One of the hardest problems new business owners face is determining how much to charge for any job. A $500 job is a $500 job, and you won?t be able to get most folks to pay you $600 to do that job just because you are not as fast and efficient as the next guy. It is up to you to get good and efficient, in order to make your hourly earnings hit the right level so that you can make a living and potentially get ahead.
One element you need to know is what to target in hourly earnings so that you can pay all of the bills and make a buck at the same time. We have been preaching to contractors for years that their hourly target ought to be in the $100 range, because our experiences showed us that getting much less than that amount meant not surviving in business.
What is your hourly target for revenues? One thing is for sure ? we can?t figure that out for you. No two businesses are alike in this figure. All we can do is help you think about how to figure out your ideal target.
Any basic Business Plan requires you to look at your business from an hourly ?break-even? amount, similar to the way we have below. Take a look:
? If my business insurance costs $500 per year
? And my truck costs me $500 per month
? And my vehicle insurance costs $1500 per year
? And I spend $10,000 each year on advertising
? And I am spending about $10 per hour on fuel for my equipment.
? And I spend $800/month on rent and utilities
? And the telephone costs $200 per month
? And I spend $600 per month on gasoline for my truck
? And I want to make $50,000 as my base salary (which is around $37 per hour for 1500 hours, with taxes and stuff)
? PLUS I want a profit of $25,000 per year in my business for my bonus at the end of the year (as a reward for hitting these numbers)
? And I need to set aside about $3000 per year for repairing or replacing equipment
? And accepting credit cards costs me 2% of what I sell
So how much should I charge per hour?
To start with, most of us do not manage to earn income for every hour we invest in our businesses. We give away free quotes (which actually cost us a small fortune to do) and we need time to create ads and collect debts and pay bills and the thousand other things business owners do.
Besides, many of us lose out to days of bad weather and the personal issues that come up from time to time.
So we are lucky to be able to bill somewhere around 1500 hours every year with our one-truck shop. This means that we expect to average 125 hours (billable) per month. Now that we understand this, we can apply the costs and determine our target hourly charge.
? For example, spreading the $500 for business insurance over 1500 hours means we need to get $0.30 per hour for this item.
? If my truck costs $500 per month, then I need to get $4 per hour to cover this item.
? If my vehicle insurance costs $1500 per year, then I need to get $1 per hour to cover the cost.
? If I spend $10,000 annually on marketing, then I need to include $6.67 per hour to cover this amount.
? If I spend $10 per hour to run my equipment, this has to add to our hourly rate.
? If I spend $800 for my shop rent and utilities, that breaks down to $6.40 per hour.
? If I spend $200/month for my telephone expense, then I must add $1.60 to my hourly charge.
? If I spend $600 per month on gasoline, then I am adding $4 per hour on to my hourly rate.
? If I want to make $37 per billable hour for my base wage, then I have to add that amount to my hourly charge).
? If I want to set aside a year-end bonus of $25,000, then I need another $16.67 on my hourly rate.
? If I plan to set aside $3000 towards equipment replacement and repair, that comes to about $2 per hour.
? If some of my customers pay by credit card, then I only get 98 cents out of every dollar I collect.
The costs used in this example tell you that you must generate at least $91 per hour for every billable hour you work, plus whatever materials cost you. And you had better be able to bill for at least 1500 hours or you will fall sadly short of the target.
If you spend about 25% of what you take in on cleaners, sealers, and supplies, like most deck guys do, then we can determine that you must charge approximately $122 per hour in order to meet your business planning numbers. If what you do is clean houses and driveways, you probably will only spend about 6% on cleaners and supplies. Then I only have to average $97 per hour to make my numbers work.
Obviously, if I don?t hit this hourly average charge, my $25,000 annual bonus is going down the drain. If you don?t hit your target two or three years in a row, a good counselor might suggest that business ownership is not for you.
The number we have reached here is a hypothetical one. You might spend more or less on any one of these budget lines. The important thing is that you do at least this much planning every year, with a clear idea of what you need and what you want as a business owner.
You have to do some homework like this every year to help you make the right decisions on what to charge for every hour you bill for. I remind you each year around this time to do some sort of a Business Plan. You can get as detailed as you want in this Plan (and, in fact, the more detailed you are the better). In the end, however, if this is all you do to prepare your self for another year of business ownership you will likely be ?successful?. Chances are that you are doing more to prepare yourself for business than your competitors are doing.
One other point: whatever your Business Plan predicts will be ?wrong? to some degree. None of us is perfect at predicting how many times the phone will ring or when it will rain. What we can do is be prepared, be professional, and be ready to adjust our Plan as we go through the year.