How To Track Billable Hours For Accurate Invoicing

The saying “time is money” is more than an excuse to leave an unpleasant meeting. How much time you spend on a project influences every aspect of your business.

At the beginning of my writing career, I landed an amazing client offering to pay a project rate worth 40% more than any other client.

But once I’d factored in the extensive edits, admin work, uploading the blog posts, and formatting…that seemingly amazing client paid me less than my usual clients once I calculated my billable hours.

Today, we’ll show you why tracking billable hours is the key to becoming more profitable, productive, and happier with your work. Plus, we’ll show you the exact steps to track billable hours accurately.

Don’t forget to check out our comparison of the best billable hours trackers available today.

TL;DR — Key Takeaways

• Billable hours are related to client-related tasks, while non-billable hours are focused on internal operations.
• Tracking billable hours helps with accurate invoicing, improved project management and profitability, finding areas of lost efficiency, and identifying employee performance.
• To track billable hours, set your rates, choose an invoicing schedule, plan your project tasks, use a billable hours tracker, track your hours in real-time, and create your invoices.
• The best method for tracking hours will depend on various factors, such as your industry, the type of work you do, and the specific client.

Billable hours vs. non-billable hours

Billable hours represent the time you spend working on a client’s project, a.k.a. the time you can bill for. 

Examples of billable hours include project work, client meetings, troubleshooting or support, consulting services, development or design (or any other type of creative work).

Non-billable hours represent the time you spend on tasks not directly related to your client’s project, such as administrative and project management tasks.

Examples of non-billable hours include internal meetings, scheduling, invoicing and other paperwork, business development (marketing, pitching, networking, etc.), training and development, proposal writing, and follow-ups.

If you’re a salaried team member, you shouldn’t be concerned about the difference between the two because your employer pays you regardless of the type of work you do.

However, business owners, freelancers, or agency managers must learn the differences between billable and non-billable tasks for several reasons:

• Accurate revenue tracking: By differentiating, businesses can better understand how much time they spend on income-generating activities.
• Resource management: You’ll learn how much time employees spend on administrative tasks, internal meetings, and other tasks to plan resources more effectively.
• Client transparency: A breakdown of billable and non-billable hours results in more transparent client invoicing.
• Profitability analysis: Tracking non-billable work allows you to make adjustments to your processes to become more profitable.
• Time management: Adding time entries for both types of hours provides insights into how you spend your time at work.

Why you should definitely track billable hours

Calculating billable hours isn’t just a fun exercise in determining which client is a pain in the neck for your business (although it can definitely help you do that!). It also offers the following benefits:

Accurate invoicing and client billing

Tracking billable hours allows you to invoice more accurately. You’ll no longer eyeball the time it takes to complete specific tasks. Instead, you’ll know how long they take and how much the client will pay you.

If you use the old-school method of approximation, you can easily get into disputes with clients over false promises. 

Improve project management

Whether you run a business or do freelance work, tracking billable hours supports your project management by setting realistic timelines for clients.

Calculate (and improve) profitability

Billable hours link directly to profitability. Here are a few ways to analyze your tracked hours against revenue and find the most profitable projects and clients:

• Calculate hourly cost vs. revenue: Compare the cost of completing work for a client per hour against the revenue you make for that client per hour.
• Track billable vs. non-billable hours: You should have more billable hours for a profitable project and client.
• Generate profitability reports for each client: Compare the total revenue earned per client against the total hours worked and costs incurred.
• Analyze project timelines and overruns: Ensure timelines go according to plan so you’re not consistently late with your deliverables.
• Use utilization rates: Consider the percentage of time an employee spends on billable work for a client.
• Compare effective hourly rates: Divide your total project revenue by the total hours worked to determine the effective hourly rate.

Identify areas of lost efficiency

Any task or project causing a block in your overall operations is easily identifiable because of the amount of time logged. Simply compare the projected time on a task against the actual time logged, and you’ll spot where you’ve wasted time.

This is an effective way to identify cases of scope creep, where you agree on a project that’s much larger in scope than your initial projections. 

Time tracking allows you to set benchmarks for common tasks and projects, create proposals accurately and suggest time frames to potential clients.

Evaluate employee performance

Time tracking sets benchmarks for tasks you typically do in your business. You can pinpoint your employees’ productivity and tie their performance to real-world results.

7 steps for tracking billable time (accurately)

Getting started is pretty easy, even if you’ve never tracked billable and non-billable hours before (with or without a time tracking app).

1. Set billing rates

The billing process starts with deciding how you’ll charge for your professional services, whether an hourly or a day rate. If you’re new to running a small business or freelancing, you can follow this process:

• Understand your costs: Calculate your overheads and determine the kind of salary or rate you want to earn.
• Research market rates: Find out what others charge for similar services in your location.
• Consider your experience and expertise: Value your skills and experience from previous projects, as they determine how much value you provide.
• Decide between hourly, daily, or project-based rates: Hourly rates are ideal for shorter projects, while daily rates work well for projects taking up to a few days. Project-based rates are popular with clients who want to know the upfront costs, regardless of the time to complete a project.
• Account for non-billable time: Adjust your rate to cover non-billable tasks you won’t be able to charge for.
• Adjust for demand and negotiation: If your services are in high demand, increase your rate and leave some wiggle room for negotiation.
• Regularly reassess your rates: As your experience, skills, and demand grow, update your rates.

