How much should I charge per hour?
Before you start reading this blog, you can download a free spreadsheet template to help you calculate your hourly rate. It is in £ but as there is no conversion needed, if you’re using another currency just look at the values.
I see so many people ask this question, especially those just starting out on their own. They ask others what they charge, they try to find out what the ‘industry standard’ is, but they very seldom actually work out what they need to charge. Yes, you can check out what others are charging, but first you need to establish what you NEED to charge. I’ll try and explain what I mean by that, and how you can do it.
I suggest you download the free calculator and use that along with this blog, I think it will really help. There is a demo video too if you’re not sure how to use it.
Alright, let’s get started on the theory behind the calculations.
You don’t earn money all the time you’re working.
So many people don’t consider this. They assume they’ll be working 8 hours a day, and simply divide the salary requirements by the hours. I recently did a poll on LinkedIn and asked people what percentage of the work they did was actual billable work. Most said less than 50%. That means that many people only bill for less than half the hours they work! So, here’s what you do. Plan a typical week and see how many hours you need to work each day. Work can mean any kind of work for the business. It could be billable work (work where you charge per hour or at least charge per project where you have allowed for those hours). That’s the work that you include in the hours when you’re working out your hourly rate. What you don’t include are hours where you work on the business, unpaid client work, working for the business (not billable) or breaks. All of these add up.
Working on the business, like marketing, advertising, content creation, planning, etc. This takes up much of your time, and yes, it brings in work, but it is not being paid for directly. Unpaid client work is not just pro-bono work, but also things like initial meetings, quoting, etc. You can often underestimate how much time can be used before you actually start charging a client. Working for the business can be things like accounting, admin, legal obligations, etc. Things that the business requires of you but are not client related and are not being paid for. Then you also need to consider breaks that you take (lunch etc). These may not influence your working hours, but they do come into play when determining when you can switch off for the evening.
Once you’ve taken all of these into consideration, you can start to see what will be required of you with regards to your working week. You will also see how many hours of paid work are actually going to be funding you. Even this information can be an eye-opener. You may not get this right off the bat. In fact, I can almost guarantee that you won’t. It is just an important exercise to actually think about this. It is then useful to track this when you are actually working, so that you know what to aim for.
The other things to consider (which are on the spreadsheet) is annual leave and sick leave. You don’t get paid for those, so they need to be accounted for. You can subtract these hours from the billable hours (see the formula below). Also, do you plan to work bank holidays? If not, you need to take off for that. Depending on where you are, that could be more than 2 weeks of work.
Here is the initial formula: 52 Weeks in a year less the number of weeks off for leave or sickness (and bank holidays) = Billable weeks per year. Multiply that by the number of billable hours per week. That will give you your billable hours per year.
Your business has costs and overheads.
This is the second part of the equation that you need to consider. You want a salary out of this venture, but before you get to that, you need to pay the business expenses. So, what do you think you’ll have as business expenses (excluding your salary) in a year? Software, insurances, accountant fees, affiliation fees, rent, and any other expenses all need to be accounted for. Make a list of these expenses and work out the annual total.
Now you know what your business costs will be.
Now we can do the maths (for those who are not using the spreadsheet).
Add the expected (gross) salary to the expenses. Then use that figure and divide it by the number of billable hours in the year (above). That will give you your hourly rate!
There are a few things to remember.
This is not an exact science. You may not work all the hours that you have predicted, especially when you start. You may have some unexpected costs, you may work some unplanned hours on the odd weekend, you may have to take some lower paid work from time to time.
Another useful exercise to do is determine what you will be paid if you work at 80% volume, or 50% volume, so that you know what you’re in for when work is not flowing. The formula above works out your hourly rate if you are working as per your structured week. I find some weeks I work as planned, some weeks require overtime, and some are completely dead. Yes, you can do the ‘unpaid’ work during the quiet times, so you could in theory do the paid work when it gets busy, but it does not always fall nicely into place.
If you are VAT registered or have to add some kind of tax if you’re in another country, then this hourly rate needs to be excluding such a tax. As you use your gross salary as a target, any personal tax would come off after that, but you would have taken that into account using the gross salary to begin with.
I hope that has helped you to better understand what you need to charge per hour. If you still compare rates with others, that’s fine, but at least you know what the going rate will mean to your bottom line. You need to be clear on what you need to charge to make what you need to make. That is the best starting point. You can then either lower your rate or increase the value of what you offer in order to charge your required rate.
If this has helped you, I have also written a book for new business owners. Please click the image to see more about that. Otherwise, I wish you all the best. If you ever need a spreadsheet for your business, you know where to find me.
This post was written by Richard Sumner, who is the owner of Spreadsheet Solutions. Richard makes custom spreadsheets for most applications for businesses of all shapes and sizes. He has also written a few eBooks, this one in particular is for new business owners and those looking to grow their business. Click on the image of the book to see what formats it is available in and where they can be purchased.