As always time tracking is a hot topic in the accounting and bookkeeping profession. How do you decide when/if to track time for client billing and or payroll.
When I originally started my practice back in the late 90’s everyone tracked and billed for time, it was just the way we did it. After a few years I realized that billing for time limited our ability to scale and did not serve our clients well. We quickly moved to a fixed fee service and based the fee on the average number of hours the work had previously taken us. This practice not only allowed us to better manage our cash flow but also allowed our clients to budget for their accounting services. We made sure our engagement letters clearly defined the scope of what was included in the fixed fee and what the rate would be for any additional services needed.
We still tracked time for our staff and used the time reports to track team productivity as well as profitability by client. While I found this information enlightening, I quickly found myself going down a rabbit hole, spending too much time analyzing the information where I could have been producing more work output and generating more revenue.
While time tracking is still common practice in the profession, it's important to consider the pros and cons when deciding if to track time and what to use those time records for.
Tracking time for billing
Pro: Tracking time for staff members allows for semi-accurate time billing of client work. By billing clients based on the amount of time spent on their work or project, you can ensure that you are being paid for the time you spend on their work.
Con: As you become more familiar with the work it may take your staff less time to complete the tasks. If you are billing by the hour, your revenue will decrease.
Thought: If you are in the business of selling time, you will limit the ability to scale your practice without adding additional staff since there are only so many hours in a day or a week. This also makes it hard for both you and your clients to budget when it's unclear how much time a job will take until it's completed. This can also raise questions with your clients when they suddenly receive a bill for a significantly higher amount than the previous months.
Exception: Project work, such as system setup, clean-up, or technology implementation, is one of the few exceptions where time tracking might actually make sense. Especially when you are unsure of the situations you might encounter once you dive into the work. One way to handle this would be to estimate the amount of time you expect a project to take, based on past experience, and quote the client a fixed fee based on the minimum and the maximum amount of time you believe the project might take. In this type of situation, it's important to keep the client updated throughout the project in the event you run into unforeseen issues that will take more time to resolve and to let the client know there may be an additional fee.
Tracking time for payroll
Pro: When you track time for payroll, you can monitor staff productivity and only pay them for the time they spend on client work. You can also identify any issues that may be causing delays in completing client work, allowing you to make changes to improve efficiency, preventing similar delays in the future.
Con: When staff time is monitored and they get paid based on the amount of time they spend on a client’s work, it can reduce their motivation to work efficiently. This is because they are not being rewarded for completing work quickly, but rather for spending more time on the work.
Thought: Paying staff a salary or fixed fee based on the expected number of hours the work should take will incentivize them to work more efficiently. Emphasize that timeliness and accuracy are the most important aspects of the work, and they should not be compromised.
Improved work management
Pro: Tracking time creates accountability for staff, who know that their work is being monitored. This can lead to better time management and more productive work. Time tracking also allows you to analyze the time you spend on specific types or work or projects. This will help when you are trying to estimate time for similar jobs in the future.
Con: Tracking time can be a time-consuming task, requiring staff to log their time and for managers to review and approve the hours worked. Reviewing reports to analyze how time was spent can take away from other revenue generating work and added costs to overhead.
In conclusion, tracking time for staff and billing clients by the hour can have both pros and cons. It's important to consider the specific needs of your business and clients when deciding whether to implement such a system. While it can be useful for accurate billing and project management, it may also have negative effects on staff motivation and increase overhead costs. Ultimately, it's up to each business to determine the best method for billing clients and managing staff productivity.
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