Entrepreneurship: hourly rates come from hourly costs

One of the key lessons I’ve learned this year as head of my own service-based company is to figure out my hourly costs to better gauge my hourly rates.  Take all the company expenses (rent, staff, training, hosting, telecom, etc) for the month, add on some level of actual income, divide it by 20 for the daily target, and divide that by 8 for your hourly rates.

So many caveats apply to that formula.  Whatever you pick for the income component, it’s not high enough.  Dividing the month by 20 days means you’re not working weekends.  Oh, and dividing it into an 8 hour day, at least for our purposes, means you simply break even if you actually spend 8 hours a day on billable stuff.

But it’s a start.  And you know what happens?  You find out a baseline number, that’s unrealistically low while possibly seeming impossibly high, but yet it’s the hourly rate below which you simply can’t work without giving your money away.  If the number works out to $45 and you find yourself offered a $35/hour gig (numbers picked out of a hat to serve a variety of industries,) you now know that you simply can’t afford to take the job unless there’s something in it that you’re willing to pay $10/hour for the privilege, or you’re going to work overtime to make up the difference.

From there, magic things can happen.  And lots of things can’t happen, which, if you’re the kind of person who has trouble saying no, is a magic all to itself.

This is also an accelerator to moving into alternate revenue models.  Once you start to think about the value of an hour, if you can come up with products or services that don’t take direct work, or that leverage your time through groups or other mechanisms, all with the goal of covering some of those hours so you don’t have to, so you can spend the time doing transformational things that’ll bring in even more business.

Whether you’ve gt a job or a company, figure out your hourly rates.  Your real costs, that you have to cover in a 40 hour week.  The decisions you make after that might surprise you.

Photo by mcbarnicle