It's not an easy task to keep track of your billable hours. Do you know how many hours you have left for this week? You might be wondering how on earth can I figure that out!
The truth is, there are a number of different ways to calculate your billable hours and it really depends on what type of business model you're using.
In this blog post, we will cover the basics of what are considered billable hours, why they are important for any service based business, and give some tips on how to accurately track them so you don't get too far behind.
What is 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. It is not unusual for this category to include both in person and phone time with clients, as well.
Why are Billable Hours Important?
There is no business without clients, so the hours you spend with your clients directly impact your bottom line.
It's important to understand how much time it takes to provide the services your customers expect because this will help you set your rates for the future, develop realistic timelines and expectations of how long it takes you to complete projects.
How to calculate Billable Hours?
Billable hours are all the hours you spend working on a project for one client. You can easily track these by using an invoice template that’s specific to your business needs, but there are other ways to keep track of them as well.
1. Set Your Hourly Rate
Setting hourly rate is the common practice for measuring billable hours. You can use the time tracking software to enter your hourly rate and then you’ll know exactly how much it costs you in order to complete a project. You will find out what amount of money is fair, based on your skillsets and experience level.
2. Track Billable Hours & Record Them
Track billable hours and record them. As discussed before, billable hours are all the time you spend on assignments that directly relate to a project.
It's important to use an invoice template specific for your business needs because it will help you set your rates for the future, develop realistic timelines and expectations of how long it takes you to complete projects.
3. Add Applicable fees
Add up your daily, weekly or monthly billable hours and multiply them by your hourly rate.
Add any applicable additional fees or taxes to the final amount. For example, if you live in a state with high sales tax rates like California (currently around ~12%) than it's important to charge clients this extra fee for all their transactions.
4. Multiply them by your hourly rate
The final amount is how much money you need to make in order for this week or month to be profitable.
If it's less than the number of hours that you have available then it means that you will not be able to meet your basic living expenses, so one way how to improve it is to get more clients or increase your hourly rate.
5. Generate Invoices
This way you’ll be able to know how much money needs to be generated in order for this week/month to become profitable and if it's not enough then one way of improving the situation would be getting additional customers, increasing your rates or working on a longer-term project.
Billing by Project vs Hourly Rate
You might be wondering if billing per project is better than making clients pay an hourly rate? Well, the answer depends on your business and how it operates.
If you're a freelancer or run your own business then hourly rates are the most common way to invoice clients. It's easy for both parties, especially when your client needs something done immediately and doesn't want to sign any contracts in order not to lock themselves into long-term commitments with upfront payments.
On the other hand, if you work at a company or are an employee then project-based billing is the best way to invoice clients.
How to Keep Track of Billable Hours
1. Determine an Invoicing Schedule
Having a solid invoicing schedule will help you track your billable hours and create a consistent workflow. You can invoice at the beginning of each month, week or day depending on how frequently you need to collect payment from clients.
In order to keep track of your time, it's important that all projects are planned ahead within an estimated timeframe with milestones marked along the way so there's a clear path of direction.
You can also use an invoice template specific for your business needs which will help you set your rates for the future, develop realistic timelines and expectations of how long it takes you to complete projects.
2. Track time by projects and Clients
Tracking time on individual projects and clients is another way to keep track of your billable hours.
This will enable you to monitor how much time it takes for each client, identify inefficiencies or required adjustments and help you set rates that are fair based on the work involved.
It will be the best to have a detailed time tracking details for every project so it is easy for both you and the client to visualize how much time is invested in it.
It’s also important to tag each project with their corresponding clients. This will help you monitor the amount of time you invest on every individual project, identify where improvements are needed or which projects need more attention than others.
3. Time Log
Time log can be used to track non-billable tasks too, but only if the client is aware of it. You can use a time log on Excel or even an app in order to keep track of your hours spent working on projects and/or doing other activities for clients.
Time tracking software with invoicing function will also help you add any applicable additional fees or taxes to the final amount.
These can be billing rates specific for different clients and services, as well as a percentage of your hourly rate that is associated with tax obligations in order to stay on top of your business’s profit margins.
4. Centralizing Time Tracking
In addition to being able to easily monitor how much time you're spending on projects, time log will help you centralize your time tracking.
Time Tracking Software with Invoicing Function can be used to record all the necessary information about projects and clients in one place.
This is especially helpful when you need to keep track of multiple clients at once or if you're working on different tasks for each client.
5. Time Management Tools
You can also use task management tools like Trello or other time tracking software to track billable hours in real-time even if the client is not paying for them yet. However it's important that all projects are planned ahead within an estimated timeframe with milestones marked along the way so there's a clear path of direction.
It will also help to use an invoice template specific for your business needs because it will help you set your rates for the future, develop realistic timelines and expectations of how long it takes to complete projects.
There are other ways that you can keep track of billable hours as well like using time tracking software with inbuilt invoicing function so all the necessary information is recorded about projects and clients.
You can also use a spreadsheet in order to separate projects, planned vs actual work times so you get an accurate report at the end of each week/month.
6. Note your Non-billable Hours
It's important to note that even though you may not be billing for some of your time, it doesn't mean that the hours are free. If you're working on a project because there's something in it for you then the client will expect the work to get done and they'll need to pay accordingly.
This way by adding non-billable work to the hours you've already worked for, will give you a full picture of how much time was spent on your business.
When it comes down to invoicing and billing clients, if one minute is billed then every minute should be accounted for and that includes things like research and development or any other task performed on behalf of a client.
Provide Clients With Full Visibility
Transparency is more than just about money, it's also about building trust with your clients. So make sure to provide your clients with full visibility of the time spent on their projects.
In addition to tracking the amount of time spent on projects, make sure to keep track of any other responsibilities you have for your clients.
This can include things like email correspondence, research and development or even just sending an invoice on time because if one minute is billed then every minute should be accounted for.
This helps avoid any disputes over billable hours and ensures a healthy balance between non-billable tasks and billable ones.
In order to have a healthy balance between billable hours and non-billable tasks, it's important to know how much time you're spending on each project. This can be done by using an app or even just your spreadsheet for better organization.
It's also important to note that genuineness is more important than perfection, it creates trust with the client which in turn helps avoid any disputes over billable hours.
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