Profit = Revenues – Expenses. Profitability rate = Profit / Revenues.
This is the anatomy of profitability calculation.
But what is physiology?
Suppose we assume that physiology is the science of how the human body works. In that case, profitability physiology is a study of how profit generation works. To learn this physiology, you need to identify and manage various profit factors such as work, time, costs, and projects.
A useful timesheet system doesn’t only help you manage those factors, but it also helps to measure relations between them and improve profitability. This article will show you how to measure and manage these categories with a timesheet system. You’ll learn the physiology of profit creation!
Let’s go into more detail and see what features a timesheet system brings.
The purpose of the time card system is to calculate time clock hours. The time card calculator is the simplest tool for time tracking. It usually includes records of the start and end times of the working day to calculate total work hours.
The work hours calculator can be simple and include only work hours per day. On the other hand, detailed work hours calculators have:
- Total work hours
- Lunch break and other breaks
- Time offs
- Calculation of regular work hours expense
- Calculation of overtime expense
To get a comprehensive time card and hours calculation, you need to determine initial inputs such as base employee cost rate, overtime threshold, and overtime rate.
Time carts automatically use such inputs and create calculations based on time data entries.
You can download a simple model for the time card template. The essential inputs for work hours calculation are the employee’s base cost rate, overtime threshold, and overtime rare.
After filling in the inputs, an employee should fill in work time and break time for each day. The time card template will automatically calculate work hours, total pay, overtime, and overtime pay.
Does the time card contain enough data for profit measurement?
Timecard contains only hours and doesn’t include a specific description of work performed or project details. To calculate the profitability, you’ll need to add more detailed data to the time card. You can do that within timesheet management software.
Did you know that the first use of time cards for recording work hours was introduced in the late 19th century? Daniel M Cooper invented the first time card — a time recording machine called the Rochester Recorder.
Periodical timesheet system
A time card is connected with a time clock and records when an employee starts and stops working. But timesheet management represent time tracking with working activity and offer more details about work hours.
Daily timesheet calculator in excel
This timesheet system is used for tracking how employees or sub-contractors spend their time daily.
The daily timesheet calculator contains data of work hours (regular and overtime) per day. In addition to the work hours, the timesheet includes vacation time, breaks, etc. You can download our template for the daily timesheet for employees in excel.
Weekly timesheet calculator
This timesheet calculator is ideal for full-time and part-time employees who track their hours weekly for payroll calculation. You can download a simple weekly timesheet template with relevant data.
Monthly timesheet calculator
The employees who need to track time and submit timesheets monthly for monthly payroll can use the monthly timekeeping tool. Get a simple excel file for filling timesheets monthly.
Detailed timesheet calculators usually present more details of hours calculation compared to the above-presented timesheet calculators. Such information is the employee’s expense rate, pieces of work performed, billable or non-billable hours.
A precise calculation of project profit is impossible if you don’t have the real expense of work per project. Time tracking per project multiplied by the hour’s cost rate can be done in more detailed timesheets and offers a reasonable expense allocation solution.
To use timesheet system properly (e.g., to increase the profitability of projects or productivity of employees), timesheets have to contain more data, such as:
- Task description
- Regular work hours
- Overtime hours
- Billable hours
- Time utilization
- Break time and time off
- Total employee cost
- Overtime pay
We prepared a comprehensive online timesheet with all details. If you want to use that, you may adjust specific columns according to your hours’ calculation and needs.
While standard timesheets are focused on how employees spend work hours, client-related timesheets provide data on hours spent on a specific engagement. Client-related timesheets should provide data on billable and non-billable hours as well as billable rates. You can download the client-related timesheet calculator in excel.
Project-related time tracking
This time and expense tracking tool contains data related to a specific project and usually presents project efficiency indicators. You can download project-related time tracking calculations in excel.
Overtime calculation is necessary for counting overtime compensation and gross pay based on hourly rates and total hours worked. But most importantly, realistic data on overtime enable us to investigate the real reason for overtime appearance. That can be unproductive behavior or increased realistic project requirements.
The U.S Department of Labor published useful applications that can be used for overtime pay calculation for US workers.
