Want to know what billable hours are?
While some businesses, freelancers, law practices, and entrepreneurs use a flat fee for the professional services they offer, the billable hour model allows for better bookkeeping and time management.
Billable hours help you track the number of hours spent on any given task or project each working day.
This way, you can find ways to optimize your processes and increase billable hours and profits.
In this article, we’ll cover everything you need to know about the billable hour model, how to set your billable rate, and how to track and increase the number of billable hours.
This Article Contains:
(Click on the links below to jump to a specific section)
- What Are Billable Hours?
- What Are Non-Billable Hours?
- How Do You Track Your Billable Hours?
- How Can You Increase Your Billable Hours?
- How Can You Reduce Your Non-Billable Hours?
- Why Should You Track Your Non-Billable Hours?
Let’s jump in.
What Are Billable Hours?
Billable hours are the number of hours spent on tasks connected to a project. These hours will be used to determine how you charge your clients.
From legal professionals and agencies to freelancers and entrepreneurs, several firms and professionals use billable hours to keep track of their projects.
But what tasks are considered billable?
Billable hours include essential project tasks such as:
- Client communication
- Project planning
- Expense tracking
- Revisions and edits
- Developing timelines, etc.
In the past, the billable hour model was largely used by legal professionals (for example, a lawyer or attorney, law firms) to calculate their client’s legal fees.
In some companies, billable hours are also used to monitor monthly project cash flow and budgets.
What Are Non-Billable Hours?
A billable hour may not cover every administrative task on your daily to-do lists.
These small tasks are classed under non-billable hours.
Activities that are non-billable include:
- Internal marketing tasks.
- Employee training.
- Developing proposals.
- Pitching to a prospective client.
- Social and networking events.
Like billable hours, you should also track non-billable hours to ensure that your firm is functioning well.
How Do You Track Billable Hours?
Now that you understand what the billable hour requirement is, you need to start tracking your billable hours.
You can do this in a few ways:
1. Set an hourly billable rate
Your first step is to figure out what hourly billable rate you can charge your client.
You can identify what this fee can be by looking at the annual income you expect to earn.
You’ll need to do some online research to check if your expected income is on par with similar services.
Then, take the salary you have in mind and divide it by the number of working hours in a year.
For example, the total number of hours in an eight-hour work week approximately adds up to 40 hours.
Multiply this metric by the number of weeks in a year (52), and you get 2080 hours in a year.
After you’ve divided your salary by the number of hours, increase this figure by a little to account for the time you may spend on non-billable tasks. You should factor in your lifestyle requirements and things like vacation, personal days, and emergencies.
Your billable hours target doesn’t have to be a fixed fee and can alternate from client to client.
For example, if you are a lawyer at a firm, you may not necessarily be paid according to your billable hours.
Many associates are only required to meet the minimum billable hours target for the year and have a fixed base amount that is unaffected should they not meet their target.
2. Determine an invoicing system
Once you’ve identified your hourly rate, you’ll need to determine how to manage your invoicing process.
This can vary depending on the size and type of business.
Many small businesses use a monthly invoice schedule and send out their invoices at the end of each month. Other companies invoice their clients twice a month, based on the volume of work tasks.
After you’ve decided on your choice of hourly billing practice, you can adjust your time tracking system to align with your billing cycle.
3. Track your hours based on each project
Recording your billable hours by the project will help you keep track of all your clients and the projects for each of them.
Doing this will ensure you stay organized and help you understand exactly how much to charge your client.
If you have multiple clients, tracking projects will help you figure out just how much work you do for them for each billing cycle and help you identify where large portions of your time go. This will allow you to re-prioritize specific tasks if needed.
Tracking your billable hours by the project will also help you determine your most profitable clients. Then, you can work towards maintaining those relationships, further strengthening them.
4. Set up a time log
It’s essential to have an effective method of tracking your billable work.
This can be done manually with the help of billing sheets.
A billing sheet is a spreadsheet that contains:
- Columns for each client.
- Description of the billable tasks.
- Time spent on each task.
However, using timesheets can be troublesome.
The data filled in a timesheet may not always be accurate — human errors may pop up from time to time. Additionally, it’s a tedious and time-consuming process.
An alternative is to log your billable hours digitally.
You can use cloud-based time tracking solutions that allow you to track your billable hours easily. It’s as simple as starting the timer and stopping it when you’re done.
5. Sum up your total billable hours
When you complete a project or at the end of each billing cycle, add up all your billable hours for each client.
For projects, list down the hours spent on each task – so you have an idea of what the client is paying for.
This transparency will also boost the trust they have for you, further enhancing client development and overall experience.
6. Prepare a detailed invoice
Once you have calculated your total billable hours, put together an invoice to send to your client.
This professional document should include the services you’ve rendered and other particulars to the business and payment.
Here’s what to include:
- Name, address, phone number, and email of your business.
