Billable hours are the lifeblood of any service firm. Whether you provide consulting services or manage a firm of attorneys or CPAs, it’s important to track and invoice your billable hours and to make sure that your staff is doing the same.
Overview: What are billable hours?
The term is most frequently associated with attorneys, but billable hours are also tracked by CPA firms, consultants, sole proprietors, and independent contractors. A billable hour is considered the time spent working on billable tasks.
For example, Jane is an independent contractor who provides HR services to various clients. Much of Jane’s time is spent handling payroll, creating onboarding letters for her client’s employees, and investigating any HR issues that may arise. As long as Jane is doing work specific to a client, it would be considered billable.
Billable hours vs. non-billable hours: What's the difference?
The easiest way to determine whether work is billable is if it’s related to a specific client. For example, any time that Jane spends processing payroll for her client, writing an onboarding letter for a client to use in their business, or determining if a client has violated labor laws is considered billable.
On the other hand, non-billable hours are those spent doing general activities that are centered around the business in general rather than for one particular client.
|Billable Hours||Non-Billable Hours|
|Any task directly related to a client project such as completing a report||Attending a networking event in your industry|
|Researching a client project||Performing general administrative tasks such as recording client payments|
|Meeting with a client or on a client’s behalf||Responding to inquiries from potential new clients|
|Planning a client’s project||Creating a proposal for a new client|
|Responding to a client’s email||Attending training or workshops|
|Answering client questions over the phone||Meeting with prospective clients|
5 types of industries with billable hours
Anyone who is an independent contractor or an employee of a service business will need to track their billable hours. The following are five of the industries that most need to track billable hours.
1. Law firms
Attorneys track billable time more than any other industry, and with good reason. Attorneys working in a law firm are required to work a minimum number of billable hours each year, with consequences such as termination a possibility if they don’t.
2. Accounting firms
Accounting firms, like legal firms, often bill clients by the hour, although CPA firms are more likely to use alternative billing methods, such as flat-rate billing, for specific tasks. However, similar to law firm billing, many firms still have CPAs regularly track and bill their hours.
As of early 2020, 1.6 million consultants were working in the U.S. If you’re consulting, billable hours are the key to your survival. Unless a consultant bills a flat rate fee for a specific project, which is rare, they bill by the hour.
Freelancers are similar to consultants, although they may or may not bill by the hour, depending on the job. For example, freelance writers typically get paid by the article and not by the hour, although freelance administrative assistants will bill their clients by the hour.
5. Advertising and public relations
Advertising and public relations agencies traditionally charged their clients by the hour, but many have now moved to a flat-rate billing system. If you’re working as a freelance public relations rep, you’ll probably still bill your clients by the hour.
How to track billable hours in your small business
Whether you’re using accounting software, time and billing software, or recording your time using a spreadsheet, follow our quick guide to start tracking your billable hours properly.
1. Determine your hourly rate
This is not as cut and dried as you may think. If you offer only one service, it’s easy to set your rates, but if you offer multiple services, chances are that you’ll have multiple rates.
For example, using our consultant Jane as an example, Jane offers a variety of HR services to her clients and all with a different billing rate.
- Administrative services — $30/hour
- Specialized recruitment service — $50/hour
- Employee relations — $60/hour
Not only does Jane need to track her hours for each of her clients, but she also needs to track her job or project so that the correct billing rate will be used.
2. Create a spreadsheet or start using time-tracking software
Your accounting software may offer time-tracking capability, but most do not. While you can certainly record your time on a spreadsheet, it’s best to use a proper time tracking application for more accurate billing.
For example, Jane is currently working on an administrative project for Client A when Client B calls her, frantic because her computer crashed and she can’t enter her payroll. Jane stops working on Client A’s project and spends the next 30 minutes on the phone helping Client B.
Immediately upon hanging up, she goes back to work on Client A’s project and only realizes an hour later that she didn’t record the call with Client B as billable time. And because so much time has elapsed, she has no idea how much time was spent on the phone with Client B since the call was on her office phone and not her cell phone.
If Jane had been using time-tracking software, she could have stopped the timer for Client A and began a new timer for Client B and restarted Client A’s timer when her phone call was completed.
Time-tracking software can be a lifesaver for consultants and sole proprietors who find themselves juggling multiple clients simultaneously. Not only does it make tracking time a lot easier, but it also can be eye-opening when you realize how much time you haven't been billing.
3. Set up clients and projects
Once you’ve determined your rates, you’re ready to set up your clients and their projects. This is an important step because it will help automate the invoicing process considerably. Once you have your correct pricing established for all of the services you offer, it’ll be much easier to correctly bill your clients.
4. Track and calculate hours
Entering your hours worked in a spreadsheet technically works, but it’s not the best way to track and calculate your hours. As you saw earlier, the odds of forgetting to write down hours on a spreadsheet are pretty high, meaning that you end up billing your clients just a portion of your actual hours worked.
But whether you’re using a spreadsheet or software, you’re ready to calculate your hours worked and invoice your clients once the month is over.
5. Invoice client
This is the final step and an important one. If you use time and billing software, or an accounting application that tracks time for you, you can easily move your billable time onto an invoice and bill your clients in minutes. When you do prepare an invoice, be sure you include an itemization of hours worked and the corresponding services performed.
You’ll also want to be sure and include payment terms, which you should have already agreed upon with your client.
Be sure you’re tracking your billable hours
Billable hours are the key to survival for many sole proprietors, freelancers, and service firms. Whether you’re an attorney, an administrative assistant, or a consultant, if you provide services to your clients, you want to track your billable hours. Stop selling yourself and your services short, and start properly tracking your billable hours today.