It’s Time to Talk About Tracking Time

Why Tracking Time Matters More Than You Think

I recently spoke with a buyer of professional service firms. I asked him: “What’s one thing you think sellers must have perfected for you to purchase them at a premium price?” He didn’t hesitate.

“Project profitability.”

He elaborated: “We see an awful lot of companies. We know when a company is properly measuring project profitability. If growth is there and they’re getting premium profit margins compared to other companies we see, we know we’re going to have to pay a premium for it.”

What does that mean for you? It means that if you want a premium valuation—or just more money in your pocket—you need a reliable system to measure labor costs. And the only way to do that is by tracking time.

The Mistake Many Founders Make

Too many professional services founders assume they know their firm’s profitability. But what they often get wrong is gross profit: the money left after deducting direct client costs from revenue.

Without accurately tracking labor hours, you can’t calculate the true cost of delivering a project. If you don’t know that, you can’t know your real profitability.

Many founders are focused on growth and new client acquisition but neglect operational efficiency. Without understanding labor costs, they might be scaling a business that isn’t truly profitable.

Another common mistake? Underpricing work. If you don’t track time accurately, you may be setting prices that erode your margins and leave money on the table.

How to Get Project Profitability Right

Calculating your labor cost isn’t complicated:

1. Develop a fully loaded hourly labor rate per employee. This includes wages, benefits, payroll taxes and other compensation costs.
2. Multiply that rate by the hours employees worked on a project.
3. That’s your labor cost. Subtract it and any out-of-pocket client costs from revenue to determine profitability.

A crucial step in making time tracking and profitability analysis easier is setting up customers and projects in your accounting system. When you categorize your invoices, bills, and time entries properly, you create a seamless process for analyzing project costs and profitability. This structure helps you see exactly where time and money are being spent, ensuring accurate profitability calculations and better financial decision-making.

If you want your team to embrace time tracking, make it easy:

• Log time in 15-minute increments—not minute-by-minute.
• Track time by project or customer, not by granular tasks which can get overwhelming.
• Ditch Excel and use an automated system. Many have features like a time clock or mobile app. Making it easier to log time will improve compliance.
• Managers should review and approve timesheets weekly.

When time tracking is simple, adoption skyrockets.  When your data is accurate, you can optimize pricing, identify inefficiencies, and boost profitability without just working harder.

Time Tracking is the Only Way to Measure Profitability

Many founders resist tracking time. They think it’s bureaucratic, their staff will revolt, and that it’s just not worth the effort. But without tracking time, you’re making assumptions about your business that could be costing you money.

Some firms try to measure profitability in other ways—none of which work:

• Gut Feel: Estimating profitability based on how busy your team feels or how much money is in the bank is unreliable. Without hard data, you might be losing money on projects without realizing it.
• Fixed Pricing Models: Some assume that setting a fixed price for services eliminates the need for time tracking. But without tracking labor costs, how do you know if you’re pricing correctly? You could be leaving money on the table or undercharging for high-effort projects.
• Revenue Alone: Just because revenue is growing doesn’t mean you’re profitable. If you don’t understand how much labor each project consumes, you can’t accurately measure margins.

The truth is that tracking time is the only way to truly measure profitability. Without it, you have no way to calculate your actual labor costs, identify your most profitable projects, and optimize pricing.

If you want a more efficient and profitable firm, tracking time isn’t optional—it’s essential.

The Path to a Premium Valuation

Want to command top dollar when you sell? Your gross profit percentage and EBITDA margin need to outshine the competition. Managing your labor force through disciplined time tracking directly improves both.

Additionally, tracking time correctly helps:

• Identify underutilized employees who could be contributing more value.
• Improve hiring decisions by showing where additional staff are needed.
• Leverage work down to lower cost resources, which may have the benefit of building up their skills to take on more challenging assignments.

Take Action

Take control of your profitability. Do this next:

• Apply for membership in Collective 54 to learn from other founders who’ve scaled successfully.
• Subscribe to Collective 54 Insights for more expert advice.
• Connect with me on LinkedIn or the Collective 54 member portal to continue the conversation.

The firms that track time properly don’t just survive—they thrive. Don’t leave your profitability to guesswork. Start time tracking today.