How to Track Billable Hours – A Step-by-Step Guide

Accurately tracking billable hours is essential for freelancers and small businesses. Whether you’re running your own time-tracking system or using one of the various tools available online, this guide covers everything you need to know about getting started with time tracking for billable hours. From setting up a log to invoicing, here's what you need to know and more.

Set Up a Time Logging System

Before you start tracking billable hours, you should prepare well. This section will guide you through the essential steps to take before you start tracking your time.

Define billable activities

To track your billable hours accurately, you need to differentiate billable and non-billable activities. For instance, you may bill your clients for client meetings, project management, or research, while administrative tasks like responding to emails or filing may not be billable.

Typical billable activities include:

1. Client meetings: This can include in-person meetings, phone calls, video calls, and email correspondence.
2. Project work: This includes tasks directly related to a specific project, such as research, design, development, and testing.
3. Project management: This includes tasks such as creating project plans, tracking progress, and communicating with stakeholders.
4. Business travel: This could include travel to a client's site for a meeting or travel to a conference or trade show to represent the client or business. When travel is billable, the time spent traveling, as well as any associated expenses such as transportation, lodging, and meals can be included on the client invoice.
5. Administrative tasks: Some administrative tasks may be billable, such as reviewing legal documents, preparing reports, or reviewing budgets.

Keep in mind that what activities are billable can vary depending on your industry, clients, and contract terms. It's important to define billable activities specific to your work.

Identify billable hours’ capacity

It’s essential to set a goal for the number of billable hours you aim to achieve within a specific period, such as a month or quarter. This will help you stay on track and measure your progress. Consider factors like your workload and the number of clients you have.

According to a report citing a new survey of 170 law firms by Thomson Reuters, US lawyers’ billable hours have plunged to their lowest level in decades as demand for deal advice evaporates. By evaluating your workflow and services, you can get a better idea on how to move your company forward.

The first step is to determine the overall employee billable hours capacity. It is a crucial task for managers who are responsible for managing resources and ensuring that projects are completed on time and within budget. By understanding the billable hours capacity of each employee, managers can make informed decisions about project timelines, staffing levels, and resource allocation.

To identify employee billable hours capacity, managers need to take into account a range of factors, including the employee's level of experience, skills, and efficiency. It's also important to consider any non-billable activities or commitments that employees may have, such as training, administrative tasks, or meetings.

By planning billable hours, you can also estimate the profitability of your business or projects. For example, the utilization rate of consulting firms without proper planning is between 71 and 78%. This information can help you to make more informed decisions about how to allocate your time and resources. It can also help you to identify areas where you may need to adjust your pricing or processes to improve profitability. It is proven that timesheets encourage people to minimize the time they spend on non-billable hours.

Choose a time-tracking method

There are many ways to track your billable hours, including manual methods like paper timesheets or digital tools like time-tracking apps. Choose a method that suits your workflow and makes it easy to record your time accurately.

When it comes to tracking billable hours, there are various time-tracking methods to choose from, and the method you choose will depend on your personal preference and work style. You may choose between manual methods like using a paper timesheet, or digital tools like time-tracking apps or software that automatically records activities. Whatever method you choose, make sure it fits your workflow. It's also important to ensure that the method you choose allows you to record all the necessary information required for invoicing your clients accurately.

The most popular methods are:

1. Time-tracking apps/software: These digital tools automatically track your time and often have features such as project and client management, invoicing, and reporting.
2. Manual timesheets: These can be paper-based or digital and require you to record your start and end times, along with a brief description of the activity.
3. Timers: These can be standalone devices, apps, or software that allow you to track your time manually and can be useful for tracking time on the go.
4. Activity trackers: These track your activity automatically and can be useful if you work on a computer all day.
5. Project management software: Many project management tools, such as Asana or Trello, have time-tracking features built-in.

Ultimately, the best method for you will depend on your personal preference and work style, as well as the needs of your clients and business.

Set up the time-tracking system

Once you’ve chosen a time-tracking method, set up the system you will use to record your billable hours. This may include creating an account with a time-tracking app or setting up a spreadsheet to log your time. Make sure to include fields like the activity, client name, date, start time, end time, and total time spent on the activity.

