How To Calculate Billable Utilization Rate

how to calculate billable hours

Tracking non-billable hours gives you the opportunity to find out each employee’s contribution to a certain task and maximize or minimize it accordingly. Basically, it is a way of finding out an employee’s strengths and the speed with which they work. If an employee is quick and efficient at creating debriefs, then those tasks should be delegated to them in the future. Tracking non-billable hours is a great way of improving process efficiency.

how to calculate billable hours

Assigning work in this way is a win-win for your organization, since billable and non-billable tasks will be completed more efficiently. And for employees, it means they can focus on tasks at which they’re either highly skilled or very efficient. It’s one thing to track and understand billable and non-billable time. It’s another to know how much billable time each employee on your team should be working.

So you can take action for future projects to make sure you communicate better with the client. Or, you can simply set better communication rules with your client to avoid drowning in the endless sea of email. You can see from the list above, that there are so many activities in a company’s life that are a cost, but cannot be charged to a client. Many professionals working on hourly assignments know how complicated it is to properly track their billable work.

Of course, non-billable hours represent the time your team dedicates to their relationship with your client. And are as important and necessary as the hours you can actually include in the bill. The key is to mantain a certain balance between them so that your projects are both profitable and successful. However, this may cause confusion if you don’t track billable hours for each project. It is a time tracking software that comes with an additional feature of tracking time spent on projects. A mentioned non-billable hours are time spent on activities not related to a certain client or project.

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Where we should be factoring those things in of course is when we look at longer time horizons, and on a departmental or agency-wide level. Why did you choose to use the gross capacity and not net capacity? Removing pass-through expenses from your gross revenue on a project produces a number we call Agency Gross Income . This is an important metric for you to be paying attention to, since it’s the number we benchmark all your spending and profitability on. Why is this important to establish before we talk about employee cost per hour? Without clarifying the question being answered it’s difficult to justify what gets factored into the employee cost calculation. The bottom line is that if we’re looking at the project/client level – we generally want to focus on Gross Margin first.

  • Next, you should keep track of the total hours spent on a project to report to the client and bill them for it.
  • Billable hours also help to avoid any possible misunderstanding with clients as the matter of who is doing what.
  • Automate the process of calculation and find out the exact billing amount in an instant.
  • Similarly, you won’t be happy if you can’t accurately bill them for the work you did because you didn’t track it accurately.
  • Every professional services manager—from the executive leadership level to delivery managers to department heads—tries to improve billable utilization.

Professionals and organizations who trade their time for money have to calculate their billable and non-billable hours. You can accurately track time for all your tasks and projects using Time Doctor. Used by large companies and SMBs, Time Doctor offers several time tracking features, productivity reports, and payroll features to generate quick and accurate invoices. Let Hubstaff ease the pain of calculating billable and non-billable hours.

Hey Stuart, I’m not sure I fully understand the question but your billable cost-per-hour will be whatever you’re paying your staff + any benefits, payroll taxes, etc. We do this simply by taking all of the time logged against the project or client and multiplying it by the Cost-Per-Hour of the employees involved. The most common application we’ve seen has been trying to assess the profitability of projects and clients either in the scoping phase of a project or retroactively. Now to calculate the hourly cost of each of your team members, you’ll need to bring these pieces together.

How Legal Practice Management Software Supports Hybrid Work Models At Law Firms

If you bill your clients on an hourly basis, you need to be cautious of how and where you invest your time. Clio’s software lets you set a running clock to record time while you work on a task. You may be tempted to round up to an even hour when billing, but padding hours unnecessarily is inaccurate and unethical. Expert advice and resources for today’s accounting professionals. Attending meetings with the client or related to the client’s project. Billable hours seem like they should be black and white, but they aren’t always. Generally, if you can tie your work back to the client, your time is billable.

This is not only because giving away hours and over-servicing clients costs your organization a great deal. It’s also because as a for-hire organization, word of mouth is everything, and you don’t want to put yourself in a position where the client is giving you bad reviews. Prove how much time you spend working, so it can be easy to negotiate a higher salary or billing rate. It’s difficult to argue with numbers — if you can show you are spending 40 hours working each week instead of the 35 you had earlier agreed to, then your client will be willing to add 5 more hours. Setting a real-time tracker is better than logging hours manually.

For best results, enter values on your desktop to calculate your total for invoicing automatically. As you work on a client or project, enter your times in and time out.

how to calculate billable hours

That’s why I recommend focusing on Gross Margin when assessing client or project level profitability and reserving net margin analysis for broader contexts in your agency. I see this most often when questions about overhead and billable capacity come into the fold. This usually happens when someone is trying to work backward from project-costing to net-profitability. Billable hours may seem rather complex and cumbersome to calculate, but with the above steps in mind, they should be easy to handle. You can make your life even easier by utilizing a piece of software fit for your needs, in order to get the best grasp on all things related to working hours. Thankfully as we looked at before, there are free templates available that allow you to easily create an invoice.