“Workers are bad at filling out timesheets, and it costs billions a day.“ (Harvard business review)
Time and expense tracking tools and profitability impact
Timecard presents data on time clock hours spent on work that cannot be used for significant profitability improvement. On the other side, detailed and automated timesheet system efficiently shows profitability indicators and enables an effective business decisions.
Essential data in timesheet calculator
A comprehensive timesheet system needs to contain data for profitability measurement from different aspects. Data processed in timesheets usually include:
- Total work time
- Time spent on specific projects, tasks, and client
- Billable time
- Non-billable time
- Time utilization
- Hourly rate
How to use the timesheet system
Using a tool like this may seem like a hassle, but it’s effortless to use. Here’s a detailed guide that will help you start.
Employee point of view
Timesheet tools should be both easy to use and suitable for data export relevant for productivity and profitability management. The employee usually fills following data:
- Date of work – that is usually set automatically. If an employee needs to book a vacation, they need to select a range of dates.
- Selecting check box indicating work related to the client or internal work
- Selecting a client drop list
- Choosing a project or service line from the drop list
- Selecting a working task from the drop list
- Input hourly rate
Management point of view
Data processed in timesheets should provide advanced reports and analytics on time consumption, tracking billable hours, and cost allocation from the managerial aspects. In other words, timesheet records altogether with managerial accounting figures are used for making business decisions relevant for achievement wished KPIs.
How to use timesheet system to evaluate project profitability?
First of all, timesheet records have to provide analytics of company performance management (KPIs). Such analytics contain data on:
- Hours (billable and non-billable)
Timesheet system usually doesn’t contain data on revenues, which could be easily exported from the accounting system. But analytics of hours and expenses is a must.
Let’s begin with revenues.
Revenues are the start point in profitability determination
A calculation of company revenues depends on agreement with clients. The revenues are usually charged based on:
- Hourly rates
- Fixed fees
- Success or variable fees
Types of revenue
There are two main types of revenue. Here’s everything you need to know about them.
Revenue based on hourly rates
Billing on an hourly rate is the fairest — you bill what you worked for. Besides, profitability management is more effective because you can measure it.
On the other side, the question is, can hourly rates always be applied? Disadvantages of hourly rate based fees are:
- They’re used only in a limited number of industries (law, advisory, management consulting)
- The client usually doesn’t prefer this as they lose control over their costs
- The client wants predictive fixed costs
- Even if a client accepts billing based on hourly rates, they rarely comply with invoices
- A timesheet system should be used to provide transparency of work performed
Revenue based on fixed fees
The advantage of stable fixed fees is that you can make a reliable budget and planning activities. But for the calculation of project profitability, fixed rates can be deceptive for profitability assessment.
For the calculation and management of profitability, it’s necessary to calculate a fixed fee (as a product of the number of working hours) and hourly rate. After doing this, you’ll often find that the hourly rate is lower than the fixed rate and that you have a loss generating project.
As a result, we recommend that fixed fees should be intensely evaluated from the profitability point of view.
How to track expenses in the timesheet system
The time tracking tool should allocate the expenses of each object. As mentioned, the objects could be projects, clients, service lines, or work tasks. The timesheet calculator tracks work hours per object.
The expenses are calculated by multiplying allocated hours with the determined cost rate.
What kind of expenses can be tracked in the timesheet system
A timesheet system can track two types of expenses — direct and indirect.
Direct labor expenses
Direct labor expenses include:
- Basic salary including taxes and social contributions
- Other employee benefits
How to allocate direct costs to the specific project or client? Direct costs can be quite easily allocated to a particular project by multiplying the employee cost rate with total work hours spent on certain projects. To do this, you need to have a calculation of hours and costs based on accurate data.
Some other costs, such as recruitment, equipment, and mobile phone costs, fulfill the definition of direct costs. Still, their allocation can be more difficult and usually require a lot of manual work. You can classify these costs under indirect costs for easier allocation.
You can download an excel file for cost allocation and cost hourly rate suitable for application in timesheets.
Indirect expenses allocation
Indirect expenses aren’t directly related to a specific cost object (e.g., project or client). Those costs include sales, general, and administration costs that aren’t specifically related to the particular client.
