How much should I charge per hour?

Charging the correct hourly rate can be a balancing act when you are starting out in business. You need to cover your costs, make a profit but still be able to compete with more established businesses. Here is a guide on how to work out the best hourly rate.

Work out your desired wage

If you've read our article How much should I be paying myself? you would know how much you should be earning from your business. 

For the sake of this article I am going to say 100k to keep it nice and simple. That 100k is the desired net profit of the business - so that is at the end of the financial year after all the costs of running the business have been taken out there is 100k left for you. 

Work out your overheads

In addition to your earnings your business needs to pay all the overheads that you need to pay out to stay in business. These may include but is not limited to:

• Licenses & Permits
• Business Name Registrations
• Company Fees and Registrations
• Rent
• Insurance
• Light and Power
• Telephone and Internet
• Bank Fees and Charges
• Office expenses

Calculate how much all your running expenses will cost you for the year. We are not accounting for any materials here - we are assuming you are charging materials separately.

Turnover required

So now that we know the desired profit plus the cost of running the business over the year - we have a figure for the projected turnover. For this example we will say it's 100k desired wage plus 15k to run the business. So we set our turnover at 115k. 

Work out your non chargeable hours

Running a business always involves working hours you can't charge out. Whether that be the time spent on administration duties or writing quotes - before you can work out your chargeable hours you need to work out your non chargeable hours. What you want to know is how many of these hours you spend in any given year. Here's a simple excercise you can do:

Start at the beginning of a typical workday and add up all that time you spend fielding calls, paying bills, booking in jobs and/or sending emails that you can't charge out. Don't forget to add in tasks you may only complete on an ad hoc basis such as meetings with accountants and lawyers. 

If you're still stumped start from when a potential customer first makes contact and work your way through your work flow to any after sales service procedures you may be using. Then average that out with how many jobs you book over any given time frame.  

Work out your chargeable hours

Now you need to work out how many hours you have available to charge out. There are 52 weeks in a year of which you need to subtract annual leave and sick leave 

Divide your turnover by chargeable hours

Now you simply have to divide your turnover by the amount of chargeable hours you came up with in the previous step.

In this case it is 115k/1472 hours which would give us $78.125 per hour of which I would round up to $80 or even $85 an hour to allow for any unforeseen contingencies.

Ensure your rate is competitive

Once you have worked out your hourly rate - it makes good business sense to compare it against other established business's in your profession. There is no use charging a rate that is not competitive... you may need to drop your price and bump up your working capital reserves to cover you until you are in a position to be more competitive.