- Contacts details of your client.
- A list of all the services you provided.
- The billable hours of each of these services.
- Your payment terms.
- The client’s deadline for the payment.
- The total amount to bill clients (any applicable taxes included).
Fortunately, you can use software to ease this entire process.
You can use a productivity management solution like Time Doctor to track your billable hours and create an invoice effortlessly.
What is Time Doctor?
Time Doctor is a powerful productivity management tool that can help you improve your time management skills.
It’s used by major companies like Verizon, as well as small-medium businesses like Thrive Market, to optimize their business efficiency.
You can use Time Doctor to:
- Identify and calculate billable hours for each task and project with ease.
- Monitor websites and apps accessed during working hours.
- Access detailed reports on time use, website visits, etc.
- Create accurate invoices based on billable hours.
- Pay through different gateways like Paypal, TransferWise, etc.
How Can You Increase Your Billable Hours?
If you’re a freelancer or even own a small business, you may want to increase your billable hours to raise profits.
Here’s how you can do just that:
1. Track all your billable time
This includes anything related to the task at hand — from answering a quick phone call to sending out a work email.
When you track every minute you spend on a project, you may be surprised to learn just how many tasks constitute your billable hours. While this sounds like a chore, all of these little inclusions will add up throughout a project.
2. Track in real-time
It’s easy to forget to record your daily project-related and billable tasks.
However, tracking the times you start and end tasks for each project as they happen will be more beneficial at the end of the month.
You won’t be guessing or making rough estimates — you’ll have a concrete log of everything you’ve done.
3. Track your non-billable time
By tracking all your time (non-billable time included), your working day will be more productive, and you can be more efficient.
You’ll be able to identify which administrative task you should spend less time on – and redirect your energy to billable tasks instead.
You may even realize you need to hire an extra employee, a virtual assistant, or turn to specific software to automate some of these non-billable tasks. This will effectively free you up to focus on billable hours.
How Can You Reduce Your Non-Billable Hours?
Finding a balance between billable and non-billable hours can be tough, especially since non-billable tasks are as essential to running your business as your core tasks.
Here are a few ways you can cut back on non-billable hours:
1. List project updates at the end of the day
If you work with a team, encourage each employee to send you a list of updates on the projects they’re working on at the end of the workday.
So, if anything urgent needs to be addressed, you can see to it right away. This will also help you plan for the following day and decrease your non-billable hours.
With the billable tasks lined up for the next day, you’ll know just how much time you can allocate to non-billable items. This will help you to spend your work hours productively.
2. Outsource some non-billable activities
If a significant amount of your time is spent on non-billable tasks, you may no longer be very productive.
It may make sense to outsource a non-billable activity or two by hiring an employee. You can choose from a wide pool of competent virtual assistants to match your requirements and budget.
3. Automate certain tasks
Some admin-related tasks can be repetitive and can slow down your workflow.
In such instances, it would be better to automate them to lower the number of non-billable hours. This will help you to remain focused on assignments related to billable projects.
Invoicing is one such repetitive, time-consuming area. Automating your invoices will let your clients see all the details on billable work without you having to create them manually.
Why Should You Track Your Non-Billable Hours?
Tracking your non-billable hours may seem counter-productive, but it’s essential to running an effective business.
Here are a few reasons why it’s important:
1. Identify which clients require more non-billable hours
By analyzing the breakdown of the number of billable hours and non-billable hours you spend on a given project, you can determine which processes or clients take up your time — and might slow you down.
In the client’s case, you can also identify what their cost is to you.
You can do this by reviewing the non-billable tasks you do.
For example, let’s say client X has asked for a multitude of changes to a project where you spent 15 extra non-billable hours for the month.
You also have client Y, who only required a handful of changes, which resulted in about six non-billable hours.
Clearly, client Y doesn’t drain you of your resources and time so that you can focus on other clients as well.
Meanwhile, it might be challenging to work with client X as they would require a lot of time and attention — limiting the number of clients you can take up. This can hinder profitability.
2. Learn about employee productivity
If you run a team, tracking your non-billable hours will help you figure out where your team members are the most productive.
Additionally, you will know how long each person would take to complete a task or a project.
You can better understand the tasks they spend the most time on (billable vs. non-billable). This will help you make informed decisions when assigning particular staff members to various projects.
For example, for a time-sensitive project, you can delegate the tasks to the most productive team members.
Every freelancer, law firm, professional services firm, or small business owner needs to understand the importance of tracking billable hours.
Billable hours can help you boost business efficiency and identify what tasks take the most time.
This can eventually help you cut back on non-billable tasks and increase your productivity.
After all, your time is valuable, and every minute spent on billable hours will help you scale and increase your business’ profitability.
Liam Martin is the co-founder of Time Doctor—one of the world’s leading time tracking software for remote teams. He is also the co-organizer of Running Remote, the world’s largest remote work conference.