How can you allocate indirect cost to the specific object? You need to allocate these costs to relevant objects starting with the determination of allocation keys. There’s no ideal allocation key. Thus you need to apply the most reasonable and independent keys.
For example, suppose you want to allocate rental and electricity costs to a specific project. In that case, you can use the total number of employees or work hours spent on a particular project. For example, if you have a project that consumes 30% of total employee work hours, you can allocate 30% of these costs to this project.
Timesheet system is a perfect tool for automatically allocating direct and indirect cost to projects, clients, or service lines.
“You can’t manage what you can’t measure.” – Peter Drucker
For effective cost management, a timesheet management software is an excellent tool for project cost management.
Profit calculation with timesheet system
Timesheet management software can help you calculate profit easily.
Determination of profit
Profit is defined as a difference between revenues and expenses that result from business activities. Profitably measurement can be done via calculation of profitability rate related to profit achieved and revenues from sales.
Gross profit is the first level of profitability. It’s calculated as the difference between sales and direct costs, such as the cost of goods sold. In service companies (e.g., accounting firms), gross profit is calculated as the difference between revenues from sales and labor cost.
Gross profit margin is an indicator of gross profitability, calculated by dividing gross profit with revenues from sales.
Operating profit is the second level of profitability. It’s calculated by deducting operating expenses from gross profit. Operating expenses usually include the following types of costs:
- General and administration
- Maintenance of equipment and software
- Insurance and health
Aggregate vs. specific profitability
To calculate the profit on an aggregate company level, you don’t need a timesheet system or cost tracking for each project.
But, did you ask yourself what does profit on the aggregate level hide? Let’s see the following graph:
Go into details and discover each client’s contribution to profit. You’ll see some low-performing and loss generating clines. Would this be the case in your company?
Profit per client based on timesheets tracking
Client profitability is the profit a company makes from serving an individual client or group of clients.
Calculating client profitability begins by identifying the wide range of expenses incurred concerning serving a specific customer. To determine such costs, first of all, you need to identify labor costs. Timesheet data provides essential information for the allocation of labor costs to a specific client.
Besides, based on reasonable allocation keys (e.g., based on work hours spent), it is possible to allocate other costs.
Profit per project
Profit per project measures the profit achieved by a specific project.
The purpose of profit per project measurement is to evaluate the team’s ability to perform a project that generates profits.
You can look into a company’s profit-generating capacity by acquiring data from several profit-related indicators. This will provide you with insight into the company’s project performance and profit analysis. This data may highlight areas where improvements are required—for example, productivity, cost variance, and schedule adherence.
Suppose you set ambitious goals on project profitability as a manager. In that case, you need to keep striving to motivate your employees to push on with project quality as expressed by several parameters, such as:
● Adherence to schedule estimate
● Staff utilization rate
● Economic value added, and
● Return on capital employed
How much profit is earned by each employee?
When we say profit per employee, in this context, we don’t refer to KPIs such as net Income divided by the number of FTE. We refer to how much profit each employee makes considering total expenditures related to them. This is very hard to assess.
For example, if two employees spend 10 hours on a project, the total hours are 20. Project revenue is determined as a fixed fee amounting to 4,000 USD, so the average hourly rate is 200 USD. The cost of the first employee, based on his cost hourly rate calculation, is 1,000 USD. In comparison, the other employee’s cost is 1,500 USD, which implies that project profit is 1,500 USD.
By this calculation, the profit earned by the first employee is:
Revenue = 10 hours X 200 USD = 2,000 USD
Cost = 1,000 USD
Profit = 1,000 USD
The conclusion is that the first employee earns 1,000 USD, and another employee made 500 USD.
Is this calculation trustworthy and reliable?
We believe it’s not, because we can’t precisely know each employee’s real contribution to the profit generation. In other words, we didn’t include qualitative assumptions in this assessment. It’s possible that the second employee works more valuable tasks, and his contribution is higher.
But how to find out which employee creates profit and which not?
To make a reliable assessment, you need to view an overall picture and return to the client’s profitability. Identify which employees are mostly involved in low profit-generating clients and which employee is primarily involved in high profit-generating clients.
