By Laura Pilkington
Running a professional service-based business can feel like assembling a 5,000-piece jigsaw puzzle. When key pieces are hard to find — like that one middle blue piece you really need! — it’s time to take a step back and reassess. In the business world, that could mean changing how you deliver projects or manage internal workflows. That’s where time-tracking comes in.
But first. What is time-tracking?
Time-tracking is when you consistently track and review working hours to manage scheduling, improve productivity, set an accurate budget, and, as you’ll see, lots more. Time-tracking is a great way to not waste time… because you know where the hours are going, and how to make the most of each one.
To do that, we need to know the purpose of tracking time. What’s the benefit?
Time tracking has many benefits, from increased efficiency and productivity to growing your profits. While it may seem like a nerve-racking act of micromanaging, it’s the opposite.
As a professional service-based business, your hours are your inventory. You buy time from your employees — or yourself — and convert that time into a solution for your clients (ideally, at a higher rate).
When you know the hours spent on billable and non-billable tasks, you have actionable data at your fingertips. And that means you know the changes needed to keep your business profitable and successful.
You might be a solopreneur, or you run a company with 10+ employees. Either way, time tracking is a must — even if you bill clients a fixed rate.
In this article, you’ll learn the impact time-tracking has on:
- profitability,
- delegating tasks,
- client capacity,
- team development, and
- key decision-making.
1) Grow your profit
No one wants to start a business and pour countless hours into it only to struggle to be profitable. Even the most passionate entrepreneur wants a financially strong company. Getting there means having a healthy profit margin, steady cash flow, and sustainable growth.
Before profits can flow, however, you must know your minimum rate (not what other companies charge). First, determine your costs: your cost of goods sold and operating expenses. From there, you land on your baseline profitable rate (BPR). This number sets the standard for your current and future projects.
Once you have your BPR, you know that you can complete a project and still be profitable — there’s no guessing when it comes to your business and money!
What’s most exciting is that when you know your BPR, you can easily see where your business can sell more value at a higher rate, which grows your bottom line (your profit) over time.
3 metrics you need to track to have a profitable business:
- Your Average Billable Rate (ABR): The average amount you charge clients hourly. This is the sum of your total gross revenue divided by the time it took to deliver services. This includes time for training and management (not internal admin tasks). The closer your ABR is to your goal rate, the better!
- Your Average Billable Cost (ABC): The average costs you incur to generate revenue. These costs equal the total expenses divided by the hours worked to deliver services. They include salaries, payroll taxes, benefits, contracted services, and software needed to provide services and generate revenue.
- Your Utilization Rate: The percentage of your team’s working hours spent on billable tasks. You can get this rate by dividing the hours worked to deliver your service by the total available hours. Your utilization rate measures how efficiently you and your team use billable hours in terms of total working hours.
Understanding these metrics and tracking project hours helps to set and maintain a target rate so you can bill clients accurately every time. This means you make the salary you want and keep your business profitable for the long term.
2) Get impactful insights from utilization rates
We’ve talked about the utilization rate, which measures how efficient each billable hour is. Now, let’s explore it more.
Remember, an employee’s capacity or available working hours does not include Paid Time Off (PTO), holidays, and other reasons they may not be available for billable work. If these are included, you get a fuzzy number that’s debatable. On top of that, comparing data between different periods just won’t give you accurate numbers.
💡 Aim for a utilization rate of around 70 – 75%.
Example: Your employee works 2,080 hours per year (that’s 40 hours per week * 52 working weeks a year).
They spend 1,500 of those hours on billable tasks. The rest of their time is spent on non-billable ones, like meetings, admin, and skill development.
To find the utilization rate, divide your employee’s billable hours by their total available hours. Then, multiply that number by 100.
We have: 1,500 / 2,080 * 100 = .72
In this example, your employee’s utilization rate is 72%. Right on target! 👏
With this number handy, you can now look for ways to…
- estimate potential revenue based on billable hours
- determine capacity and when to hire more staff
- spot inefficiencies in workflows or processes and improve them
- know which clients (or projects) are most profitable
Is time tracking effective? Yes! Now you see it’s much more than logging hours to invoice clients.
