Time tracking is a wonderful tool for:
- making your estimates more accurate
- managing the size of your team
- justifying invoices when a client takes issue with what they are being billed
- providing more data for performance bonuses (temporal efficiency is important, but only if it comes with quality)
- finding the drag in your workflow so that you can become more efficient over time
- choosing the types of work at which you can be more cost-effective/efficient than your competition
- scheduling projects more effectively
The problem is that when done wrong (which is easier than doing it right) time tracking itself can be the drag on your workflow. I have a colleague who, in a very unscientific study of me sharing an office with him for two days during which I was curious enough to time him, spent 15% of his time documenting how he spends the other 85%!
To my mind (though I admit I'm a better technician than business strategist) that is way too much overhead for time tracking. In a small company, doing it this badly is, in my opinion, worse than not doing it at all.