What you can do to improve profitability
Here are a couple of things you can do to ensure improving the profitability of your business.
Have accurate timesheet calculations of hours and expenses
As mentioned, the only way to determine profit generated from a specific client is to make a cost allocation to them. But it’s impossible to make cost allocation without accurate time hours calculation.
That can be quite challenging because that may require significant manual work for hours calculation. Such manual work brings on more costs, so the final result of this approach is not guaranteed. Automated timesheet system is a better solution, but it also requires each employee’s time and effort.
Still, a simple timesheet management software with accurate and minimal required entries could be a reasonable solution.
Investigate which clients and projects have low profitability
Once you have revenues and expenses allocated to specific projects and clients, you can quickly identify profit margins. As presented above, overall profit could seem like an outstanding achievement. Still, if you go into detail, you’ll discover loss generating clients. Such engagement requires making some new decisions.
On the other side, you’ll identify a client that creates high profit. It can be a real surprise for you. Such engagement requires a new advanced approach as well.
Find out the reason for low profitability
After you make a list of your clients and projects by profitability from the timesheet system, you need to investigate the reason for low or high profitability in the next stage.
Costs point of view
- Who are employees involved in working with low-performing clients?
- Do they spend more hours than expected with specific clients?
- How can you improve their productivity? Can they be classified under low-performing employees?
- Who are employees involved in working with top-performing clients?
- Do your employees work too much on certain projects?
- Do you have too many employees involved in working with one client?
- Are the right people involved in working on the right projects?
- Do highly paid employees work on low sales-generating engagements?
- Should you switch low-performing clients to low-performing employees?
- How many hours are left unbillable?
- What is the structure of working tasks, and is there too much administration work done by senior staff?
Revenues point of view
- Have all hours been billable?
- Do you miss invoicing the performed work?
- If you take low-performing clients, list tasks performed and employees involved, what do they have in common?
- Do you have stable fixed project fees while hours spent on projects are increasing?
- Is it possible to re-negotiate fees in low performing engagements?
- What would be the impact on revenues if you terminate the contract with low-performing clients?
- Does the strategic relevance of some clients can be justification for the loss generated?
- What is your key managers’ work task structure, and what is their contribution to the revenue generation?
Discover Time Analytics as a simple timesheet system
Time Analytics is a simple to use timesheet online tool that helps you answer the above questions and make the right decisions. Within this section, you can see how you can apply this timesheet system and improve project profitability.
How to calculate employee cost rate in timesheet calculator app
The first step in Time Analytics set up is filling employee data. Besides necessary employee data, you’ll be asked to provide their cost rate.
Enter the work hour costs for each employee. Based on this information, the cost tracker details the costs of a specific project, multiplying the number of hours of all employees involved in the project by their cost hourly rate.
How to determine cost rate
You can either enter the:
- Direct cost rate, or
- Operating cost rate
If you want to focus more on gross profitability, you need to fill in a direct cost rate. That is calculated by dividing the total monthly salary by regular (expected) monthly hours spent to work. For example, if the gross monthly salary is 3,400 USD and the employee spends 170 hours each month, their cost rate would be 20 USD.
Suppose you prefer a more detailed calculation and want to focus on operating profitability management. In that case, you can enter the operating cost rate.
Operating cost rate = Direct cost rate + indirect cost rate
In addition to the salary, you need to include other general costs such as rentals, depreciation, maintenance ( further: operating costs). For example, suppose the monthly operating expenses amount to 1,700 USD per employee. In that case, you can calculate the indirect cost rate by dividing 1,700 by 170 hours. As a result, this cost rate is 10 USD while the total operating cost rate is 30 USD.
You can use historical or budgeted costs to calculate the hourly rate.
Timesheet filling by employees
The first criterion for the implementation of a timesheet solution is that it should be easy to use.