2. Choose an invoicing schedule

Choose your invoicing schedule from the following options. 👇

• Hourly invoicing: You’ll track the hours spent on specific projects and send an invoice regularly (e.g., weekly or monthly).
• Project-based invoicing: You’ll set a fixed project fee and send an invoice once you’ve completed the work.
• Retainer invoicing: Your clients pay a set fee in advance (monthly, quarterly, etc.) for a certain number of hours and services.
• Milestone-based invoicing: You’ll split the payment based on pre-determined milestones; each time you complete a milestone, the client pays an invoice.
• Recurring billing (subscription): You’ll charge clients a recurring fee for ongoing services and products on a monthly or annual basis.
• Progressive billing: This method is common in industries such as construction. You send out invoices based on the amount of completed work.
• Upfront payments (deposits): You’ll invoice clients a percentage of the total work before you start.

3. Plan project tasks

Detailed project planning is crucial to stay on top of all of your billable activities. For each client or project, define the most important:

• Project goals
• Deliverables
• Tasks and subtasks
• The people who will complete those tasks (if you don’t work on your own)

4. Use a billable hours tracker

Tracking hours manually or using an app such as Excel is a starting point—it’s better than not tracking anything at all.

However, billable hours trackers like Toggl Track take the manual work out of time tracking and let you get on with your work while the app does the heavy lifting. Here’s how our platform automates and simplifies the time tracking process with a variety of features:

• Automated time tracking: You can do this across apps, websites, browsers, and even devices
• Accurate invoicing: Direct export of your total hours so you can bill clients for every minute and not more than that)
• Integrations with accounting software like Quickbooks, project management tools like Asana, communication tools like Slack, connectors such as Zapier, etc.
• Automated timesheets: No need to remind your team to fill them out; Toggl Track generates them independently
• Online work timer: Separate billable and non-billable work hours automatically
• Time reporting and analytics: Generate time logs, track project performance, and see where your workday could be more productive
• Mobile app: Track time on the go on iOS and Android

5. Track hours in real-time

There are two main ways to track time: write everything down (using notes or an app) and then add up your hours once you stop working, or track them in real-time as you’re doing the work.

Tracking your hours in real-time has a range of benefits, such as:

• Improved accuracy: Time tracking tools complete the work in the background and can even assort the time based on different tasks, tools, websites, or devices.
• Increased accountability: When you track hours in real-time, each employee is accountable. This instills trust in clients, as they know where their money is going. It also creates an audit trail in case something goes wrong.
• Improved productivity: You’ll gain real-time insights about time blockers and easily spot inefficiencies before they snowball into major issues. With timers and notifications, you know immediately if your work is going according to plan.
• More accurate invoicing and budget control: You’ll log all your hours worked immediately, with billing precision to the level of seconds. This ensures companies stay within budget and don’t overspend.

6. Analyze your timesheets

Most good time tracking software automatically generates timesheets handy for billing and invoicing.

By analyzing your timesheet reports, you can monitor project milestones and assess utilization rates based on time reporting and analytics. For example, you might learn some employees are becoming easily burned out.

7. Create an invoice

The invoices you create should be accurate, detailing what you worked on and for how long.

For example, Toggl Track lets you create super simple, effective invoices based on the time tracked in the app (see all the fields you can customize below). To take it one step further, integrate Toggl Track and Quickbooks to get paid more quickly and easily.

What is the best method for tracking billable hours in your industry?

The best methods for logging time will depend on your industry, the type of work you do, and the clients you work for. Here are some examples:

• Law firms typically charge by the hour, so hourly tracking is an easy decision.
• Agencies may benefit from real-time hourly tracking but may also charge project rates based on deliverables.
• Designers and developers track and invoice based on hours, sprints, or projects.
• Construction companies typically track time and charge based on phases where multiple teams work on different parts of the project simultaneously.
• Finance teams and accountants track time per client based on hours, tasks, or completed projects.

How to integrate billable hour tracking into your existing workflow

If you’ve never tracked billable hours, you may get some pushback from your team in the beginning. However, the process is fairly easy, and with non-intrusive tools such as Toggl Track, your employees don’t have to worry about being spied on.

Here are a few tips to integrate billable hour tracking into your existing processes and motivate your employees to track their time.

• 🔌 Use integrations to their full extent. Connect time tracking tools with your existing tool stack for increased efficiency and accuracy.
• ⏱️ Encourage real-time tracking. It’s easier and faster for the employees and reduces the chances of human error.
• 💰 Standardize time categories. To make it easier for employees to log their time, set up categories for billable and non-billable hours and types of activities.
• 📚 Provide training and guidelines. Onboard your employees to your new time tracking software. Explain why you’re tracking time, and reassure it’s not a way to monitor but rather improve efficiency and profitability.
• 📄 Review and optimize regularly. Check employee timesheets to find patterns, inefficiencies, or errors in the time tracking process.

Start tracking billable hours with our time tracking software

Tracking billable and non-billable hours is one of the most efficient ways to increase productivity, efficiency, and profitability without introducing major changes to your business. It improves time management, helps with accurate billing and invoicing and removes inefficiencies in your operations.

If you’re ready to make your business more efficient, try Toggl Track. It’s easy to use, has a handy time tracking Chrome extension, and numerous integrations with the tools you’re already using.

Create your free account to get started today!