Most businesses are considered ‘non-employer’ businesses, where the owner is the only employee of the company. Most are engaged in service or consulting industries and derive revenue via billable hours. Yet few really know how to calculate their hourly rate and charge too little.
To determine your hourly rate we first start with the fact that there are 365 days in a year. Subtract from that 104 days to account for weekends, leaving you with 261 potential work days. Subtract from that 20 vacation and personal days plus 9 holidays. That leaves you with 232 days to run your business and earn your money.
Realistically, not all 8 hours of a standard workday can be spent working for customers. You will need time to devote to financial matters, reading email, marketing, office management, etc. Conservatively, these tasks will consume about 3 hours of your 8 hour day, leaving about 5 billable hours per day. 5 hours a day times 232 work days amounts to 1160 billable hours per year.
Next, we need to consider your expenses. In addition to your wages, there are the variable and fixed expenses of the business. You have to estimate your annual variable costs, such as travel costs, self-employment taxes, franchise fees, etc.
Next, you need to account for your annual fixed costs, such as rent, utilities, loan payments, phone, insurance, accounting, legal, etc. as well. Let’s just say your variable and fixed costs account for $20k per year and you desire to make $100k per year. Simple math says that you need to charge an hourly labor rate of $103.45 per hour (($100,000+$20,000)/1160=$103.45).
There is an Hourly Rate Calculator you can download that is based on the above narrative.
Many clients recoil at this number, saying that the rate is just too high for the market. They vow to simply work more hours or reduce their expenses, only to miss their numbers and eventually either be forced out of business or work a ridiculous number of hours per week for a drastically reduced wage just to keep the doors open. Savvy entrepreneurs understand their costs and come up with down-to-earth expectations for the number of billable hours they need to bill to break-even.