Ideally, you should have either paper or electronic files for each client that retains your services. Keep a copy of your time log in the client’s physical or electronic file. In order to avoid this, it is recommended that employees submit their project-related queries, problems, and updates a day before or at the start of the day. This will not only save time but speed up the pace with which employees will work on a project. The more time is spent on working on the actual project, the better the efficiency and billable time. We also have a calendar view where you can enter time which helps you see gaps in your billable hours.

Resources

If you don’t have enough billable resources to keep up with new clients or projects that come in the door, you’ll need to turn down business which will slow growth. You can calculate billable hours, either manually or using a time tracking tool. Hubstaff makes it easy to set up billable rates for each of your team members. By doing this, you can fully customize what each team member accrues based on the projects or clients that they’re working on. If you keep billable and non-billable hours on the same timesheet, you run into several issues. For one, you can’t bill your clients accurately if you’re not separating all your hours up.

  • You and your employees need to remove any form of distractions and tackle procrastination during working hours.
  • This is all information you should know to improve productivity and, most importantly, keep an eye on profitability.
  • Working on a client’s projects, communicating with them, and revising your work for them could all be considered billable activities.
  • When a project is completed on budget, you know your profit margin has been met.
  • Includes strategies for measuring, understanding and managing the causes of churn.

Automated tracking of non-billable hours also streamlines billing and invoicing. It also improves employees’ morale, saves time, and makes the clients happy. 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. 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.

Also, note how there are two fields to give you an estimate of the maximum number of billable hours you could put in that month if you were working at 90% productivity versus 75% productivity. To maximize on an attorney’s billable hours, some law practices resort to increasing their overall work hours to upwards of 70 or 80 hours per week. A billable hours quota of over 2,000 hours per annum is not unheard of. If you have a good automated invoicing system, you will stay consistent and thus avoid missing invoices.

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. 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.

Free Freelance Timesheet Templates

With this in mind, there are tools that lawyers can use to make it faster and easier to calculate and log their hours—like a billable hours chart. By billing in standard time increments and using an attorney billable hours chart, you can spend less time trying to calculate your billable hours manually. Download the billable hours’ template for Excel to record your hours worked and hourly pay rate for each client or project in a day.

They’ll also provide visibility to your clients and ensure an enhanced customer service experience. But for the purpose of modeling gross margin on a project or client level, we want to leave these costs out of our calculation. This is because billable expectations, vacation time, sick days, and other benefits can vary dramatically from one organization to another, or even one employee to another within your company.

how to calculate billable hours

Here’s what you need to think about when measuring billable utilization for your professional services firm. Once you’re tracking time, you know not only how much each of your employees is working, you also know what they’re working on. You can use this information to make sure that each employee’s contribution to the company is maximized. See how ClickTime can help your organization decrease non-billable hours and get back to the work that makes you money. Outside of reducing time spent in non-billable meetings, you can speed up many of your team’s tedious, manual activities with software. You can raise rates, renegotiate contracts, or reduce hours, but it’s critical that you and your client are on the same page.

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Billable hours are the nr. of hours spent working on a specific project and client. They include things such as client email communications, content creation, or unexpected revisions. Billable hours are directly related to a project and don’t include training, recruiting or bookkeeping. 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. 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.

You won’t overcharge for your services if you know exactly how much time each case requires. As a result, you will gain your client’s trust, which will enable you to attract more potential customers in the future. Billable hours simplify cooperation between two parties, bringing some definition as to what tasks should get invoiced and compensated and what tasks shouldn’t. To get paid for services, many agencies, software shops, and consulting companies turn to billable hours, and for good reasons. As they say, time is money, and billable hours are clearly the bridge from one to the other. The first step to track your billable and non-billable hours is to create a project and all the tasks you want to track under it.

Don’t worry about the task at hand, just start tracking your time and get on with it. We mentioned social media there but a lot of the procrastination can become before a project even gets started. It’s a good idea to dedicate a block of time to a certain task. For example, you finish your breakfast and you have three hours until lunch.

You’ll then have to multiply this number by your hourly rate to accurately invoice your client for the work done. 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 https://quickbooks-payroll.org/ processes. Tracking the time – of when the action has started, when each billable hour took place, as well as when you’re done with a client/project. The time needs to be accurately tracked, as it’s the very basis of the billing in the case of billable hours. Archdesk gives you the possibility to clock in/out from the place you work and register the time you work to a specific task inside a project.

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These tools help you tackle all the above problems and can even create invoices automatically. Don’t factor in any hidden administrative task while estimating the project’s total cost. GPS location trackingBuilt-in efficiency tools to help teams work smarter. Related articles on how to run a more efficient, profitable law firm. We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.

