it? Setting a real-time timer whenever you start a new task is the best way to maximize your time and improve your profitability.

Not only can it help you identify employees who might be procrastinating, but it will also ensure that you’re not forgetting to log certain tasks. Or worse, that you’re not wasting precious time at the end of the day scrambling to try and recall time spent on activities.

Make sure to use free real-time billable hour trackers such as Toggl Track or ClickUp.

Step #5: Record your non-billable hours

It might be tempting to only focus on monitoring billable work.

After all, this is where the money comes from. Yet, this would be a mistake. Non-billable hours include activities such as training, recruiting, networking, or marketing your business. These activities, although not directly related to specific projects, all help support your business and ultimately increase your bottom line. 

"Non-billable hours include activities not directly related to projects but which help support your business and increase your bottom line."

For instance, training will help your team be more knowledgeable and more efficient. 

This will allow them to consistently provide high-quality work and enable you to charge more.

So, you need to track these hours to ensure you allocate enough time to training up your team. Tracking non-billable hours is an excellent way to improve the team’s efficiency and your business’s profitability over time.

By tracking them, you’ll be able to assess what clients are not profitable due to the amount of non-billable hours their projects require and adjust accordingly for the next project. You’ll also be able to identify admin tasks that take up most of your team’s time and automate or improve your processes.

Step #6: Calculate your total hours

Once you’ve completed a client’s project, or at the end of a billing cycle, you’ll need to calculate the total number of hours spent on the project. You’ll then have to multiply this number by your hourly rate to accurately invoice your client for the work done.

Step #7: Prepare a detailed invoice

A client’s invoice should outline the key information listed below:

• Your business name, logo, physical address, phone number, and email address 
• Your client’s details, including name, physical business address, email address, and phone number
• A list of the services you’ve provided. Note that you should itemize the list to make it clearer
• The corresponding number of billable hours and hourly rate for each item
• Any additional fees or taxes
• The total for the invoice, including taxes
• The payment terms and deadline

You can find free customized invoice generators or templates online.

Step #8: Avoid block billing

Block billing means grouping various activities under one single time entry. As discussed in the previous point, you should always itemize your services to allow for clarity.

This means that you need to thoroughly track the time spent on each specific task. 

For instance, rather than writing ‘’client meetings’’, divide the tasks between each communication type (email, phone, face to face) and stipulate the number of communications. This way, clients will better understand how your team spent their time on the project and grasp the amount of work involved.

Maximize the profitability of your projects

As a business, productivity is crucial to help maximize your time, make the most of your billable hours and ensure your profitability. Some of the key things you can implement to maximize your team’s productivity and, therefore, your billable hours include:

• Harnessing the power of time tracking software to accurately monitor time spent on tasks and projects and bill clients accordingly.
• Creating a business-wide time tracking policy.
• Identifying lower-rate billable hours and menial tasks and delegating to support staff. You should always focus on assigning higher-rate billable hours to staff working on high-value tasks.
• Leveraging client portal solutions for agencies using tools such as ManyRequests. These collaborative tools will help you make the most of each billable hour by allowing you to assign tasks within your team, set a timeframe and deadline for each, and monitor progress in real-time. They’ll also provide visibility to your clients and ensure an enhanced customer service experience.
• Using digital tools such as digital signatures or transcribing software to minimize time spent on unproductive tasks. You can also create templates for some of your documents, such as client presentations.

As a business owner, knowing how to keep track of billable hours properly can be challenging, especially when wearing so many hats every day! Follow this 8-step process to track your billable hours and you should be on your way to increasing your bottom line in no time.

Originally published Jun 7 2021

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