Are inaccurate invoices quietly eating away at your agency’s profits?
For digital agencies, tracking billable hours can be the difference between a healthy cash flow and constant financial headaches. Not only can mismanaged time lead to revenue loss, but it can also create cash flow problems, damage your agency’s reputation, and even lead to legal issues.
In this blog post, we’ll break down the difference between billable and non-billable hours, how much time your team should spend on each, and most importantly, how to accurately track and calculate billable hours.
Let’s start with the difference between billable and non-billable hours.
Billable vs Non-Billable Hours
Billable hours cover the time you and your team spend performing tasks that directly contribute to completing your client’s projects.
It’s often tricky to distinguish billable from non-billable hours but here are a few guiding questions to help you draw the line:
- Does this task directly contribute to finishing the client’s project or deliverables?
- Does the client benefit from the time spent on doing this task?
- Is this task outlined in the client contract or project agreement?
If you answered yes to these questions, the task is most likely billable, and you should track and invoice it accordingly.
However, some tasks might fall into a gray area—they could be billable or non-billable depending on your agreement with the client.
Here are some examples of billable and non-billable work:
Billable Work:
- Graphic design
- Content creation
- Social media management
Non-Billable Work:
- Company-wide meetings
- Professional development or training
- General administration
Tasks That Could Be Both (depending on your agreement):
- Creating client contracts
- Invoicing and reporting
- Work revisions
Why Separating Billable and Non-Billable Hours Matters
Why does it matter so much?
First, it provides transparency for both you and your client, eliminating the guesswork in pricing and ensuring accurate charges for the work delivered and services received.
It also gives you a clear picture of where your team’s time is going.
For example, if you don’t track non-billable hours (like team meetings or admin tasks), you might overestimate the time spent on client work. This could lead to undercharging clients because your pricing doesn’t reflect the actual time spent.
By tracking both, you gain a better understanding of time allocation.
This helps you set fair prices, properly structure work processes, and ensure your team focuses on tasks that drive revenue for the agency.
How Much Time Should Your Agency Spend on Non-Billable Work?
Just because non-billable work doesn’t directly generate revenue doesn’t mean it’s worthless. It would be impossible for your agency to operate smoothly without administrative tasks and team development activities.
However, we do want to minimize non-billable time to maximize profitability.
A good rule of thumb is to keep non-billable work under 20-30% of your team’s total time.
Automating repetitive tasks, limiting meeting times, and setting clear boundaries on client work revisions help lessen non-billable hours. Tools like Asana and Monday.com are ideal for setting up automated approvals, task delegation, and workflows, saving valuable time. Additionally, AI tools like Read.Ai can provide quick meeting summaries, giving you a recap in minutes, so you spend less time on admin and more on the work that matters.
The goal is to strike a balance—spend enough time on non-billable activities to keep your agency running smoothly, but not so much that it eats into your profitability.
How to Calculate Billable Hours
Define billable tasks
As mentioned above, some tasks can be considered either billable or non-billable. That is why, before starting a project, it’s important to clearly discuss with your client which services will be billed and not.
Put the agreement in writing through a formal contract by outlining the specific tasks and their agreed-upon rates.
Set your hourly rate
To determine an hourly rate that reflects the value of your services, consider your agency’s total expenses, desired profit, and the number of billable hours you expect to log in a given period.
For example, let’s say your annual expenses are $200,000, and you want a 20% profit margin, so you’ll need $240,000 in revenue. If you estimate you can bill clients for 1,200 hours in a year, your hourly rate should be around $200 per hour ($240,000 ÷ 1,200 hours = $200).
Consistently track your time
Time-tracking is often misconstrued as micro-management but it’s actually quite the opposite.
Because the hours that you and your team spend are precious (and expensive), time-tracking is the key to figuring out where inefficiencies lie so you can improve your processes.
A pool of time-tracking resources like Harvest or Toggl can be used to log both billable and non-billable hours in real time.
Make sure your team clearly understands the real purpose of time-tracking so that they see it as a tool for growth, not control.
Calculate total billable hours
With your time log in place, it’ll be easy to sum up the hours spent on billable tasks and multiply them by their corresponding rates as you have set in your contract.
For example, if your rate is $200 per hour, 45 hours would result in an invoice of $9,000.
Create Transparent Invoices
Detailed and transparent invoices help build trust and ensure clients understand the effort behind the project.
When you bill, be sure to break down the hours spent on specific tasks (e.g., “10 hours on Facebook ad strategy,” “5 hours on design revisions”).
Also, include any expenses or additional costs and offer a summary of the project’s overall progress.
Need Extra Help Maximizing Your Billable Hours?
Calculating billable hours is just the start. Once you’ve got the process down, take time to regularly review and optimize.
Can you streamline certain tasks to maximize your billable hours? Are your hourly rates reflective of your expertise and the current market demand?
As your agency grows, these are the questions that will keep you competitive.
And if you ever need help on the financial side, we’re here to help.
At Agency CPAs, we’re not your typical CPA firm. Built specifically for agencies and service-based businesses, we work with you throughout the year, focusing on the financial strategies that help your business grow sustainably.
We’ll ensure that every hour you and your team spend is driving your business forward.
Ready to get started? Use the calendar below to schedule a call with us.
Until next time!
