08 Jun It is Time to end the Timesheet
Recently, there has been much discussion in the accounting community about pricing and moving away from the billable hour.
However, in these conversations, there is still the reliance on the timesheet.
Before I get into the detail as to why we must get rid of the timesheet, I want to clarify a point about timesheets. Many accountants use timesheets for all of their team that track each 6 or 10 minutes. However, as a generalisation, bookkeepers often track each hour of activity. Whether you are tracking 6 minute units, 60 minutes, half days or full days, it is still the same.
Usually, there are four reasons offered for tracking time:
- Necessary to know the time so you can price
- Need them to manage workflow
- Necessary to know how team members are performing
- Need them for cost accounting.
Prices are set by value, not hours. This is the case even when the competition are charging by the hour. Just think of your own purchases – do you buy the cheapest of everything? We buy value. Sometimes we hear people saying that their clients demand the billable hour. Firstly sellers dictate pricing, not buyers. More importantly though, if we have nothing else to compare on, we will compare on price. The real problem in pricing is that many accounting professionals are not differentiated.
Now the statement that you need timesheets to manage workflow is rather ludicrous. But we must discuss it. Time is not value, it is not a cost; it’s a constraint. Duration i.e turnaround time is far more important than time spent. If you have set out the scope of project properly and identified the issues or tasks to complete the project then you manage the project by the completion of these tasks. Duration is where the bottlenecks occur, not the time spent. Through the understanding of scope, managing tasks and using after action reviews, a more effective workflow will result.
The third justification is also somewhat amazing. True leadership and management does not rely on timesheets to know how a person is performing.
Connected to this is that some bookkeeping business owners employ other bookkeepers and pay them on a contractor basis for the hours worked. In essence, they are employing / contractors that are replicating themselves. But for the reason that the billable hour does work is the same reason that this does not work. There are no incentives for the contractors to be more effective. There is no incentive in the business to build a better system, to harness technology and to utilise a global workforce to create a better business.
Some claim that the only way to calculate profitability per customers is with timesheet. Accounting professionals would obviously know that you don’t need timesheets to know your businesses costs – look at your profit and loss statement. Don’t confuse costs with cost allocation.
Cost accounting if full of arbitrary allocation and errors, no matter it be timesheets, Activity-based costing. Let me have a look at your P&L, revenue per customer and let me talk to your team and I will be able to allocate your costs that will be very close to your timesheet.
The most important though is that costs need to be known before you do the job, not afterwards.
Further, costs are largely fixed in most accounting and bookkeeping business. Businesses with large fixed costs like airlines etc don’t concentrate on cost accounting but rather yield management.
But there is still more in this debate.
The hourly rate is not even an accurate cost allocation method as it includes profit. Cost allocation is not profit allocation. But even if you remove the profit component, it still bears no relationship to your actual costs. To set the hourly rate most people just look at the competition but if was really true costs then it would have reference to your actual costs. With the timesheet, you are attempting to run a Profit and Loss statement for every hour of work done. This is absurd since your business is an independent system and can’t be broken into a series of recorded hours.
Finally in this regard, the hourly cost allocation gives no weight to the lifetime value of the customer.
Critically, timesheets are not helping you to price better, to manage workflow better, to attract the ideal clients, measure what matters to your customers or improve the firm.
The reality is this debate is over. As accounting professionals, we need to move on to far more important topics.