What are billable hours?

Definition

Billable hours are the hours on a job that the client can be asked to pay for. On the books, these hours are the quantity behind service revenue, not a ledger account of their own.

A freelance-heavy design studio uses them to turn time on a job into an amount to bill. They come from the timesheet, not from the payroll total alone.

They are not a Balance Sheet line. Unbilled client work can sit as a receivable until the bill goes out, and the hours themselves live in the time file.

Stay with hours that can be charged when you read them. Whether the studio later bills every hour at the full rate belongs on a different page.

Where it shows up

P&L: Related to the hours that become revenue when billed.

Balance Sheet: Related to unbilled work until the invoice goes out.

Cash flow: Related to when those hours actually collect.

See also: Timesheet · Utilization Rate · Invoice

When you look at your Income Statement, you will not see a line titled these hours. You will see revenue after the studio bills the job, often hours times the agreed rate.

When the hours are high on a job, more time is waiting to be billed. When they are low, the job used little chargeable time, or time was coded as internal.

Until the bill goes out, unbilled work can sit on the Balance Sheet as accounts receivable or as unbilled receivable. The hours are the quantity behind that balance, not the balance itself.

On the Statement of Cash Flows, collecting the billed job is an operating inflow. Hours can be billable for weeks before cash arrives.

The timesheet is the source document. Payroll may pay for 40 hours while only 32 of those hours are chargeable to a client.

How it works

A designer starts a brand job and tracks time against that client. Each block of work is coded as chargeable or not.

Chargeable time is billable hours. Internal reviews, unused time, and shop-wide admin are worked hours that are not billable.

At billing time, the studio multiplies billable hours by the agreed rate. Thirty-two hours at $150 is $4,800 waiting to be billed.

Stay with the hours in this reading. The $4,800 is the value of those hours at the standard rate, not proof every dollar will later collect.

Direct labor is the wage cost of the people who did the work. Billable hours are the client-facing quantity of that time, not the wage itself.

Cost of services still records that wage cost as the job is delivered. Billing the hours later is what turns them into revenue; it does not create the labor cost.

A timesheet that mixes jobs, or that dumps uncoded time into a leftover bucket, will misstate the hours. Anyone asking why a brand job shows 32 hours should be able to open the time file and see those rows.

Do not treat every paid hour as billable. Paid time includes lunch, training, and internal work that the client will not be asked to buy.

Hours can be billable and still unbilled at month end. They wait as unbilled work until the studio sends the bill.

Example

Harbor Mark is a freelance-heavy design studio. A designer spends 32 hours on a brand job at an agreed $150 an hour.

Multiply: 32 times $150 equals $4,800 to bill. Those 32 hours are billable hours; the $4,800 is their standard value.

If the designer also spent 8 hours on internal shop work that week, those 8 hours are worked and paid. They are not billable, and they do not go on the client's bill.

If the $4,800 sits unbilled at month end, the hours are still billable. The Balance Sheet holds the unbilled work until the bill goes out.

If the client later pays $4,800, cash rises and the receivable falls. The 32 hours do not change after they have been billed.

The studio does not post a line that says billable hours. The timesheet already holds them; the bill turns them into revenue.

Common mix-ups

Billable hours are not the same as hours worked. Worked hours include internal time the client will not be asked to buy.

Billable hours are not the same as a realization rate. A realization rate is the share of standard value that later billed and collected; this page is the hours that can be charged.

Billable hours are not cash. Thirty-two hours at $150 can sit unbilled or unpaid while payroll has already left the bank.

Related terms

• Timesheet: The record of hours worked, used to drive payroll and job costing.
• Utilization Rate: The share of available hours that are billable.
• Realization Rate: The share of billable value that actually gets invoiced and collected.
• Effective Hourly Rate: Revenue collected divided by total hours worked.
• Invoice: The document that bills a customer and creates a receivable.
• Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
• Direct Labor: Wages for the people who directly make the product or deliver the service.
• Work In Progress Schedule: The job-by-job schedule comparing cost incurred, revenue earned, and amounts billed.