What’s an hour of your day worth to you?
Regardless of your business model – whether you are building a product or providing a service, unless you charge by the hour, you probably have no idea what 1 hour of your time is worth.
This is a mistake! Your hourly value is an asset – and it is not to confused with or blended into your salary. Although related, they are different.
Your salary is how much your business pays you for your services and production.
Your hourly rate tells you what 1 hour of your time is worth. And this number is worth its weight in gold.
If you already sell your services at an hourly rate, then you’re ahead of the curve. You have an exact number which tells you whether or not a job, a particular service, or a client’s specific request is worth accepting. You are already using this number to make swift and painless business decisions.
THERE ARE 2 BIG REASONS YOU NEED TO INTERNALIZE YOUR HOURLY MONETARY VALUE
Delegation – You need to know intuitively when it is better to delegate a task to someone else. If an independent contractor or employee can do the task cheaper, and just as well, then it’s time to delegate.
Deletion – You also need to know when a task just isn’t worth your time. Busy work makes you feel like you are being productive but doesn’t provide the return on investment of time spent.
When you know the dollar value of an hour of your time, you can easily apply it to assess if any job or service is worth doing yourself, delegating, or not doing at all.
SO HOW DO YOU FIGURE OUT YOUR HOURLY RATE?
If you’re already charging an hourly rate for your services, you’ve done the math below and set yourself up for success! Easy peasy!
If not, here’s the steps to take to help you figure it out.
If you were recently working in the same sort of position for someone else, or you already know the going rate of a professional in your field, then you have a good basis for determining your hourly rate. This may not be your exact rate, but it gives you an idea of where you should be.
Figure out your business costs for the year. This is when up-to-date bookkeeping comes in handy. This will include all your business expenses like employees, supplies, equipment, and all other money-out transactions you have in a year.
Total your personal expenses for a year. This includes things like groceries, utilities, trips, housing, etc. In other words, the sum total of the money it takes for you and your family to live the life you’re accustomed to.
Don’t forget to include your income taxes! It’s normally recommended to set aside 15-20% of your income for taxes.
Determine how many hours you plan to work in a year. 40 hours a week X 48 weeks = 1,920 hours. I’m using 48 weeks as a base since I’m assuming that you are taking some vacation time for holidays and yourself.
The basic formula with examples:
Part 1 – Expenses – Total Costs of Living
Business expenses $40,000
Personal expenses + $65,000
Taxes (20%) + $21,000
Total expenses $126,000
Part 2 – Hourly income needed per Expenses
Total expenses $126,000
Working hours ÷ 1,920
Hourly Rate $65.63/hr
Note: This number – your required hourly rate – is the very minimum you would need to generate in order to meet your overhead based on these expenses. Your numbers may look very different depending on your business, lifestyle, and expected working hours.
Bottom Line: Your minimum required hourly rate is the minimum required hourly amount you need to charge (and quote) for all service-related work in order to maintain your business and your personal quality of life. However, this above rate doesn’t include the amount of profit your business needs to generate in order to re-invest in growth.
So, use this number as a base, then play around a bit to see what you would need to earn per hour to make your desired profit – either as a percentage (15% for example) or as a dollar amount (approx. $19,000 based on the above example at 15%).
Also, before you finalize your hourly value or rate, make sure it is comparable to your industry’s or profession’s standards. This information is normally available somewhere on the web; industry association websites are a good place to start.
Over the years, Still Waters Bookkeeping has noticed that some business owners and professional service providers struggle with defining and holding to their true hourly value without solid financial to support and show them why it’s vital to do so.
If you feel you may fall into that category, please reach out to schedule a free initial conversation with me personally.
I’m here to help you get a true, current grip on your financials so it’s more natural for you to calculate, accept, and adhere to your hourly value and your required hourly rates.