Managers should develop a clear set of guidelines and policies for how employees should use the system. This should include details on how to log time, how to categorize billable and non-billable hours, and how to report any issues or errors with the system.

Employee onboarding is also an important part of setting up a time-tracking system. New employees should receive training on how to use the system, as well as information on the organization's policies and expectations around time-tracking. This can help to ensure that all employees are using the system consistently and accurately.

The following are some elements that should be included in time tracking guidelines:

1. Purpose of time tracking: Explain why time tracking is important for the organization, including how it helps to improve efficiency, monitor project progress, and ensure accurate billing and invoicing.
2. Time tracking system: Provide an overview of the time tracking system being used, including how to access it, how to log time, and how to categorize billable and non-billable hours.
3. Time tracking policies: Detail the policies and procedures for using the time tracking system, including deadlines for submitting time logs, how to report errors or discrepancies, and consequences for failing to follow time tracking procedures.
4. Billable and non-billable activities: Outline which activities are considered billable and non-billable, including any specific requirements or restrictions for different types of projects.
5. Time tracking for remote work: If the organization allows for remote work, provide guidelines on how to log time for remote work activities, such as online meetings or virtual collaboration.
6. Training and support: Detail any training or support that will be provided to employees to help them use the time tracking system effectively, including user manuals, training sessions, or online tutorials.
7. Privacy and confidentiality: Include information on how the time tracking system will be used and stored, including any privacy or confidentiality measures that will be implemented to protect employee data.

By including these elements in company time tracking guidelines, organizations can ensure that employees understand how to use the time tracking system effectively and that time logs are accurate and consistent across the organization.

Enter All Billable Hours

Once the time-tracking system is in place and employees are trained on how to use it, the next step is to start logging billable hours. Logging billable hours involves accurately tracking the time spent on billable activities, categorizing those hours appropriately, and submitting time logs in a timely manner.

This will help keep everything precise and prevent inaccurate hours, and also help you better evaluate time needed to finish tasks. Apparently, 62 percent of high-earning individuals in America (whom they define as the top 6% of earners) work 50 hours or more per week; 35 percent work 60 hours or more per week. However, most of that time is spent unneccesarrily. Proper time tracking can help you use time more efficiently, wasting less hours as a result.

Establish a routine

To effectively track billable hours, it's important to establish a routine for logging time. This may involve setting aside dedicated time each day or week to log time, or incorporating time tracking into daily work routines. By establishing a routine for time tracking, employees can help to ensure that they don't forget to log hours or miss any billable activities.

It’s important to let your employees know the importance of proper time tracking, and time tracking software can be a great help with establishing this routine. Surveying 500 workers last summer, the firm calculated that each person lost $50,000 per year in revenue due to insufficient tracking of emails with clients and others. In total, “almost 40% of respondents reported never tracking time spent reading and answering email,” with only 33% of respondents saying they “always” or “often” do.

Start the timer

When beginning a billable activity, employees should start the timer in the time tracking system. This can help to ensure that all billable hours are accurately recorded and that no time is missed. Employees should also ensure that they select the appropriate project or client for the billable activity, to ensure that time is allocated correctly.

Note billable activities

As employees work on billable activities, they should take notes on what they are working on, any milestones achieved, and any issues or challenges encountered. This can help to provide additional context for billable hours and make it easier to categorize time entries accurately.

For example, lawyers often miss out on billable hours. A good time tracking software should be a great help when it comes to making sure everything is noted accurately.

Stop the timer when activities change

When moving from one billable activity to another, employees should stop the timer for the first activity and start a new timer for the next activity. This can help to ensure that time is accurately allocated to each activity and that there are no overlaps or gaps in time logs.

Review time entries regularly

It's important to review time entries regularly to ensure that they are accurate and consistent. Managers may want to review time entries weekly or monthly to ensure that they are in line with project timelines and budgets and that there are no discrepancies or errors in billing or invoicing. Regular review can also help to identify areas for improvement in terms of time management and project efficiency.

Track Non-Billable Hours for Efficiency

In addition to tracking the hours you actually bill, it’s essential to keep a record of how many non-billable hours each client consumes. This will provide helpful insights into which clients are more likely to require additional resources or charge more for services. By analyzing this data, you can find opportunities for increasing efficiency and profitability.