Depending on the industry and how many small meetings the professional has with the client, this could add up to an inflated bill. A billable hours chart with carefully chosen increments can help keep this number within a range that is reasonable for both the professional and the client. It might seem silly in the moment to track a five-minute phone meeting or the two minutes how to calculate billable hours it takes to send a work email. But all those small increments of billable time can add up over the span of an entire project. Track every minute you spend working on a client’s project to increase your billable hours. At the end of each billing cycle or when you complete a client’s project, review your time log and calculate your total billable hours for the project.

The Comprehensive Guide To Billable Hours

how to calculate billable hours

If you’re a writer who needs to do 60 minutes of research before starting your work, then that would be a billable hour. As long as it’s a part of the assigned project, then it all goes towards your billable hours. Looking at the various employee costs, you will get a sense of how much variation there is across all of them. Again, this will be a function of their utilization and labor costs. Seeing how to calculate billable hours the rates based on each profit percentage, will help you see how much you can charge and how profitable you can be. As a decrease in overhead cost comes into play as you take on more client work, you will see a bump in your profitability as well. Now, let’s make it all make sense by figuring in the profit margin you will need to consider to make offering your services truly worthwhile.

You will find that administrative tasks are responsible for the vast majority of these hours. Automatic time tracking and instant billing will drastically cut he hours allocated to calculate invoices and manage payments. Before beginning to track billable hours, employers have to jointly decide the hourly rate with clients. This is because if by the end of the day you go back to think about what you did for a certain project, you might not come up with accurate results. So record your time as and when you clock in and out of a project. Productive utilization measures the number of hours spent on non-billable work deemed vital to the ongoing business of the firm.

Knowing how much time per month you and your team are spending on meetings, answering e-mails and taking phone calls, is the first step to improve overall efficiency and productivity. This will take care of your time tracking needs without you having to do collate reports manually. This software will increase your bandwidth to focus on more pressing tasks. You could calculate the average (x̄) and standard deviation (σ) of that sample set and set minimum targets to (x̄ – σ) and maximum targets to (x̄ + σ). This would mean that for a typical normalized distribution, you’d see people falling within that range about 68% of the time.

You can track and record all the hours spent on the project and then separate billable and non-billable hours or you can simply record billable hours and leave out non-billable hours. Non-billable hours also include activities that employees do for their own benefit, for example, taking a 5-minute break to freshen up, or eating. These activities are not directly related to work tasks but contribute to the employee’s total hours. Non-billable hours (sometimes called “overheads”) refer to any work done that doesn’t get invoiced to clients. Businesses have to have non-billable hours to ensure their internal processes run smoothly, and they can have a positive effect on company culture if they are managed correctly. You might think you’re only spending five minutes on a task, but when you look at the clock, it’s been an hour!

To Improve Team Management

There are many cases where employees claim to waste a lot of time. They include performing administrative work, writing reports, and creating invoices. With the correct view of every situation in the business, shifting priorities and setting guidelines for activities that include meetings, team activities, and training would be easier. Thus, the billable hours approach is helpful in such instances. Your Gross Profit margin will be the revenue you receive from the client, minus the cost of your team’s time and any materials or pass-through expenses directly related to the project. Marcel is an agency profitability optimization consultant, keynote speaker and the CEO of Parakeeto.

how to calculate billable hours

It automatically tallies up your billable hours from the timesheets, calculates utilization rates as well as tracks hours spent on non-billable work. The only thing you need to do to get this data is to make time registrations a staple in your routine.

Set Up Your Project Budget In Resource Management

The Runn billable hours tracker ensures that the data is centralized and safe, as opposed to using paper-based solutions or cumbersome spreadsheets. You get to basically reinvent your resource management practices, discover internal trends, forecast demand, and increase project profit.

  • If no response is registered within 60 seconds of showing the pop-up, the time tracker stops on its own.
  • Here are some ways to use software and solutions to help track billable hours accurately.
  • With TrackingTime you can easily identify which are the clients your team spends more non-billable hours than convenient (excessive phone calls, meetings, e-mails and so on).
  • Enter the number of workdays you plan to take as vacation days in 2021.
  • When you know the true cost per production hour for each team member, you can calculate exactly how much you need to charge per hour for that person to meet your gross profit goals on the projects.
  • We need to look at the true hourly rate, so leave the 40 hrs/week calculation alone.

Working with existing customers and signing in new ones is the desire of every business. With more projects, there’s a high chance that the organization’s top line will go up. When working with a client on a project, make sure to clearly state when you’ll be invoicing them. Add any applicable additional fees or taxes to your clients’ invoices. This will allow you to bill your clients accordingly, optimize your time, and maximize your net profit. Product updates New features and improvements of ManyRequests Security Learn more about ManyRequests security initiatives.

