How do you charge your clients? Many businesses charge for their services by the hour. Tradespeople are a good example, or virtual assistants, lawyers and consultants. But are you charging enough to meet your expenses?
Many people believe that taking on more staff to do the hourly work is the only way to grow these types of businesses. You only have so many hours in the day to be able to humanly complete the work available, so they turn to more people as the answer.
But adding to your team is not necessarily the only way to scale your business. Once you understand the profitability of your business, and in particular the break even point of your hourly rates, you can then determine the best course of action.
Here’s a quick way to figure out your profitability if you charge by the hour.
ONE: How many hours do I need to work to cover my expenses?
Let’s dust off your last yearly profit and loss statement. If you don’t have one, pull out your last tax return.
Write down your total expenses figure. Divide this by your current hourly rate.
Total expenses per year / Hourly Rate = Number of hours to work in a year to meet expenses
Great! Now let’s take this one step further.
TWO : How many weeks or days does this equate to?
Now you know how many hours you need to work in a year to cover the cost of all your expenses, let’s see what that means on a weekly basis. Think about how many weeks you would like to work each year. Hint: It won’t be 52 unless you don’t like taking holidays! Take the number from the previous step and divide by your desired number of weeks to work in a year.
Number of hours to work in a year / desired number of weeks to work = Number of hours to work in a week to meet expenses
This gives you some great insight into how you can spread the hours across your week and whether in fact you have enough hours available to meet this requirement.
THREE: You’ve now got your breakeven point
Congratulations! You’ve worked out exactly how many hours you need to work each week as a minimum to cover your expenses. You won’t have any funds left over to reinvest into your business, or be able to pay yourself at this stage, but you’ve got the expenses covered which is a great first step.
FOUR: Can you make a profit?
Absolutely you can! What was your answer in step 2? Can you reasonably work more hours than this in a week? You can work out your potential profit by multiplying the extra hours available by your hourly rate.
Extra hours in the week available x Hourly rate = Profit per week
If you’ve found by doing this exercise that you can’t reach breakeven point, don’t despair. You could look at increasing your hourly rate, decreasing your expenses or even change the way you are charging from hourly to package rates. But more on this in the next blog!
If you’re looking at ways you can improve your financial position, then my 5 Pillar Financial Audit can help you quickly and easily identify opportunities for promotion, changing your product mix, pricing and potential savings. Sign up here for 50% off or send me an email. Let’s get you back in front of your finances again.