What you need to know about how to calculate billable hours
The process of how to calculate billable hours is a matter that you should not take lightly. Every business owner and freelancer should be able to answer the question “How do I calculate my billable hours?” This article aims at giving you all the necessary information about it.
In a previous article, we focused our attention on how to write an invoice for your freelance work from A to Z. So, we think it’s high time that we break down all the pieces of knowledge you need to know about how to calculate billable hours. We’ll try to answer all the whats and hows of billable time calculation.
The definition of the billable hours
Generally, freelancers, start-ups, and agencies tend to track their work in billable hours. So what are billable hours? They compose the total hours of work. In cases that teams work on multiple tasks or professionals that undertake many projects, the concept of billable time is highly valuable. It also comes in pretty handy since it helps them keep their billable hours and the overall workload under control.
The perks of tracking billable hours
Tracking your time gives you substantial information about how much you work and directly affects the way you calculate your billable hours. The tracking process can also facilitate the way you create budgets for future projects (if you’re part of a team). Simultaneously, it also helps you invoice accurately your clients and provides you with hard data. Data that can be used to pay employees for their working hours as a small business owner or share the payment with partnering freelancers. If the right billable time is not tracked, then no one will get paid for their labor’s worth.
How to determine your billable hours
You’ve decided to start tracking your hours from now on, but you’re not sure about the tasks that qualify as billable hours. The list of things you may include can be quite long depending on your profession and other miscellaneous factors.
However, the most common ones are the exact working time and project documentation. In between, many professionals track, as billable time, the planning and research phases. The meetings, any unexpected communication, and email correspondence can also count as billable. Let’s not forget the travel time (if relevant) and of course the retouching on the project upon agreement with the client. All of the cases mentioned above are important since they are related to the quality and quantity of the deliverables handed over to your clients. So, next time you invoice a client for a project, try calculating the billable hours taking into consideration all the above instances.
Billable vs non-billable hours: How to tell them apart
We’ve just explained all about the nature of billable hours and the most common tasks that can be tracked as billable hours. But what about the non-billable time? How could we define non-billable hours? Sometimes the line between what should be charged or not is blurry.
Every time that you doubt what to do, ask yourself the following questions. Have you misused the time you’ve spent on the project? Have you spent much time setting straight your own mistakes? Or has the time spent advanced the project forward or not? If you want to invoice your clients without straying from the ethical billing practices, answer the above questions sincerely. Overbilling your clients will not get you more clients or a good reputation. Quite the opposite, it will probably decrease the inflow of clients.
Depending on the project, business, and occasion, you could track as non-billable time, always using your time tracking software, all the hours that you’ve met your client before signing a contract as well as any project-related training. Social occasions with your team and clients could also be treated as non-billable time.
How to set your billing rate
Before you know how to calculate billable hours, you need to set your billing rate. The hourly rate definition is the amount of money that a professional charge for an hour’s work. Each industry has different billing rates for its professionals. The experience, studies, and popularity of a job increase or decrease the earnings for a position. So, if you want to decide on your hourly rate, find out how much you would make per year. Don’t forget to add a % for the freelance business expenses. You too will have business expenses since you won’t be an employee anymore, right? Plus, you may also want to specify a % of annual profit.
Let’s set an example
Jenny is a senior web developer. For a senior position, she would receive a salary of around $100.000 and she estimates her business expenses to be about $15.000. At the same time, she wants to have an extra profit of 10%, working 1400 hours a year. Let’s get into some basic mathematical operations to figure out what her web developer hourly rate will be:
How to calculate billable hours
After all this useful information, the process of how to calculate billable hours must seem clearer. You gather your billable hours to be invoiced to a specific client and multiply them by your hourly billing rate. This sounds pretty easy, but only if you have one client with one project. However, if you have multiple clients and projects with different billing rates, then you need to be extra careful to add the different rates correctly and calculate the work done accordingly.
Accurate hour billing is essential, and there arises the need for a time-tracking partner that can work as a billable hours calculator for you! One that will allow you to time track in real-time, submit your hours in weekly timesheets as well as offer you extensive reporting regarding how and on what tasks or projects you track time. Especially if you’re part of a team that works on many projects, a platform, where your colleagues/employees can track billable hours on every project they’re involved, is indispensable. On top of everything, you and your team can set billing rates per hour, per task, per assignee or even have a fixed cost to cover everything concerning a specific project.
Overall, knowing the whole process of how to calculate billable hours is valuable to any business regardless if you do it by yourself or if you have a time-tracking tool to lift the weight off your shoulders. This kind of meticulous time tracking strategy improves your invoicing stats and business integrity since precise time tracking always results in spot-on professional invoices.