Balancing billable and non-billable hours is a challenge for many businesses; just how do you get the sums to add up so that you cover all non-billables and remain profitable?
For agencies, consultants, and contractors, this can be a major headache. But, knowing just how to manage your employees’ time and adequately bill your clients can prove to the key to success.
Below we’ll uncover how billable and non-billable hours work for businesses and how you can make those working hours even more valuable.
Billable and non-billable hours basics
Let’s start with the basics. If you’re a service provider and charge based on time-worked, you’ll know that managing billable and non-billable hours adequately is no easy task. But why are some hours billable and some not?
What are billable hours?
Billable hours are quite simple; these are the ones you charge your clients for work directly done on their projects; for example, the hours of a developer working on a new webpage, administrative work, or other project activities.
What are non-billable hours?
Non-billable hours are a little trickier and depending on your business these may be different. For example:
- Internal marketing activities;
- Office management;
- Employee vacations or sick time;
- Or, additional/unestimated changes that may occur during fixed projects;
The last point can particularly prickly. As a for-hire organization, word of mouth and online reviews can be vital to finding new clients and retaining the old ones; many fear that renegotiations once a project has started will put their business in an uncomfortable position when all they really want to do is deliver results.
By managing billable and non-billable time accurately, businesses can cover more non-billable hours, and negate some of these uncomfortable situations.
Why are non-billable hours so vital?
While service providers would love to have as many billable hours as possible, this is easier said than done. When it comes to billing a client, you will need to justify the time spent on a project, or if you have a fixed budget, you’ll need to manage your staffing hours as effectively as possible.
The challenge? As a business, you’re responsible for your staff, and that means covering days off (vacation or sick leave) and their salary, regardless if their time was marked as billable or not.
In addition, you’ll have other expenses to consider – employee development and training, invoicing and bookkeeping activities, company meetings, and more.
Do you know and consider all of the above costs in your business? Are you sure that all your projects are profitable?
Accurate management of your billable and non-billable time as well as costs is the answer. Set employees’ billable and cost rates, mark all tasks as billable or not, accurately track time and availability. This is how you can get actionable insights.
For example, you can do more extensive contract negotiations with the client next time, agree on how do you handle out-of-scope requests, request retainer, raise rates, etc.
Why is time tracking important?
Tracking time gives you a reasonable insight into a number of business indicators:
How long your staff spent on a task or project
This tells you how many staff you need to complete a project, the critical areas for improvement, and, additionally, highlights any gaps so you can meet the agreed deadlines.
How profitable or unprofitable the client was to your business
By understanding how much time and how many resources were spent on a client and their project (billable and non-billable) you can evaluate whether this was a worthwhile venture for your company, and whether to continue cooperation after the project is finished or engage in renegotiation.
Your team’s productivity and performance
Tracking time allows you to access productivity and how well and accurately the team evaluates its work and adhere to the agreed time frame. This is how you can assess key areas where you need extra staff or additional training.
More efficient planning
Whether you have an office-based team or work closely with freelancers, when planning your business activities, you need to know who you need and when. If you do estimates properly and track projects progress, you can always predict with a higher rate of accuracy when a given employee will be free and will be able to take on a new endeavour.
Better quotations and estimates for future billing
Profitability is the basis of business, and if you want your enterprise to work, then you need to ensure the math behind it is correct. By tracking time, you’ll be in a better position to quote your clients accurately (based on data from past projects) ensuring profitability to your business.
When combined, each of these factors plays a role in the future success of your business and ensuring it remains profitable.
So, how do I balance non-billable and billable hours?
There is no single recipe. But one thing is for sure. If you keep a detailed record of time spent on projects – how accurate your initial estimates were and in which areas you went wrong – you can effectively analyze the result and find where you can improve.
By tracking time, you can aim to ensure that the profits you receive for your billable time covering the costs of those activities that do not bring profit to your business.
P.S. Everhour offers a perfect time tracker to help you measure and monitor your billable and non-billable time with ease to boost your business success.