One of the most important things we do as business owners is to decide how much we want to earn from our business each year, because only then can we determine how much we actually have to sell.
What follows is a simple calculation to work out what your hourly charge rate should be. Now before you say, “But I’m not charged out by the hour”, the principle is the same for you. You need to know how much you want to earn and how your business is going to generate that income.
So, first decide on how much you want to earn; how much do you want to pay yourself? For this example I am going to work on £50k (before tax).
Obviously our starting point is 52 weeks but from this we need to take off 5 weeks for holidays and one week for being ill. This leaves us with 46 weeks. Why? You can’t earn while you are on holiday or off work sick. This means that based on a 5-day working week we have 230 days per year when we can earn money.
Therefore, to earn my £50k I need to invoice £218.00 per day and based on a normal 7.5 hour day this is an hourly rate of £29.00 per hour. But, this is where a great many business owners make a big mistake and end up wondering why they never make any money. Because the fact is you only make £29.00 per hour when you are doing chargeable work. And that is the key – chargeable. Sales, networking, invoicing, meetings, estimating, travelling, social media, etc., are not chargeable hours. So, you need to know exactly what that split is. Some say that of a typical working day only 40% is chargeable. But, for my example I am going to work on 50%, which means that my hourly rate of £29.00 per hour now becomes £58.00 per hour.
Now before you start thinking, that’s not so bad, or I’m already charging more than that. To this figure you need to add your overheads and variable costs. For example: rent, insurance, car, tools, computers, petrol, etc.
This is a very simple calculation but one that most business owners don’t do. Please don’t be one of them, as knowing what your chargeable rate should be will make a big difference to the standard of the life you live.