Know exactly how much to charge your clients or pay your employees and freelancers for their work. However, if an employee is billed by the hour, they must also keep track of the time they’re being paid. Billable hours are the number of hours or amount of time tracked by a professional to bill their client or employer. That’s why Time Doctor auto-generates detailed productivity reports to help you see where you’re spending your time. You can do this whenever you’ve completed a task or want to take a break.

Agreeing On An Hourly Rate

We need to look at the true hourly rate, so leave the 40 hrs/week calculation alone. We only want to consider the actual time we have to dedicate to meeting our client’s needs. For a refresher, go back to our rundown of Professional Services Accounting here.

Billing in such way helps to show what activities are being done under the scope of the project and, therefore, need to be paid for with the client’s money. Non-billable time includes administrative work, invoicing, office management, business marketing activities, vacations, sick time, and other time-consuming things that are not related to projects. Not to mention the regular daily activities like having lunch or taking a short break from work. Here is a list of tasks and activities that could get included in the average billable hours template.

Tasks That Do Not Account For Billable Hours

Find out which clients yields a revenue stream that exceeds the company’s costs and which don’t. Digital time tracker or manager is designed to record your working hours. It helps to simplify billing clients and provides data to support your invoicing. Such tools are ideal if you offer legal services or other work where keeping accurate records of billable hours is crucial. There are a few reasons why tracking billable hours makes sense for your business. The most obvious reason is that it helps you figure out how much to charge clients.

Unlike manufacturing, which sells a product, or retail, which sells a service, professional services firms sell the time they spend working. Whatever the case, registering time and keeping track of billable hours is paramount if you want to know what to expect from your projects in terms of timing and budgeting. Depending on the industry, project, and collaboration details, you might have to either include only billable hours in your tracking sheets or both, billable and non-billable ones .

Install a browser extension that limits the time you spend on time-sucking sites or completely blocks https://quickbooks-payroll.org/ you from accessing them. Social media sites and even news sites are common culprits to target first.

But you won’t know the value of your non-billable hours if you don’t track them at all. In the chase for more billable hours, it’s easy to forget that the most direct way to increase profitability is to grow your business. You can do this by building more capacity to take on more clients. Or you can equip your employees with more skills to do higher quality work .

Minimum And Maximum Utilization Targets

You will get paid for what is worth without underselling your services. Failing to meet billable hours targets also spells slower growth.

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. 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.

Or, if you’re spending a lot of time invoicing, you may want to invest in accounting software that allows you to automate the invoicing process. Most service businesses – digital agencies, accounting and law firms, consulting companies – use billable hours to charge their clients for the services they provide. Understanding billable hours, they’re able to see how much time employees spend on revenue-generating work. This is especially important for firms that charge their clients based on an hourly rate.

how to calculate billable hours

Guides for Lawyers How Legal Practice Management Software Supports Hybrid Work Models at Law Firms As law firms navigate our post-pandemic world, it’s important that we have more conve… Before you begin working on a client matter, take note of the exact time that you started and write it down on your time log.

Once the hourly rate is set, you would want to determine an invoicing schedule. Most small businesses and freelancers follow a monthly billing cycle with payments coming in at the end of each month. Finally, when talking specifically about billable or chargeable utilization, the responsibilities of more junior resources might be entirely focused on delivering billable work. On the other hand, more senior resources might be tasked with winning new business, investing in internal methodology, or nurturing existing client relationships.

Best Practices For Billable Hours

Any type of clock, watch or timekeeping device will work, as long as it is accurate and in good working condition. Similarly, when you cease working on a client matter, write down the time that you stopped working in your client’s time log. You can either revise the rate, terms of the contract or reduce hours. In case a certain client continues to be less profitable, it is probably time to think about the future of the relationship. Trust Payments LeanLaw partners with Gravity Legal to provide law firms with a comprehensive trust accounting solution. Two-Way Accounting Integration LeanLaw & QuickBooks have a partnership to bring the most deeply integrated experience to law firms.

As An Example Of This Labor Cost:

In these industries, in particular, the aim should be to increase billable hours and reduce non-billable ones. This is because the higher your billable hours, the more money you make thereby increasing the top line of your business. However, this does not mean that activities that do not serve as billable are included too. The next section will give you some tips on how to increase billable hours. I do like where you’re going with thinking about how Theory of Constraints and Lean apply to the world of professional services. I started my career in manufacturing environments, deploying these sorts of strategies to help make our production operations more competitive.

It’s usually wise to set up this period to coincide with the frequency in which you send your invoices to clients, for clarity’s sake. Proper management software gives you the opportunity to download reports on the Timesheets . It also allows you to extract all the data you need to pass on to your accountant to regulate the payments of your employees or subcontractors. Depending on what kind of business you run, you might find yourself in a situation where your business is required to bill by the hour. The legal industry, for example, is well known for using billable hours to a large degree.