Are timesheets necessary for the success of your accounting firm?
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The short answer is, “no.” In fact, timesheets can actually be financially detrimental to your firm. Rather than use timesheets, your firm can value-price its services and charge clients based on your overhead expenses and target income.
Here at Gusto, we aim to give accountants valuable tools and information for expanding their firms and assisting their clients. That’s why we, along with our partners at CPA Academy, delivered a webinar all about the disadvantages of using timesheets. Our webinar titled, “Value Pricing: Timesheets are Dumb for Your Customers, Your Staff, and Your Firm,” was a thought-provoking conversation and you can watch the full webinar here.
The presentation featured Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Editor-at-Large at Gusto. Greg and Caleb have a great deal of experience working for and with accounting firms. Their backgrounds and expertise in accounting enabled them to offer valuable perspectives on the use of timesheets.
In addition to this article, which is Part Four, you can also read Parts One, Two, and Three of this webinar article series to learn more about why timesheets can be harmful to your firm and clients.
In this article, you’ll learn all about why timesheets are not an optimal way to manage employees, how timesheets can be financially detrimental to your firm, and how to calculate your accounting firm’s prices.
CPA time tracking does not help firms manage employees
Timesheets are incredibly common in the accounting profession, but using timesheets can be detrimental to your firm. Timesheets may appear to be a useful tool for managing accountants, but in reality, the majority of employees do not complete timesheets accurately:
[Managers are] like, ‘I have to have timesheets because without timesheets, … I can’t properly manage my people, and I can’t properly do cost accounting without timesheets.’ … Yes, you can totally properly manage your stuff, … [but] don’t forget this: ‘I’d make it a point to be accurate with a timesheet,’ said no employee ever. We already know … your timesheets … are full [of errors].– Greg Kyte
Timesheets often don’t accurately reflect the amount of time accountants work because there’s often pressure to under-represent or over-represent the duration of a task. Greg observed that those who complete errorless timesheets likely don’t need to be managed closely:
There’s a possibility that the timesheet is not full of [errors], and guess what—those … whose timesheets are accurate are not the people that you need to use a timesheet to manage them properly. Those are your golden people who are doing everything that you want them to do.– Greg Kyte
Timesheets do not necessarily enable firms to manage employees, largely because firms that use timesheets will often encourage employees to work off the clock.
Another misconception with timesheets is that they’re necessary because of variable costs. Greg argued that firms only use fixed costs:
You need timesheets for cost accounting, right? No, you don’t because all firm costs are fixed costs. … It’s like, ‘Oh, we’ve got more business, … so we need to hire more staff.’ That means you go up, but that’s not a variable cost on the job. A variable cost on the job is like, ‘We need to paint this widget, so every widget we produce costs more paint.’ [Firms] have step costs, [which] are different from variable costs, and ultimately, big picture step costs are still fixed costs.– Greg Kyte
Because firms have fixed costs rather than variable costs, they can charge clients based on value pricing rather than time tracking. Value pricing means firms evaluate the amount clients value their accounting services and charge clients according to projected value. Although most accounting firms still utilize timesheets, value pricing is often a better alternative.
How timesheets can cost your firm money
In addition to timesheets not improving a firm’s ability to manage employees, they can also be a financial drag to firms. Greg shared an example from when he worked in an accounting firm about how its use of timesheets was financially detrimental. Because he needed to reach a certain number of billable hours, he had to work outside of his field of expertise:
I was hired to be part of the technology support team, and I was specifically a QuickBooks Pro advisor. … When I got hired, they’re like, ‘Hey, listen, you’re not going to get all the billable hours that you need to hit your goal by just doing QuickBooks support, so during tax season, our entire department turns into a tax department as well.’– Greg Kyte
Greg had difficulty performing tax duties because he was hired on specifically as a QuickBooks Pro advisor. During tax season, he had to learn how to use UltraTax quickly, and because he was unfamiliar with the software, he worked slowly.
I totally blew past whatever hours that the partner who gave me the return thought it would take. … I got pulled into my partner’s office, and he told me I was so slow that nobody wanted to give me any work. … I think that whole thing comes from how partners divvy up their revenue for the firm.– Greg Kyte
Nobody wanted to give Greg billable hours because he worked slowly, resulting in a firm partner having to reimburse the firm. If a partner assigns an accountant an assignment and the accountant goes over the amount of money they charged the client, the partner would then pay the firm an overhead charge in order to meet the difference. For example, if a client pays $1,000 for a service and an accountant charging $125 an hour takes 10 hours to complete that service, the partner would need to pay the firm approximately $250 in order to compensate the accountant.
At Greg’s firm, partners didn’t want to assign him billable work because they would have to pay the firm if he worked too slowly. Greg wanted to work, but the partners decided that it was better for him to do nothing rather than work slowly. Because of the use of employee timesheets, Greg’s firm didn’t utilize all of the accountants at their disposal, which created pressure on other accountants to complete more work during tax season. Their timesheet system was not only harmful to the firm’s finances, it negatively impacted employee wellbeing.
Accounting firm pricing
Your firm can price its services without using timesheets. The first step you can take to determine the amount you charge clients is calculating your overhead costs combined with your target profit:
You have to look at, ‘Okay, how much is my firm’s overhead?’ and then you say, ‘How much profit do I want to make?’ and then you go, ‘Profit plus all of your fixed costs.’– Greg Kyte
After determining your desired profits and fixed costs, you see how much money you need to make from your accounting services. You can then figure out the number of new clients you’ll need to sign on and calculate the amount you’ll need to charge each client in order to reach your firm’s financial goals.
We’re going to bill a fixed price this year, and then you go, ‘Is [that] going to cover everything? How many new clients can we expect? How many new clients do we need to get to … [reach the amount] we wanted to make for the entire year? It’s really just that you still have to do the cost accounting—you still have to do all [of] the calculations.– Greg Kyte
Greg observed that most professional industries charge by the service rather than the hour, and accounting firms can benefit from following the same practices. One substantial benefit to discontinuing the use of timesheets is that it will make your firm more appealing to accountants. This is especially important because of the growing number of accounting jobs. Gaining and retaining talented accountants can be challenging, and not requiring accountants to fill out timesheets is an attractive incentive for potential hires.
Learn more about getting rid of timesheets
Numerous accounting firms utilize timesheets, but your firm may benefit from alternative methods of pricing. Some firms view timesheets as a great way to manage employees, but timesheets are often riddled with errors. Additionally, the use of timesheets can put your firm in the position of paying out of pocket to compensate hourly accountants if their wages surpass the amount of money the client paid. A great alternative to using timesheets is calculating your firm’s overhead costs and desired income to determine the amount you’ll charge clients.
If you’re looking for more ways to serve your clients while expanding your firm, consider partnering with Gusto! Gusto offers an exceptional People Advisory Certification program that empowers accountants to advise clients with different people-based advisory needs, such as payroll, benefits, and HR. As a People Advisor, you can better serve your clients and their incredible teams. Get certified.