Balancing Act

So there I was working with a client who is getting ready to start their own business. We were covering many of the usual things that you would associate with a new start up. Things like where will I find clients? How should I set up my business? Then she asked one of the most important questions; how much should I charge my clients?

If you own your own business, then you know that this is one of the greatest challenges you will face. As we learned in our economics class: Set your price too high and you will not have enough demand. Set your price too low and you might be busy, but that does not mean you will be making enough to survive.

So what is a business owner to do?

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One of the first things you can and should do is ask similar businesses who are in your community what they charge. It may surprise you how many people will give you this information if you ask politely.

Beyond researching your industry and your community there are three other critical calculations you should look at to determine your prices.

1. The 60/30/10 Rule.
Using this rule we are going to assume that you will spend approximately 60% of your time on client work. You are going to spend about 30% of your time on business development, sales and marketing activities. Finally you will probably have to dedicate about 10% of your time to managing your business.

So we will assume that you are working a 40 hour work week and that between holidays, vacation and professional development that you have 48 work weeks in a given year. With these assumptions, you will be working 1,920 hours per year.

With 1,920 hours per year available to you, your work will break down to the following number of hours per year:

60% or 1,152 hours are billable hours.
30% or 576 hours are going to be used to find new clients.
10% or 192 hours will be spent on management of your business.

So you have 1,152 hours to make hay. How much did you make at your last job? Include all of the benefits you had like health insurance etc.

That amount should be divided by the 1,152 hours to arrive at your hourly rate. So if my client needed $57,600 per year, she would have to charge $50.00 per hour.

Another quick and dirty way to arrive at an hourly rate is to take your salary that you earned from your last job and divide it by 2080 hours (40 hours per week x 52 weeks per year). What number did you come up with? Now double that number.

Essentially this is a quick way of accounting for the benefits and other amounts you will have to spend on things like self-employment tax.

So for my client who earned $57,600 per year, she would take $57,600 and divide by 2080 hours. This would give her an hourly rate of $27.69 per hour. Then she doubles the $27.69 to arrive at an hourly rate of $55.38 per hour.

The last method we will talk about here is based on what you need to pay your expenses.

Lets assume that in a given year (365 days) that you are taking weekends off (104 days) and that you are taking another 40 day off for vacation/holiday time and personal development. You are left with 221 work days per year.

Let’s take another 66 days and devote those to getting new clients. You now have 155 days that you can earn money.

Now take your basic living expenses, along with those of your business and taxes and divide this by 155 days. This will give you your daily rate. Then take the daily rate and divide by 8 hours.

So for my client who made $57,600, she would need to earn approximately $74,880 to account for 30% taxes ($57,600 x 1.30% = $74,880)

She then has to divide $74,880 by the 155 days that are available. In her case, she needs to make $483.10 each work day. On an hourly basis, she would need to make about $60/hour.

My suggestion is to use all three methods to get a ball park estimate of what you need to charge. This is also a great way determine if your business is capable of meeting your financial needs.

Have a question or a comment? Please feel free to write me at jrosen@rospro.com.