Time analysis provides:
- Simple interface for data entry (only a few minutes for daily entries)
- Use defined timesheet templates in a case of repetitive tasks
- Productivity driven self-dashboard for each employee (an employee may like Time Analytics because they can have insight into their productivity in the Analytics section)
Application of time records and cost hourly rates
After the employee fills daily tasks, projects, and hours, the timesheet system gathers all data and creates valuable reports. There are four dimensions of the reporting:
These reports present a list of all clients with total hours calculation for a certain period, tracking billable and non-billable hours, time utilization, and the cost of each client engagement. For each client, you can open a details section that shows the work structure for that client: who was involved, what tasks are done, which projects are done, and how many hours are spent per employee, task, and project.
2. Employee reports
Employee reports present a list of all employees with a structure of billable and non-billable hours, time utilization as a productivity indicator, and cost of each employee.
The projects report shows a list of projects with hours calculation, either billable and non-billable. You can also see the expenses related to each project, the people involved and performed tasks within a project.
4.Work tasks report
Working tasks reports show time consumption structure per different type of activities including the cost of each activity.
Evaluate cost per project and client
Evaluating cost per project or client is another thing a timesheet can help you with.
Cost allocation per each client – calculate hours and costs
Cost allocation identifies, accumulates, and assigns costs to costs objects such as product departments, projects, clients, or service lines (CFI).
Timesheet system automatically allocates all generated costs to the object (in this case – clients). With this breakdown, you answer questions: what is the price of each client engagement?
In the Analytics section, you can see the cost breakdown for the selected period for each client. Besides, within a particular client, you can see all details: who performed the work, the services or tasks structure for the client, etc.
Calculate timesheet based costs per project
Same as cost per client, you can have detailed insight in cost per project with one click. Besides, you can have insight into how much each working task costs.
Discover where your profitability leaks
Now when you have an timesheet calculator, cost allocation, and foundation for specific profitability measurement, you can discover what profitability drivers are.
You simply compare revenues per client with cost per client from the timesheet system in the next stage. You’ll easily calculate gross or net margin per client or project.
After that, you’ll discover the reasons for low or high profitability for some clients. In terms of low profitability clients, you need to identify whether reasonable hours are spent for a particular client, who works on this engagement, and the real reason for low profitability.
Make smart decisions for improving the profitability
You need to answer the question:
Is the low profitability a consequence of the employee inefficiency or bad contractual terms with clients?
Check whether the same employees appear as engaged at low-profitability clients or projects. If so, you need to evaluate their work and productivity. On the bottom line, you can consider replacing them or giving them less complex tasks.
If you consider that engaged persons are highly productive, but you still have low profit at some clients, that is good news for you. This is what you can do:
- This information can be used to change contractual terms with clients
- Propose increase of your fees
- Consider termination of contract and make space for new clients
- Use this info for negotiation of new similar clients and engagements
Without hours and cost tracking in timesheets, you won’t be able to take proper actions.
Focus on high profitable clients
Based on the work hours calculation described above, you’ll be able to set an advanced approach to high profitable clients:
- Focus on relationship improvement and invest in such clients
- Increase cross-selling and up-selling activities
Other profitability KPIs managed by time sheet software
In addition to gross and net profitability per project, the timesheet system offers evaluation and management of other relevant KPIs. Those KPIs are:
- Total billable hours
- Time utilization
- Billable rate
- Average total hourly rate
- Cost rate
- Revenues per employee
- Net profit per employee
All these KPIs should be controlled at all times. Consequently, the timesheet app presents the main dashboard with the monthly movement of essential categories.
What industries can use timesheet automation for profitability improvement
Typically, timesheet systems are suitable for labor-intensive industries. Timesheets management software is usually applied in professional services:
- Accounting, audit, tax, and financial advisory firms
- Consulting firms
- Creative industry
- IT firms
- HR agencies and leadership and development firms
- Law firms
- Architectural firms
- Engineering consulting firms
- Health care firms
Looking at company aggregate profit can trick you.
You can’t achieve relevant profitability if you don’t have a system to follow each engagement’s revenues and costs. Only by accurate hours and costs tracking will you make a robust foundation for making smart decisions.
Don’t forget that employees aren’t usually happy if they need to track their time because they can feel increased control. Thus, the timesheet system has to be easy to use. It needs to be more friendly and help employees improve their productivity.