Time is money, but there’s more to the story

It may seem counterintuitive, but investing more time and energy into your billing process could end up saving you time and bringing in more money in the long run.

As an accountant, it has probably been drilled into your head that you need to track your time and maximize your chargeable hours.

However, if you simply track and bill time at a standard rate, you are probably throwing money away.

That is because there are several problems with just accepting the dollar value spit out by your time and billing software. The main problem is that this discourages efficiency. Where is the incentive to do the work in less time if it means you will earn less money? Why invest in new software that will do the job faster? Why take the time to standardize your procedures on similar clients?

Continuing to charge clients the way accountants have done for decades actually encourages inefficiency. The good news is that thinking outside the box could lead to more profit for you and your practice.

Let's start with the hourly rate used. Having one standard rate for each employee is too limiting. A grid of different rates for different clients and different situations makes more sense.

For example, your most successful clients should be willing and able to pay top billing rates. On the other hand, you may have a not-for-profit client that warrants discounted rates.

The next issue is the dreaded time writedown.

I don't know about you, but I have not been able to crystallize in my mind exactly what a writedown really is. If time value comes to $2,800 and I can only bill $2,200, what does that $600 writedown mean? Did I lose $600? Not really. I lost the difference between what my time and billing software told me I should bill and what I actually did. That's not actual lost money — it's lost potential money that may or may not have been billable in the first place.

Here's how I now deal with client billings.

Instead of using a software package that multiplies hours by a set rate and spits out a suggested invoice amount, and then a writeup/writedown report after inputting an invoice amount, I now use my time and billing software to simply track hours for each job.

For each client invoice, I use a simple Excel spreadsheet to enter the hours for every staff member and have it multiply by an appropriate rate to come up with the suggested invoice amount.

This is where the time and effort comes in, because the appropriate rate is flexible depending on the circumstances. In addition to the type of client, I consider a range of other factors: was this a rush job that warrants a higher rate? Were we able to do something extra special for the client that perhaps saved the client a significant amount of money, which will make the invoice seem negligible? Or, maybe I actually would like to get rid of it's a client for some reason — there's nothing like a large increase in the fee to help make that happen.

After arriving at the invoice amount, I enter the hourly cost for all staff that worked on the job. The invoice amount less the total staff cost gives me the gross margin on the job. I then calculate my gross margin per hour that I worked on the job by dividing the gross margin by the number of hours I put in.

For example, say the time value on a job came to $3,500, made up of 10 hours of my time at $200 an hour and 15 hours of my staff time at $100 an hour. If my staff cost was $40 an hour including benefits, my overall cost was $600 and my gross profit on the job was $2,900. My profit per hour was then $290.

If you do this for all your clients, it becomes clear which are the most profitable ones. This type of approach highlights those clients where billing rates are high, staff costs are low and other people do more work than you do. You are then more likely to keep your eye out for new clients that would meet this criteria. That is a win-win situation.

If you are like most people, you probably don't spend enough time on your billing process. That is a mistake. I even have a separate code for tracking how much time I spend creating client invoices. If you spend more time on billing you will probably make more money. It's as simple as that.