Many service businesses find establishing a fair charge-out rate difficult. Here are some guidelines on establishing a fair but profitable rate for your business.
HOW TO WORK IT OUT
These are the 5 basic steps you need to take to work out a charge-out rate for your time:
1. Decide what income you want from your business
2. Work out how many hours you can realistically charge out per year
3. Work out a chargeable rate to achieve your income
4. Work out your overhead costs
5. Add a profit margin
1. DECIDE WHAT INCOME YOU WANT
Assume you want an annual income of at least $48,000 (before tax) from your business. This figure could be related to the standard of living you want or what you could earn elsewhere as a salary.
2. HOW MANY HOURS CAN YOU REALISTICALLY CHARGE-OUT?
When you’re selling your knowledge, skills and services, you’re effectively selling time. The key point here is that you have to be realistic about the amount of time you can actually charge out during any one year.
This is how it’s worked out:
| Weeks x Hours | Total Hours | |
| Total Year |
52 x 40 |
2,080 |
| DEDUCT | ||
| Holidays |
3 x 40 |
120 |
| Public Holidays |
2 x 40 |
80 |
| Sick Days |
1 x 40 |
40 |
| Total Hours to Deduct |
240 |
|
| Balance Available |
1,840 |
|
| Less Non-Chargeable Tasks |
Say 25% of your time |
460 |
| TOTAL CHARGEABLE HOURS |
1,380 |
|
3. WORKING OUT YOUR CHARGE-OUT RATE TO COVER YOUR INCOME NEEDS
| Annual Desired Income |
$48,000 |
|
|
Divided by Chargeable Hours |
1,380 |
|
| Hourly Charge Out Rate |
$34.78 |
|
| Add Appropriate Industry Levy |
Say 4% |
$36.50 |
So in order to earn a salary of $48,000 a year, you must at least charge your time out at $36.50 (rounded up). But this is only the labour component of your charge out rate. You still need to recover your office overhead which takes us to step four.
4. WORKING OUT YOUR OVERHEADS
You should know what your overhead costs are from previous profit & loss statement or if you are a new business from your business plan or budgets.
Let’s assume, for this exercise that they are something of this order:
| Accounting Fees |
$1,000 |
| Advertising |
$2,000 |
| Cleaning |
$500 |
| Depreciation |
$1,000 |
| General Expenses |
$700 |
| Electricity |
$1,000 |
| Insurance |
$600 |
| Legal Fees |
$800 |
| Motor Vehicles |
$3,000 |
| Printing |
$800 |
| Rent |
$6,500 |
| Repairs & Maintenance |
$900 |
| Telephone |
$1,200 |
| TOTAL |
$20,000 |
$20,000 divided by the 1,380 chargeable hours means you need to add another $14.49 to your hourly charge-out rate of $36.50.
5. ADDING A PROFIT MARGIN
In addition to making your target salary of $48,000 you also need to make a profit margin to cover you for replacement costs of equipment and repairs as you don’t want to be taking this out of your salary.
So the final calculation is:
| Charge-out rate to cover your income requirements |
$36.50 |
| Charge-out rate to cover your business overheads |
$14.49 |
| Sub-Total |
$50.99 |
| Profit Margin (say 15%) |
$7.65 |
| Final charge-out rate |
$58.64 |
This means that your charge-out rate should realistically be at least $58.64 an hour minimum.
| THINGS TO CONSIDER |
| Is the rate competitive? |
| Is it lower than average? |
| Is it higher than average? |
| Do you lack confidence and undersell your services? |
| If your rate is well above average, you might need to look at emphasising the value-added components that justify the difference. |
