Entrepreneurs, Small Business Owners – What is Your Time Really Worth?
Written by Josh Davis
What is your time really worth? When you first start a business or go self employed, one of problems many face is not knowing how much their time is worth. If you’re just starting out, you’re obviously going to offer a lower hourly rate that your competition, so that you can get some gigs under your belt, build a client base and portfolio. There are some hidden dangers here that you need to be aware of. By being the “cheap” guy you’re going to get some crummy jobs and crummy clients to go along with them. You’re also at risk of taking a job that starts out small and ends up being double the work because of the typical lack of experience in dealing with clients, expectations, creating scopes and sticking to your guns. We’ll get into that further in a future post.
To find out what you should charge as your hourly rate, you need to break down your expenses – your living expenses, auto payments, equipment, office supplies, credit card payments, food (approx) and gas(approx) for an entire year. Categorize them into personal expenses and business expenses. Do NOT forget to calculate your taxes! If you’re unsure of this number, consult a tax professional or to be safe add your personal and business expenses together and multiply that number by 40%. There is a certain minimum you must make each year to pay for the above expenses. Now you need to add some profit on top of that – What do you want to make this year? $20k? $40k? Add that number with your yearly expenses and you’ll have roughly what you need to make that year.
For example, if your personal costs were $35,000, your business expenses were $10,000 and your taxes were $18,000 then you would need to make $63,000 to stay in business.
Now you need to find out how many billable hours you’ll have for that year. Keep in mind that as a self employed person, you ONLY get paid for the hours you work, where as a salaried employee can surf the net for a few hours a day and still collect the same check each week. Do not think you can bill 40 hours each week, it’s just not possible (unless you’re spending 80 hours in the office and have projects standing in line out the back door) In reality every hour you bill will be accompanied by an hour of non billable work such as accounting, searching for work, calling clients, marketing yourself or surfing the net. Consider sick time or vacations as well. Let’s be really conservative in the following calculation:
(52 weeks – 4 weeks vacation – 1 week sick time) x 5.5 days a week x 4 billable hours a day = 47 x 5.5 x 4 = 1034 billable hours a year.
And you had $63,000 worth of costs. To find your hourly rate, you need to divide that number by your billable hours:
$63,000 / 1034 = $61 per hour
This is just to pay your bills and break even. You need to find out how much you want to make, and factor that into the equation.
You need to study what the competition is charging as well. If everyone else is charging $40/hr and you’re charging $61 you might have a problem.
Always think in terms of your billable hours. If you need to charge $61 or even $40 an hour, think twice about accepting a gig that you can only get for $15 an hour, because you’ve just created a loss in those hours, you didn’t meet your minimum.
Now, this is difficult if you’re just starting out, but you shouldn’t have that many expenses and you’ll likely not have that 4 weeks of vacation time each year which will lower your minimum hourly rate to stay alive.
Josh is owner of iBot Web, a Fort Worth-based company that designs and develops websites and print ready marketing materials, and also owns and operates a photography studio specializing in exotic vehicle & glamour photography. He also is a director for the Tarrant County Entrepreneur Club which holds monthly meetings for small business owners, entrepreneurs and decision makers in north Texas.
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