The Importance of Calculating Billable Hours and How to Do It Right

Are you looking to figure out how to calculate billable hours for your business? Maybe you’re not even sure if it’s relevant to what you do. If you’re a business owner or freelancer, this should be something you’re looking to master. However, it’s also relevant to anyone who deals with clients, like consultants, creative teams, developers, cleaning companies, landscaping, fishing lure creators, or lawn gnome decorating specialists.

Let’s look at how calculating billable hours works and how Hubstaff can help make that whole process a lot easier.

This won’t come as a surprise to anyone: businesses run on money. At any point in time, you’re either paying someone to do something or receiving money as payment for something you did.

However, knowing exactly how much money should be moving around is what billable hours are for. Here are a few very specific instances where you’d need to have calculated billable hours:

• Sending out invoices to a client

• Preparing accurate estimates

• Paying your employees and freelancers for their work

• Preparing budgets for upcoming quarters

• Budgeting out projects

Billable hours, for those who are unfamiliar, are pretty self-explanatory. They’re the hours that are tracked by an individual on a team as they’ve worked normal or overtime hours that can be billed to a client.

This is why they’re so important. If you haven’t tracked your hours accurately — both billable and non-billable (we’ll discuss that later) — then you won’t actually know how much to charge your clients and can’t correctly bill anyone, which means no one gets paid.

And no one wants to be told they’re not getting paid.

If we’re going to talk about billable hours and why they’re important, we also need to chat about non-billable hours.

First, what are non-billable hours? Well, they’re simply any amount of time you spend at work that can’t be billed to your clients. These things are usually admin work but can also include:

• Employee onboarding and training

• Working on pitches for new clients

• Company-wide meetings

• Networking

• Bathroom breaks

• Entertaining clients

• Invoicing, payroll, and bookkeeping

• Friday lunches

• Happy hour

Secondly, why are they so important? As you can imagine, it would be almost impossible to run a business without some non-billable work going on, no matter what type of company you run.

But, how do you make sure you’re getting the most out of your non-billable time? To start, you can track those hours so you can see their real value. Here are some of the main benefits of tracking non-billable hours:

• Non-billable hours remove inefficiencies

By tracking how much time you spend on tasks that you can’t bill to anyone, you can see how much you are paying your team versus how much you’re accruing. Plus, it helps you see how your team spends their time, meaning you can better minimize hiccups or slowdowns in your process.

• Non-billable hours help foster growth

How much time does your team spend looking to better themselves for the company? Non-billable hours are an excellent way to determine that. You can better track how much time everyone spends cracking away on projects versus how much time they spend researching industry trends and studying up on their specialty.

• Non-billable hours help you see where the money is

By tracking both billable and non-billable hours, you can better understand how much each of your clients is costing you and which ones are the most profitable. This can help you better quote clients in the future and possibly help you balance the time spent on certain types of work to foster growth.

While there isn’t a set precedent for how much time should be spent on non-billable hours, there are a few things to consider.

For one, it largely depends on the kind of business you run. While a cleaning company may only spend a few hours on the job, they’re normally charging a flat rate to their clients while a law firm might charge by the hour. A company with numerous remote employees or clients might have more admin work — figuring out payroll and invoices — while a more automated company might spend significantly less time doing that.

What you should consider with non-billable hours is how much they’re worth to your business. If there’s a lot of training involved with what you do, then those hours should be given more importance. However, if your company works off the old “time is money” adage, then maybe you should find ways to cut down on non-billable hours.

It has less to do with your industry, and more to do with your company itself. When trying to figure that out, look at how much non-billable time you currently use and see if that is providing a benefit to your company or not.

Obviously, both billable and non-billable hours are essential. But, should they be separate affairs?

The short answer is yes.

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.

On one side, your client won’t be very pleased if they find out you’re billing them for the hour your team spent watching a guy on YouTube eat a 30-foot burrito. 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.

The simple solution to this is to track your hours.

One of the best ways to track your team’s hours (we think) is with Hubstaff. Our robust time tracking app makes it easy to track time, activity, and progress on projects all in one place.

Hubstaff can also be used to calculate billable hours. Here’s how:

Step 1: Set up projects or clients to bill towards

Inside Hubstaff, you can set up individual projects based on your unique clients. If you’ve been using Hubstaff, then you’ve probably already done this. But, if you’re new to our platform, then you can easily do that in your projects tab.

Step 2: Set your billable rates

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.

Step 3: Track your team’s time

Once you’ve got your projects and rates set up, the next thing to do is get down to business. Have each of your employees track their time using our desktop, web, or mobile apps. Make sure, depending on the project they’re currently working on, that your team is tracking their time towards the correct task.

Step 4: Set a few budget limits

While your team is cracking away at their tasks, make sure they’re not going overboard by setting budget limits. You can do this in the projects tab in Hubstaff. By setting a project’s budget limit, you can make sure that the appropriate amount of time is being spent on any given project based on what you’ve quoted your client or how much money you’ve allocated towards that task.

Step 5: Invoice your clients and pay your team for hours worked

After the workweek is over, you’ll get a notification in your inbox that it’s time to pay your team members for all their hard work. All you have to do is accept their hours worked and they’ll automatically be paid based on the bill rate you set up before.

Once it’s time to send the client the bill, all you have to do is head over to your invoices tab within Hubstaff. Find the client you’d like to send the invoice to, and Hubstaff will automatically calculate the line items based on the work your team has done for them. Then, all you have to do is send them the invoice, simple as that.

Depending on the industry you work in, calculating billable hours may look a little different.

Freelancers

As a freelancer, you typically have several on-going projects you’re working on at once. Making sure you’re tracking your billable hours accurately means you’ll be able to bill your clients appropriately. Additionally, by seeing how many non-billable hours you accrue each week, you can better estimate how much bandwidth you might have for starting new projects or taking on new clients.

Lawyers

Lawyers, like freelancers, typically have a large number of clients that they’re juggling at once. However, unlike freelancers, some law firms require that their team members meet a minimum number of billable hours each year. Sometimes their bonuses are even based on their hours logged per year. So, as you can imagine, keeping track of your hours as a lawyer is extremely important.

Consultants

Similar to lawyers, consultants work with a large body of clients and have to keep a detailed log of hours to make sure that they’re billing everyone correctly. Additionally, not every client will have the same bill rate, meaning that having an intuitive way of keeping track of those hours is extremely important. Unless, of course, you like to be confused and flustered a lot. Then, by all means, go for it.

On-the-go teams

If you run a company like a landscaping or delivery business, you and your team members are often on-the-go. This can mean that it’s sometimes hard to keep track of who’s working, how long they’ve worked for, and when they worked. By tracking everyone’s billable time accurately, you can better bill your clients for the work they need to be done. This can keep things organized and help avoid time theft. Additionally, by keeping a log of these hours, you can see if you need to start increasing rates or cut down on any non-billable time.