Does your firm utilize timesheets to charge clients for accounting services?
Although timesheets are common across many professional industries including accounting, there are disadvantages to charging clients by the hour.
Here at Gusto, we aim to equip accountants with valuable information that they can use to expand their accounting firms and improve their ability to serve clients. That’s why we, along with our partners at CPA Academy, presented an informative webinar about the drawbacks of using timesheets. We presented our webinar titled, “Value Pricing: Timesheets are Dumb for Your Customers, Your Staff, and Your Firm,” and you can watch the full webinar here.
In addition to this article, which is Part One of the series, you can also read Parts Two, Three, and Four to learn more about timesheets as well as value pricing.
In this article, we’ll share helpful highlights from presenters Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Editor-at-Large at Gusto. You’ll learn all about the history of timesheets, the disadvantages of accountants using time tracking, and how accountants determine hourly rates.
The history of employee time tracking
Accounting firms often utilize timesheets to determine the amount of money they’ll charge clients for their services. Timesheets, by their nature, have their roots in the labor theory of value. The labor theory of value purports that the appraisal of services should be determined by the amount of time or labor it takes:
The labor theory of value indicates the economic value of a good or service as determined by its total amount of labor required to produce it. … You can determine the economic value of a good or service by how much time [or] how much of your labor was required to produce it.– Greg Kyte
When firms utilize timesheets, they abide by the labor theory of value because the price of their services is determined by the amount of time it takes to perform accounting tasks for their clients.
Although timesheets are common in numerous professions, time tracking wasn’t popular until the 1940s and 50s. Lawyers brought widespread attention to the use of timesheets, and other professions began using time tracking to determine the value of their services. In the 1940s, efficiency experts calculated that lawyers who used time tracking made a higher profit than those who didn’t:
You got these efficiency experts, who are really doing time and motion studies … [and are] trying to [optimize] efficiency. … In the 1940s, management experts started looking at attorneys, and they found out that the attorneys who kept records earn[ed] more money than the attorneys that did not. … These experts said, … ‘Look at what you want to make, add in your costs, and then divide that by the number of hours that you believe you can bill during the year,’ and that’s what your billing rate was.– Greg Kyte
Efficiency experts recommended that professionals use hourly rates to earn more money. Greg and Caleb cited Ron Baker, co-author of The Firm of the Future: A Guide for Accountants, Lawyers, and Professional Services, as stating that timesheets within accounting initially began for cost-accounting purposes, but it eventually became the primary way in which accountants charged clients.
The problem with accounting firm timesheets
Many accounting firms still utilize timesheets to bill their clients. Firms utilize timesheets because it simplifies the process of charging clients for accounting services:
There’s a lot of variables, [and] there’s a lot of uncertainties with the services that we provide. … The main benefit [of using timesheets] is it feels fair. … It feels fair to people based on the uncertainty that both parties have going into it. The other reason … is—it’s easy. It’s just an easy process.– Greg Kyte
The problem with accountants charging by the hour is that there are different subjective measures and uncertainties that go into the time tracking process. Greg used the example of tracking time when it comes to thinking about your client’s work. Although you may not be performing accounting duties at your desk, you might still be working for your client mentally throughout the day.
Anybody who’s kept the timecard or had to build the time knows [the disadvantages of tracking time]. It relies too heavily on subjective measures. You hear the stories of these people who were like, ‘Yeah, I was taking a shower this morning, and I was thinking about my client. When I got out, I bill them another two-tenths of an hour,’ and it’s like, ‘Okay, does that [mean] you [were] really on the clock?’ … I don’t know. Maybe you are. Maybe you had a [breakthrough with your accounting work].– Greg Kyte
Greg noted that the times in which accountants clock in and out are often subjective. He posed the question of whether or not accountants should stop billing their clients if they take a break or use the restroom:
In terms of subjectivity, if I had to use the bathroom, [do] I stop the clock? … If I [were the client’s] employee, I wouldn’t clock out to go use the bathroom, so I went back and forth on that [question]. When does the clock start? When does the clock stop?– Greg Kyte
Although using timesheets may seem fair and straightforward, the amount of time you spend charging a client can become unclear. Different subjective factors impact the amount of time you bill.
On top of the subjective measures in which accountants charge clients, firms should note that time tracking is typically inaccurate. Greg observed that employees usually do not go to the trouble of maintaining accurate timesheets if they’ve worked for their firm for an extended period.
How accountants determine hourly rates
In addition to the subjective factors determining the duration in which accountants bill clients, there’s also a great deal of subjectivity in calculating hourly rates. Accountants largely base hourly rates on their competition rather than the actual value of their services:
What is a fair hourly rate? You don’t know. You’re basing that on what you think your competition is charging—not on going, ‘Well, I actually provide this much value in every hour that I [spend working].’ … [The hourly rate is] not fair. You’re just going, … ‘Well, the partners of your firm want to make this much profit, they have this much overhead, and they’re trying to back into … what they guess is the right number of hourly rates that they can bill in a year.– Greg Kyte
Competitor prices and your firm’s financial needs determine the hourly rate that clients pay, meaning that the price doesn’t reflect the value of your services. Caleb noted that hourly rates are arbitrary:
Accounting firms don’t collect empirical evidence to determine [a fair hourly rate]. They will go about it … in any kind of economic sense. It’s just pulling numbers out of the air or just basing it on something that somebody else did, which they probably just pulled out of the air.– Caleb Newquist
Accountants’ hourly rates do not reflect the value of their work. Additionally, accounting firms will often use timesheets even when they charge clients fixed prices. Greg noted that in his past experiences with time tracking, the number of hours he worked didn’t affect the price his firm charged clients. He worked more hours than other accountants, but it didn’t impact the amount clients paid:
I was slow with everything I did, and [my manager] was like, ‘You know what? The clients [are] going to pay the same amount if you do it or if I do it. Because [if] you’re going to do it, you got a lower hourly rate [because] you take forever. I’ve gotten a [higher] hourly rate [because] I can bang this stuff out [quickly].’ At the end of the day, [clients] paid the same amount. It’s like they have fixed prices.– Greg Kyte
Even though Greg’s firm technically charged hourly rates, the prices their clients paid did not fluctuate based on the number of hours that they worked. They functionally set fixed prices, but they ostensibly charged by the hour.
Learn more about timesheets and setting prices
Accounting professionals often view time tracking as a fair and simple way to charge their clients, but because of the subjective factors that affect the amount of time you spend on the clock and the price of your hourly rate, time tracking is not the best pricing strategy for accounting firms.
If you’re looking for more ways to grow your accounting firm, consider partnering with Gusto. When you become a Gusto partner, you get exclusive access to tools and resources to support your clients into the future. We make it easy for accountants to onboard pay and advise their clients and firms. We also enable accountants to streamline payroll and benefits. Join Gusto’s Partner Program today.