Importance of Calculating Billable Hours and How to Do It

By | October 14, 2022
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Payroll is one of the most important aspects of running a successful business. It’s difficult to stay afloat when you don’t know where your money is going, and what steps you need to take to stay in the black. That’s why tracking your employees’ billable hours and calculating their net pay is so important.

Calculating billable hours uses the concept of “time in the project” to help you determine how much you need to pay employees for doing a specific job. In simple terms, this can be thought of as how long it takes to complete a project. 

But, how exactly do you account for all your employees’ time spent on tasks that are not billable? There’s no doubt that better management of billable and non-billable hours is one of the best ways to ensure your business is profitable.

According to workplus, employers overpay their employees by as much as 200 billable hours per year because they don’t use time-tracking software at work.

This article will help you understand the importance of billable hours and how to calculate them. We will break down the definition of billable hours, discuss how you can track them, and outline how accurate time tracking can help in the process. 

What are billable hours?

Billable hours are the time you spend working on projects and activities that will generate revenue. These include tasks such as:

  • Working on a project that you bill a client for (for example, a contract manufacturing employees working on specific equipment for a client).
  • Tasks performed in the field that are directly related to a service you are doing for a client (for example, inspection of buildings and properties).
  • Field service being performed by employees (for example, caregivers visiting patients at their homes).
  • Time spent on presentations and reports for a client.
  • Time spent on managing a project for a client.

Importance of tracking billable hours

Left unchecked, billable hours can add up and cost you more money. Whether it’s the time you spend handling customer support emails or the number of hours your sales team puts in, every minute counts.

When it comes to knowing how much to charge for your services, knowing billable hours is key. Billable hours is directly related to expected revenue and profit margins.

Without calculating billable hours, it’s impossible to know exactly how your business is doing. Tracking your billable hours allows you to control how much you bill your clients, as well as pay your workers.

Tracking Billable vs non-billable hours

There are two types of hours that you should track, billable and non-billable. The distinction between these two types of hours is important because it affects how you should calculate your average billing rate.

Tracking both billable and non-billable hours is the key to making sure you’re getting the most out of them. However, tracking these hours can only do so much for you. So if you want to be more efficient with your employees, you must know how to calculate payroll hours accurately. 

But why do we need to track non-billable hours? Non-billable hours can’t be billed to clients, so it’s important to keep track of them. This will stop inefficiencies in your company and give you an idea of how much time is spent on things that aren’t generating revenue. Also, non-billable hours ensure business growth with the right resource utilization.

Time you should spend on non-billable hours

For a majority of businesses, the key to being more efficient lies in streamlining business hours. By setting up processes that allow you to track time spent on each different task, you can ensure to pay workers appropriately.

There’s no set precedent for how much time should be spent on non-billable hours. Besides accounting and payroll, various factors will determine how many non-billable hours a company has. If your business is structured more like a traditional corporation with a certain number of workers and clients, then you’d want to limit your non-billable hours.

Depending on what industry your business is in, you might need to spend more time ensuring you get paid or figuring out how to enforce payment from the client. For example, if you spend time planning the layout for your clients’ construction site and they don’t pay, it doesn’t matter how much time you spent on a presentation that went nowhere.

Time tracking tips for more accurate results

Calculating how much time you spend on projects is hard enough. Doing it accurately is even harder. How do you then use that information to decide which areas need improvement and what resources can be redeployed? 

You start by tracking time spent, giving managers a clear picture of the hours they have invested, and where you should focus your efforts to increase profitability.

Thus, time tracking becomes a crucial part of the billing process. It helps you keep track of how much time you’re spending on each project so that you can calculate your billable hours and get paid for them.

There are many different types of time trackers available:

  • Manual processes like Microsoft Excel and Google Docs have built-in functions that allow users to input information about their projects, such as client names or dates when work was done. They also allow users to create graphs showing how much time was spent on each task by clicking buttons next to them (like “chart data”).
  • Mobile apps such as allGeo offer similar features but it reduces the manual efforts of entering data into the sheets. Your employees can log work hours via multiple ways like app, text, IVR etc. allGeo provides an advanced solution by allowing users to automatically clock in and out based on their location via geofencing which will help you to calculate overtime, 
  • You need to keep track of employee work hours accurately and quickly. With an hourly time calculator, you can do just that. The best thing about it is that you can use it to track employee hours across all the organization, not just your own team. This way, you will receive accurate working hours and avoid paying extra to workers. 

How to calculate billable hours using allGeo

Billable hours are the amount of time that you spend on a project or job. This can be difficult to determine since there’s no standard definition for billable time. However, you must know how to calculate billable hours so that you can accurately calculate payroll hours. 

Step 1: Set up task or job site (Need to know the hours employees get paid based on the Task or the Client worked for)

Step 2: Have the task/job sites added as Earnings code

Step 3: Set your billable rates respective to the earnings code (Works only in earnings code cases) 

Step 4: Add your team

Step 5: Have the employees clock in/out with task/customer name selection

Step 6: Track your team’s time

Step 7: Create a report that would show the time spent on every task/customer/earnings code they worked for

Step 8: Report will calculate the amount wrt to the earnings code & the rate.

Balance between non-billable and billable hours

There’s no one solution to getting organized and balancing your time. But by tracking and maintaining a record of your employees’ time spent on each activity, you can ensure productivity and profitability. 

Thus, time tracking becomes a key solution to calculating billable and non-billable hours. It will help you to keep a tab on how much time you spend on different projects and areas of your business. And you will be able to identify which tasks are most profitable and which are not, resulting in higher client retention, better ROI on your time investment and accurate payroll distribution. 

Conclusion

There is no “one size fits all” approach, and each tracking system will reflect the specific needs of your business. Accurate time tracking is important in order to complete accurate payroll that calculates both your non-billable and billable hours.

While it can be a little tricky to calculate your billable hours, once you get familiar with it, it’s an easy and repeatable process. Tracking your billable hours goes beyond the simple question of your pay rate, because you may be undervaluing or overvaluing your workers depending on how you calculate the time spent on various jobs.  

With the right time tracking system, you can understand where your employees spend the most time. You can also use off the shelf time tracking software like allGeo for more accurate results. You will be able to reduce your non-billables and produce more quality work in the process by introducing these strategies at your workplace.