Bookkeeping for Service Businesses: Best Practices

Service businesses—consultants, agencies, professional services, skilled trades—have different bookkeeping needs than product businesses. No inventory to track, but time becomes your most important asset. Projects need profitability analysis. Retainers require careful accounting.

This guide covers the bookkeeping essentials for service-based businesses.

What Makes Service Business Bookkeeping Different

Time Is Your Inventory

You don’t sell products; you sell time and expertise. Tracking time accurately is as important as tracking inventory for a retailer.

Higher Margins, Different Costs

Service businesses typically have:

High gross margins (50-80%)
Labor as the primary cost
Lower capital requirements
Fewer hard costs to track

Project-Based Work

Many service businesses work on projects:

Each project needs profitability tracking
Scope changes affect financials
Progress billing is common

Retainer Relationships

Ongoing client relationships create:

Recurring revenue (good for cash flow)
Prepaid income accounting considerations
Capacity planning needs

Setting Up Your Service Business Books

Chart of Accounts

Service businesses need a focused chart of accounts:

Income Accounts:

Consulting/Professional Services Revenue
Project Revenue
Retainer Revenue
Training/Workshop Revenue
Other Services Revenue

Cost of Sales (Direct Costs):

Direct Labor (if tracking separately)
Subcontractor Costs
Project-Specific Expenses
Direct Materials (if any)

Operating Expenses:

Salaries and Wages
Payroll Taxes and Benefits
Rent
Software and Tools
Professional Development
Marketing
Insurance
Professional Services
Travel and Entertainment
Office Supplies
Utilities

Accounting Method

Cash basis: Record income when received, expenses when paid

Simpler
Works for most small service businesses
What you see is what you have

Accrual basis: Record income when earned, expenses when incurred

More accurate matching of revenue and costs
Required for larger businesses
Better for project profitability analysis

Many service businesses can use cash basis; discuss with your accountant.

Tracking Time

Why Time Tracking Matters

Even if you don’t bill hourly, track time:

Understand project profitability
Know your effective hourly rate
Identify time-wasting activities
Price future work accurately
Evaluate employee productivity

What to Track

For each time entry:

Date
Client/project
Task/activity type
Duration
Notes (what was done)
Billable vs. non-billable

Time Tracking Tools

Simple options:

Spreadsheet (basic but works)
Toggl (free tier available)
Clockify (free)

Integrated options:

Harvest (time + invoicing)
FreshBooks (accounting + time)
QuickBooks Time

Time Tracking Best Practices

Track in real-time: Don’t reconstruct at end of week

Be specific: “Client A project” not just “work”

Track non-billable too: Understand where all time goes

Review weekly: Catch missed time while you remember

Use it: Don’t track if you won’t use the data

Project Accounting

Why Track by Project

Without project tracking, you know total profit but not:

Which projects made money
Which lost money
What went wrong on unprofitable projects
How to price future work

Setting Up Project Tracking

In your accounting software:

Create a “customer” or “project” for each engagement
Tag all income to the project
Tag all direct costs to the project
Include allocated labor costs

Project Profitability Report

For each project, know:

Metric	Amount
Contract Value	$25,000
Revenue Recognized	$25,000
Direct Costs:
- Labor (time × rate)	$12,500
- Subcontractors	$3,000
- Other Direct	$500
Gross Profit	$9,000
Gross Margin	36%

Identifying Problem Projects

Review projects monthly:

Which have low or negative margins?
Why? Scope creep? Bad estimate? Inefficiency?
What can you learn for next time?

Revenue Recognition

When to Recognize Revenue

Completed contract method: Recognize all revenue when project complete

Simplest approach
Cash basis aligns with this naturally

Percentage of completion: Recognize revenue as work progresses

More accurate for long projects
Required for very large/long contracts
Matches revenue with costs incurred

On payment: Recognize when paid (cash basis)

Most common for small service businesses
Simple and conservative

Retainer Revenue

When a client prepays:

You receive cash (asset)
You have an obligation to provide service (liability: unearned revenue)
As you provide service, recognize revenue

Example:

Client pays $3,000 retainer on January 1
You provide $1,000 of service each month
January revenue: $1,000, remaining liability: $2,000
February revenue: $1,000, remaining liability: $1,000
March revenue: $1,000, remaining liability: $0

This is accrual-basis treatment. On cash basis, you might recognize when received (check with your accountant).

Billing and Invoicing

Billing Methods

Time and materials: Bill for actual time at agreed rates

Fair and transparent
Less predictable for client
Rewards slow work

Fixed fee: Agreed price for defined scope

Predictable for client
Rewards efficiency
Risk of scope creep

Value-based: Price based on value delivered

Higher earning potential
Requires understanding client outcomes
Harder to define

Retainer: Fixed monthly fee for ongoing services

Predictable revenue
Good client relationships
Must manage scope

Invoicing Best Practices

Invoice promptly: Don’t wait to bill completed work

Be clear: Itemize what was done

Include payment terms: Net 15, Net 30, etc.

Make payment easy: Multiple options, online payment

Follow up: Don’t let invoices age

Expense Management

Direct vs. Indirect Expenses

Direct expenses: Attributable to specific clients/projects

Subcontractor on a specific project
Travel for client meeting
Software purchased for project

Tag these to the project for accurate profitability.

Indirect expenses: Overhead not tied to specific work

Office rent
General software subscriptions
Marketing
Administrative staff

These are covered by your margins across all projects.

Common Service Business Expenses

Software and tools:

Industry-specific software
Project management
Communication tools
Design/development tools

Professional development:

Training and courses
Conferences
Books and subscriptions

Marketing:

Website
Content creation
Advertising
Networking events

Professional services:

Accounting and bookkeeping
Legal
Business coaching

Tracking Reimbursable Expenses

If clients reimburse certain expenses:

Track them separately when incurred
Include on invoice with markup if applicable
Match reimbursement to the expense
Ensure you’re not double-counting as both expense and income

Key Metrics for Service Businesses

Effective Rate

Calculation: Revenue / Billable Hours

What you actually earn per hour of billable work. Compare to your target rate.

Utilization Rate

Calculation: Billable Hours / Total Work Hours × 100

What percentage of time generates revenue. Target: 60-80% for most service businesses.

Average Project Value

Calculation: Total Revenue / Number of Projects

Track over time. Is it growing?

Client Concentration

No single client should represent more than 20-30% of revenue. Track this quarterly.

Revenue per Employee

Calculation: Total Revenue / Number of Employees

Benchmark for productivity. Varies by industry.

Your Service Business Bookkeeping Routine

Daily

Track your time
Note project-specific expenses

Weekly

Review and categorize transactions
Send invoices for completed work
Follow up on overdue invoices
Review project time against budgets

Monthly

Reconcile all accounts
Run project profitability reports
Review utilization metrics
Send retainer invoices
Follow up on all A/R over 30 days

Quarterly

Deep dive on project profitability
Review pricing vs. actual margins
Assess client concentration
Plan capacity for upcoming work

Need help with your service business bookkeeping? At Profit Path Books, we understand the unique needs of service businesses. Book a consultation to discuss how we can help you track time, manage projects, and understand your profitability.