Balancing between billable and non-billable time is a constant challenge for most agencies, consultants, freelancers, and other contractors. It's safe to assume that companies and teams want to bill as many hours as possible. But one of the most effective ways to land new clients - and gain an opportunity for more billable hours - is to do more non-billable work such as marketing, internal branding, recruiting, etc. The goal here is to generate enough billable hours and charge enough for them to make up for your non-billable activity.
What are billable hours?
In most cases, any time spent working on tasks directly related to your client's project can be treated billable. While what is considered a client-related task may vary from business to business, during this article, we'll try and zoom in on a billable hour's definition that covers most bases when it comes to creative projects.
How do billable hours work?
Total billable hours are the sum of time spent working on business projects that can be charged to a client according to an agreed-upon hourly rate. Businesses, agencies, entrepreneurs, and freelancers often use billable hours to charge clients for their services. To make sure you're right to charge by the billable hours, workers need to continuously track the amount of time spent on each task and project every day.
Billable vs. non-billable hours
To make things clear, here's a list of most notable work obligations that your business may consider billable:
- Performing actual work toward completing the project. Yes, it's that simple.
- Research and analysis
- Project planning
- Developing project timelines
- Reading and responding to work emails and other views of communication
- Making revisions for the work submitted to the client
Business profitability Cheat Sheet
Unfortunately, not every business activity can be directly billed to clients. Here are some examples of work tasks that, in most cases, shouldn't count toward your billable hours:
- Creating and developing proposals for new work
- Pitching these proposals to clients
- Meetings that take place before signing a contract
- Training courses
- Networking events
- Social and team-building events
- Fixing your avoidable errors
- Work that goes beyond the scope of the project, as outlined in your contract
- Invoicing, processing payments, creating reports, and performing other administrative tasks
How to track billable hours
1. SET YOUR HOURLY RATE
Before you start tracking billable hours, you first have to determine the hourly rate you'll charge your clients. For example, you can set a target for the annual income you'd like to earn. Do a bit of research and make sure your target income aligns with what other businesses offering similar services are earning. Once you have the desired figure in mind, divide it by the number of working hours in a year, roughly 2,080 hours for a 40-hour workweek. Once you have that hourly rate, you may wish to raise it a bit to offset the time you'll spend working on non-billable activities.
2. DETERMINE AN INVOICING SCHEDULE
Once you have your hourly rate set, choose the most appropriate invoicing schedule, and start following it. Among small businesses, agencies, and freelancers, a monthly billing cycle is the most common practice, with invoices going out on each month's last day. Once you determine your invoicing schedule, you'll be able to adjust your time records to align with your billing cycle.
3. CREATE A TIME LOG
Next, you'll need to create a time log to track your billable hours by client. Since developing a manual time log can be a burden, you can choose to track your billable hours using a time tracking app. If you use a cloud-based project management solution, you can easily track all your billable hours using the time-tracking feature. Just start the stopwatch on the appropriate task and choose the proper job type and hourly rate.
4. TRACK YOUR HOURS BY PROJECT
Recording your billable hours by project will help you know which client you'll invoice for your work. It will also help you track how much time you're spending on each project during the billing cycle and how much you're making on each one.
5. CALCULATE YOUR TOTAL HOURS
At the end of each billing cycle or upon completing a client's project, you should review your time logs, timesheets, and time reports, and double-check your total billable hours for each project.
6. CREATE A DETAILED INVOICE
After calculating the total billable hours for the billing cycle, you should create an invoice to send to your client. This invoice should include details such as your business information, including your name, address, and contact information, an itemized list of the services provided, the billable hours for each service, the deadline for payment, etc.
Do you know what would be great? If the project management software you were using for time tracking also had an invoicing feature. That's where ActiveCollab steps in once again.
What is a good billable hour's percentage?
Typically, creative digital agencies and similar services should strive for an overall utilization rate of 75% or more. Precious billable hours will inevitably get wasted on administrative tasks and other non-billable work, or simply get lost due to faulty timekeeping, and get written off in the event of project overruns.
How can you reduce non-billable hours?
Firstly, you need to make sure you're tracking all your hours correctly. Make your time records in real-time using the ActiveCollab Stopwatch feature, and you'll avoid writing off those hours that inevitably slip through your fingers if you're not careful. Using the right project management solution is also a good place to start cutting down busywork by defining clear timelines and schedules, fine-tuning your workflows, and making sure everyone on your team is tracking their hours, too.
Can we eliminate non-billable hours?
Apart from optimizing your workflows and checking up on the team timesheets regularly, there's a good case for non-billable hours and their objective utility. In the pursuit of more billable hours, it's easy to forget that a big part of increasing your overall profitability is increasing your hourly rate and charge more for the work you do. For most digital service businesses, non-billable time is there to expand your knowledge and professional capacities in a way that lets you charge a little bit extra for every new client you get.
What is a non-billable expense?
While billable expenses are costs a client has agreed to be billed for, non-billable expenses are costs related to your work that most clients are generally unwilling to reimburse. For many agencies and contractors, non-billable expenses will make up a large majority of their business costs. Examples of non-billable costs may be business travel, travel insurance, software subscription fees, unique or special training, materials, and business supplies.