Reflections-calculating a charge out rate.

Service businesses need to etablish a fair and profitable rate.To work this out there are six steps.
1.Decide what income you want.
A before tax income of at least $36,000 .Relate this to a salary,standard of living,investments and a margin for risk.
2.How many hours you can realistically charge out.
Be realistic about the amount of time you can actually charge out in one year.We are unlikely to work 40 times 52 = 2080 hours.Take away holidays and stat days,sick days that gives 46 weeks times 40 hours= 1840 hours.Take away other activities that are non chargeable,tendering,banking,breaks,admin etc.A lot of time can be taken up in this non productive work, as much as 25% of your time.
Take away 25% from 1840 and we have 1380 hours.
3.Work out a chargeable rate to achieve your income.
To earn $36000 divide by chargeable hours 1380 = $26.09
Add the correct ACC levy, say 4% = $27.13
This is the labour component,we also need the office overheads because these costs need to be recovered.
4.Work out your overhead costs.
From cashflow,business plan assume costs like this:
Accounting,advertising,cleaning,depreciation,power,rent,telephone,insurance etc.
Let us assume $20,000 a year and divide by our hours 1380 so that gives us another $14.49 added to our hourly charge out rate.
5.Additional hourly rate to cover overhead costs = $27.13 + $14.49 giving a total of $41.62.
6.Adding a profit margin.
An extra factor to add on top of your salary to be made,in the event of repairs to and replacement of plant and machinery.Without a profit margin these costs will come from our salary.
Be aware how competitive the rate is by comparison to others in the industry.If lower than the industry average we can adjust higher to get closer and can earn a better income.However for higher than average this could mean others have an unrealistic rates and are not aware of the true costs and overheads and may face problems later on.
After a year of business we may be able to calculate more accurately the number of billable hours that we can achieve.Also charging too little for your time and skills can undermine the confidence that people have in you, and can be as bad as charging too much.This is because people may wonder why there is a difference in charge out rates.