Why Track Time?

I emphasize the importance of time tracking to small business owners because it is a reliable way to start understanding productivity within the business. Without knowing how much time is spent where, it is very difficult to get an unbiased view profit and capacity. Beyond just "good practice," time can majorly affect the business' ability to grow - especially in a service-based industry.

If you fail to see the value in tracking time, or it is a low priority in your organization, then consider the following.

AGI / FTE

If you have made the leap to selling value instead of an hourly rate, time-tracking seems a bit backwards. However, if you look at your adjusted gross income (your fees minus cost of goods sold) divided by your number of full time employees, you can see a high-level view of time efficiency.

As an example, let’s pretend your business’ AGI was $300k last year and you had 3 employees. $300k divided by 3 employees equals $100,000 per FTE.

Now, let's assume that salaries equaled $200k total for the year.

This essentially means that for every $1 you paid your employees, the business received a $1.50 return on that investment (AGI / Direct Labor). This is also known as your Labor Efficiency Ratio or LER.

In the professional services space, the ROI really should be $3 or more. The benchmark per FTE in the creative services/marketing industry is right around $180k.

If you find your AGI per FTE or Labor Efficiency Ratio not where it should be, then you should consider the following questions:

Are We Inefficient, Underbilling, or Both?

Chances are highly likely that if you don't have a good understanding of the time you spend working on client projects or retainers, you are giving a lot of your time away for FREE. This is called "underbilling" because you are producing more value than what you're getting paid for.

Secondly, if you are achieving your Net Profit goals despite having a low ROI per employee, you most likely still are having difficulty scaling to the next level. This is because Labor Efficiency is a leading indicator to Net Profit. You can't double the size of your team and maintain high profitability if your team is inefficient or improperly managing their time.

Find The Baseline

I don't recommend setting a goal of tracking every minute for every person forever. It's simply unrealistic. I DO recommend an audit of where you spend your time, which means you have to know how long certain projects or deliverables take. You can do this in a couple of bite-sized ways:

1. Have NEW employees track their time in their first few weeks so you can see if they are properly learning and implementing your process. Once the employee is efficient, do away with time tracking until there is an issue.
   

2. Track time on specific parts of your process or specific projects one at a time. This is especially helpful when standardizing a deliverable or something specific that you sell to clients. If you have internal proof that deliverable X takes 4 hours to complete, then you can build a price for deliverable X that satisfies your profit margin goals.
   

3. Not all employees are equally productive. Experience, skill, and natural strengths all factor into time-to-complete. It's important to make this designation because it gives you the option to bill at different rates or price a deliverable with "blended rates" based on the makeup of the team. It also helps you balance workload knowing that a junior employee needs 8 hours on the project, vs. a senior employee needing 2.

How To Get Started Tracking Time

Here are some steps you can take to encourage your team to start tracking time:

1. Discuss with your team: Talk to your team about the benefits of tracking time and get their feedback. They may have concerns or questions that you can address.

2. Make it as easy as possible: Find a time tracking tool that meets the needs of your company. There are many options available, from basic spreadsheets to sophisticated time tracking software.

3. Train your team: Provide training to your team on how to use the time tracking tool, and ensure that everyone is comfortable with it.

4. Lead by example: As a manager or business owner, lead by example and track your own time. This can help encourage others to do the same.

By following these steps, you can help your company find efficiencies and create a system for identifying ways to become more productive and profitable.