One of the most common questions we are asked by new business owners is how much they should be charging per hour and how to work out their hourly charge out rate.
There are a number of factors to consider when working out when pricing your services. Here is our recommended 8 Step Pricing Formula to work it out.
1. Work out your total number of billable hours per year
Based on full-time hours, this would be 8 hours a day x 5 days a week x 52 weeks a year = 2,080 hours per year (note: the number of hours a day is general and not specific to any award).
2. Make an allowance for holidays throughout the year
You need to make sure you deduct your holidays throughout the year including:
- Annual leave (20 days)
- Personal leave (10 days)
- Public holidays (if applicable – 10 days)
This would be a total 320 hours (40 days x 8 hours a day)
So this leaves 2,080 hours from Step 1, less 320 hours for annual time off as described above.
So the adjusted hours per year that you are available to work would now be 1,760.
3. Make an allowance for non-billable activities
It’s not realistic to expect anyone to have 100% billable hours, so you’ll need to make a further deduction for the following activities:
- Professional development/training/inductions/upskilling
- Business administration (such as installing equipment or invoicing)
- Non-billable meetings with potential new clients, networking, tool box meetings, team meetings
As these activities are hard to predict, I like to use a percentage, such as 20% to cover these activities. So 1,760 adjusted hours (from Step 2) less 20% (352 hours) for the miscellaneous activities would be 1,408 billable hours per year that you could achieve.
4. Work out the total operating costs of your business
These are overhead expenses/operating costs over 12 months (except direct expenses to do with producing your services) and include:
- Licenses, permits and business insurances
- Software subscriptions
- Professional fees (bookkeeping, accounting, etc)
- Office staff wages
- Motor vehicle expenses
- Utilities (telephone, internet, electricity if you have premises, etc)
- Plus any other operating expenses (that are not related to producing your services
If you have a bookkeeping system and software in place such as Xero, you can get this information from your annual Profit & Loss Statement from your bookkeeper or accountant. If you don’t have bookkeeping software in place, you can work it out yourself manually from your paperwork.
5. Add in other other outgoings
You need to work out other outgoings that are not part of your operating costs in Step 4.
These need to cover outgoings over a period 12 months and include:
- Any capital investments in the business to pay back
- Business loans/car loans/equipment loans
6. Add in your desired profit
How much profit do you want to earn in addition to your wages/salary over the period of 12 months. Is it $30,000, $50,000 or $100,000?
How much profit you want needs to be considered in context with what pricing you could command in the market place. If you’re not sure, I would recommend starting in the middle as you can always increase your prices as you go.
Once you have decided on your profit, this will be included into the pricing formula.
7. Work out the annual revenue you will need to generate
Add up the figures from Steps 4, 5 & 6.
Example: If your business has $120,000 in overheads/costs (which includes your wages/salary), you have other outgoings of $40,000 and your profit goal is $50,000, you will need to generate $210,000 in Annual Revenue.
8. Use the Pricing Formula to calculate your hourly rate
Now that you know the Annual Revenue you need to generate plus your available billable hours, you can now work out how much to charge per hour.
Here is the formula:
Operating Costs + Other Outgoings + Desired Profit
Divided By The Number of Billable Hours
= Your Hourly Rate
For example:
$120,000 (Operating Costs) + $30,000 (Other Outgoings) + $50,000 (Desired Profit) = $200,000
Divided by 1408 (Billable Hours)
= $142.00 Hourly Rate (plus GST)
So now you know your hourly service charge out rate, you just need to work out the other job costs such as materials, the number hours of predicted labour for the job + a buffer (I like to allow a 20% buffer).
8. Other things to consider when pricing your services
- Know your worth – what are you charging per hour, project, or service basis
- Research the market rate to see what are other people in your industry charging for similar services
- To find out if you’re making a profit, you need to track your expenses and profits (overhead expenses + job profits) PLUS your actual hours for each job versus the hours you predicted you would need
- Use a bookkeeping app to track your numbers + profits
We recommend Xero as it’s a robust system that will track your overall business numbers plus the numbers (profit & loss) for each project that you. If you don’t track things, you could be losing money without realising it.
Need some help with your pricing?
If you need help with pricing your services, tracking job costs and tracking your business performance, we offer Free Consultations.
If you’re not currently using a bookkeeping app OR if your current bookkeeping app doesn’t track job costs, we can also talk about how switching over to Xero could significantly benefit your business.
We love helping small businesses adopt new technologies and offer Free Consultations to walk you through what it would take to switch over to Xero and how this can benefit your business.
To take up this offer, CLICK HERE to book your Xero Discovery Session today.