3) Manage projects and delegate tasks — like a boss
My #1 tip for successfully managing projects is to start with your expected expenses and profit you plan to make, based on budgeted hours. Then, compare your actual hours spent to your budgeted amount. This shows you where you might be off track or ahead.
Tracking hours shows you real-time data on progress for different task categories (the fewer, the better!). These metrics show you which tasks consume the most time, where you go over budget, and what you can delegate. Which means you can streamline and profitably manage projects, automate manual tasks, update a project’s scope, and refine workloads.
To stay profitable, aim to sustain a 10 to 20% net profit margin. That’s your percentage of revenue left over as profit after paying expenses and taxes.
A 10% net profit margin means you have at least a 50% gross profit margin, which is your percentage of revenue left over after subtracting your cost of goods sold (COGS). With a 50% gross profit margin, half of the revenue you earn comfortably covers the essentials, like salaries and operating costs.
💡 Hey, small business owners (including solopreneurs)! I recommend you aim for a gross profit margin higher than 50%. Stay ambitious! Go for a 70 – 80% gross margin. As a sole proprietorship, partnership, or LLC, your owner’s draw is not recorded as part of the profit and loss (or income) statement. This means a higher gross profit margin is necessary to cover your salary.
4) Hone in on client capacity
Knowing how many clients you can comfortably take on is vital information for your business.
When you have accurate data on where billable hours go, you know…
- your services that are the most or least profitable
- your workload so your team is not stressed and overworked
- your capacity so you can book or waitlist new clients and projects
- your time and resources, and which clients consume the most of them
Your time-tracking data helps you plan the right projects for increased profitability — year after year.
5) Improve employee training
When you have reliable data, you know the areas that impact productivity the most. There are common inefficiencies and bottlenecks time-tracking reveals. Have you noticed them in your business?
Basic tasks taking too long? If an ordinary task takes too long, more training is needed.
Task switching? If an employee frequently switches between tasks, a project management issue needs to be addressed.
Project delays? If projects are delayed at a specific milestone, skills or processes need refining.
Repeated mistakes? If a lot of time is spent correcting mistakes, gaps in knowledge or skills need to be addressed.
6) Keep on trackin’ for transparency and accountability
Sometimes, emotions get involved in business. This should sound familiar if you’ve ever felt resentful at work. The beauty of time-tracking is that it gives you an objective measurement of the work.
When hours are accurate, the data doesn’t lie, which is why time-tracking also benefits your employees.
Time-tracking is not a way to look over your employees’ shoulders and micro-manage their work. Instead, it increases visibility, so you know how long a project really takes. As your ability to estimate improves, you increase profits.
With a record of time spent on specific tasks, you have clarity about where all that valuable time goes. And you have a factual report for making fair, unbiased decisions.
💡 Time-tracking must be accurate to be a valuable source of information. The best approach is to have employees record less time that is accurate vs. more time that isn’t.
Time-tracking is not about meeting a quota. This produces junk data and confusion. Accuracy is more important than precision. So, let employees know that this data is used to help everyone estimate new project timelines and budgets, and stay within the project scope.
7) Make data-driven decisions
Your business success is rooted in data-driven decisions. This key element allows for sustainable and profitable growth. Time-tracking helps you identify the cause of an issue so you can make those decisions easily and find a solution and a better outcome.
If an employee misses project deadlines, for example, time-tracking reports can show where the bottleneck is so a more realistic deadline can be communicated.
Checking time spent on tasks means more efficient processes, timely delivery, and client happiness. And you benefit from having actual data to better estimate what it takes to bring a project from start to finish — instead of relying on a gut feeling.
Ready to make the most of time-tracking for your business goals? We’ll be sharing more tips on how you can use your time-tracking data to get game-changing metrics in an upcoming post – stay tuned!
I’d love to know your time-tracking takeaway! Leave a comment below and share what you plan to do in your business so you’re getting the most out of every hour.
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