If these tasks consume time that should have been used for client work, be sure to deduct them from the total number of billable hours.

Small and solo law firms said that only 60 percent of their day is spent practicing law, according to findings of the 2019 State of U.S. Small Law Firms Report. It’s essential to know how much of your time falls into this category as well.

Common non-billable activities are:

1. Internal meetings: Meetings that are solely to discuss internal operations or business development are typically non-billable.
2. Administrative tasks: Activities such as filing, record-keeping, and general office maintenance are typically non-billable.
3. Business development: Any activities related to finding new clients or developing new business opportunities, such as networking events or sales calls, are typically non-billable.
4. Recruiting: The time spent on recruiting activities such as posting job listings, screening candidates, conducting interviews, and negotiating job offers are not typically billed to clients.
5. Training and development: While training and development activities can be billable if they are directly related to a specific project or client, general training or education activities are typically non-billable.
6. Sick or vacation time: Any time taken off for sick or vacation days is typically non-billable.

Tracking Costs and Expenses for Comprehensive Profits

When tracking billable hours, it’s important to also track associated costs and expenses. If a project involves travel, materials, meals, and other related expenses, be sure to include those in your billing process.

Identifying billable and non-billable expenses

Before you start tracking expenses, it's important to identify which expenses are billable and which are not. Billable expenses are costs that can be directly attributed to a specific project or client and can be passed on to the client for reimbursement. Non-billable expenses are costs that are not associated with a specific project or client and cannot be passed on to clients.

Some examples of billable expenses include travel expenses for client meetings, equipment rental for a specific project, or materials purchased for a specific project. Non-billable expenses might include general office supplies, employee salaries, or rent.

How to track expenses

There are many methods for tracking expenses, including manual methods like using a spreadsheet or notebook and digital methods like using accounting software or expense tracking apps. Time-tracking apps can often record employee expenses, too.

Expenses can be tracked through expense reports or by collecting receipts. An expense report is a document that an employee fills out to detail their expenses, including the date, type of expense, amount, and any receipts or documentation related to the expense. Expense reports are usually submitted on a regular basis, such as monthly or quarterly, and must be approved by a manager or supervisor before being reimbursed.

Another method for tracking expenses is by collecting receipts. Employees can be asked to provide receipts for any expenses that are incurred on behalf of the company, such as travel expenses or office supply purchases. These receipts can then be organized and entered into an expense tracking system or used to create expense reports.

Invoicing for Billable Hours

After all your event details are collected and project information entered into the software, it’s time to generate an invoice. A professional invoice sets the tone for a successful project, so take the time to create a clear and concise document that includes relevant information about the services provided as well as terms of payment. An invoice is often accompanied by timesheets or an activity report.

Review time entries against the client’s contract

Before creating an invoice, it's important to review the client's contract to ensure that all billable hours are accounted for. This can help avoid any confusion or disputes.

Check billable hours and billing rate

Once the client's contract has been reviewed, it's time to determine the billable hours and billing rate. This should be based on the agreed-upon terms in the contract, including any hourly rates, project fees, or other billing arrangements.

Create and send a professional invoice

Once the hours and billing rate have been determined, it's time to create and send the invoice. This should include a detailed breakdown of the billable hours, along with any other expenses or fees that are being invoiced. The invoice should be clear, easy to understand, and include any payment instructions or terms.

Follow up on unpaid invoices

Finally, it's important to follow up on any unpaid invoices. This can include sending reminders or notices to clients, as well as working with them to resolve any issues or disputes. By following up on unpaid invoices, businesses can ensure that they are paid for their work and maintain positive relationships with their clients.

Conclusion

Tracking billable hours is an essential part of managing a successful business. Thanks to modern technology, many firms are expected to grow in the upcoming years, and proper time tracking will greatly increase this possibility. By accurately tracking billable hours, businesses can ensure that they are being paid for their work, stay within budget, and maintain positive relationships with clients. The key to successful time tracking is to establish clear goals, understand employee capacity, set up a time-tracking system, and regularly review and adjust the process as needed. By following the step-by-step guide outlined in this article, businesses can ensure that their time-tracking process is accurate, efficient, and effective. With the right approach and tools in place, tracking billable hours can become a seamless part of running a successful business.