Covering the bases

When I first started out in my consulting business I found it quite confronting to charge an hourly rate that was high enough to cover the bases. I started with a lower rate, and quickly discovered it wasn’t enough, but I found it challenging to raise it, mostly due to my perspective on what the rate “meant.” I found a simple trick to help me shift my perspective, and better work out what I needed to charge to make the business stack up.

I was talking to one of my mentors and he pointed out that I was linking my hourly rate to my sense of self-worth. Am I really worth that much? Who am I to ask that much for one hour of my time?

He said he’d found the same thing when he first started out, and some advice he’d received had helped him.

The trick is to think that you’re not getting paid for the hour you are spending with your client. They are paying for all the other things that need to happen in order for you to be there, to be present and delivering to your client’s needs, in that hour.

It’s a simple, and subtle, trick. But over time, it has become more natural for me and I’ve been way more comfortable charging an appropriate hourly rate that covers all those expenses. It also helped when I started thinking about expanding and taking on another employee. To think of the business as “more than me.”

That’s the conceptual trick, to shift perspective. But there’s a practical outplaying of this principle as well. To do this, you have to have clarity on your overall budget—how much does it cost you to run your business each year?

I discovered that I didn’t really have a handle on this. And in talking to a number of friends and colleagues over the years who are starting out on their own, it seems to be a fairly common thing.

This includes things like insurances, travel, marketing, accounts, software you use, your computer (assuming you use one in your work,) your wage (if you pay yourself a set salary) or life expenses (if you’re a sole trader that doesn’t pay yourself a fixed amount each week/month,) but also those “invisible” things like your time off, or lull periods in your work (July, Dec and Jan used to be pretty quiet times for me, due to holiday periods impacting available work.) And, of course, working out your anticipated tax on the income you generate (how this works will depend on how you run your business, but it’s easy to forget!)

Once you’ve added all that up, you can then work out how much time you realistically can spend each week doing direct “chargeable” work. That is, the ones with a dollar figure next to them on an invoice you issue to a paying customer.

FWIW, I found that when I factored in new business development, accounts, travel, learning time, and everything else, I on average achieved 3.5 solid days of “billable hours” each week. It varied of course—some weeks busier, some weeks slower—but that served me well for my calculations.

Then it’s simple division, total expenses/hours, with a little buffer to accommodate overruns, slow months etc.

By example:

Let’s say you work out your annual costs are $80,000.

And you determine you can do 30 hours per week billable.

And you want to allow yourself the typical 4 weeks off per year.

30 hours x 48 weeks = 1,440 billable hours per year.

$80,000 divided by 1,440 = ~$55/hour.

Of course, your final rate needs to be aligned with what your customers and clients are willing to pay. But at least you know if they aren’t prepared to pay enough to cover those expenses, you need to rethink things…

Not only is this a good way to help ensure you’ll make ends meet, but it also means that when you are confronted by that inner voice (critic?) that says “you’re not worth that much,” you have an answer. “It’s not about that. It costs $55/hour to cover my business’ costs, so I can be here, doing what I love and serving my customers.”