The Logic Behind Calculating Billable Hours
Billable hours, for those who have yet to hear of them, are your team’s work hours that make up the bill that will be submitted to the client. It seems pretty straightforward, right? Well, although it should not be too complicated, there are definitely some grey areas when it comes to billable hours.
If you’re a business owner, learning the logic behind calculating billable hours should be something that’s part of your to-do list. However, it’s also relevant to non-business owners, such as anyone who is a solo entrepreneur or actively deals with clients, consultants, landscaping, and overall professions where pay is on an hourly basis.
Debunking Billable Hour Mistakes
When it comes to calculating billable hours, there is a common mistake that most business owners make - they trust their intuition. Although excessive involvement in all areas of the business expands your knowledge of operations and costs, you should not calculate hours intuitively.
Overlooking certain activities can cost you potential revenue. Similarly, overestimating billable hours without data to back it up will result in unprofessional invoices, which may lead to a lack of trust in the company from those being invoiced - which could be the customers, clients, collaborators and more.
A study conducted by Affinity Live, a professional services automation company, revealed that every person lost around $50,000 in revenue due to miscalculation of time spent on email communicating with clients. When the company considered the issue across the whole professional services industry, they estimated that the US economy loses around $7.4 billion in potential revenue, or 50 million hours of productivity a day.
Why Calculate Billable Hours?
Tracking billable hours is a must since it gives you insights into how many hours your team is putting in that can easily be allocated to a specific project. This way, you can determine the value of the services you offer. However, that is only scratching the surface. If you listen to what the numbers are saying, they can help you see if employees are deserving of their wages, namely whether they are properly compensated for the work they put in.
When done right, calculating billable hours will help with:
Calculating realistic costs and deciding fees when sending out invoices to a client,
Preparing accurate estimated costs within the company,
Paying your full-time, part-time and remote employees for the precise amount of work they have done,
Budgeting out projects by letting you have a clear estimate of labor costs associated with an undertaking,
Plan budget estimates for upcoming quarters based on previous expenses on similar projects.
What about non-billable hours?
Billable hours does not necessarily mean all hours worked. As a solo entrepreneur or business owner, you know that there are many work hours that you cannot charge a client for, namely nonbillable hours. You can also not avoid nonbillable hours, they’re part of every workplace. Nonbillable hours, amongst others, can include:
Team hours spent brainstorming
Time spent in preparing project proposals for new pitches
There is a “no one size fits all” philosophy to determine how much time employees should spend on nonbillable hours. This largely depends on the company and its services. Some services, such as landscaping or home repair and homecare (caregiving), are very hands-on and require little nonbillable hour time. On the other hand, other services, such as digital marketing or social media, may involve more nonbillable hours by nature.
Generally, think about the value that these hours are bringing to your company to determine whether they need to be restructured.
How do I calculate billable hours?
Now that you understand the importance of calculating billable hours for your business, you are rightfully wondering how to do so. Generally, you can either decide to calculate billable hours or use a digital solution to do so.
In the fast-paced business world, drowning yourself in administrative work is counterintuitive. This is why many businesses are opting for automated timesheets to skip the hassle and focus on what matters most.
Automated timesheets give you in-depth and actionable insights into your team’s start and end work hours. Additionally, they provide details on employee breaks, overtime, and paid time off. More or less, these timesheets do all the groundwork for you. Instead of spending time collecting timesheets, you can focus on acting upon what the numbers are telling you.
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Overall, calculating billable hours is pretty straightforward and self-explanatory. However, keep in mind that rounding employee billable hours is a highly regulated matter and there are some clear rules you should follow. To make sure that your practices do not violate labor laws, spend some time learning how to accurately round employee work hours.