How did you originally set your pricing for your business?
Did you base it off what other tradies in your area were charging?
Do you feel that you are working long hours, however, still struggling to get ahead financially?
The number one reason for business failure is due to incorrect pricing. For a lot of tradies, little thought goes into the calculation of their pricing or charge out rates. This means the business owner is guessing, or in other words, gambling their investment in the business. Incorrect pricing negatively impacts your profitability and cash flow, as well as increases the number of hours you have to work.
Calculate your charge out rates with the ‘end in mind’ and ask yourself the following four key questions:
- How many hours a week do I want to work?
- How many productive, or billable hours will each employee generate for the next 12 months (taking into account lost hours for annual leave, travel, meetings and lost time?).
- How much profit do I want to make over the next 12months?
- What is the overhead expense required to conduct my business for the next 12 months (non-income earning staff/office/vehicle/insurance/marketing).
What are your paid hours per week and actual billable hours per year?
|Hours per week||40||Paid 40 hours for 52 weeks = 2,080 paid hours annually|
|Bill – billable hours||1,232||Less Leave, Holidays, Travel, Meetings, Lost Time, Admin|
|Ben – billable hours||1,232||Less Leave, Holidays, Travel, Meetings, Lost Time, Admin|
What are the numbers?
|Bill||$67,954||Income earning staff (Including superannuation)|
|Ben||$47,079||Income earning staff (Including superannuation)|
|Net Profit||$100,000||Target Before Tax|
|Overhead Expenses||$78,860||Non income earning staff, office, vehicles, insurance, equipment, marketing, professional services|
|Total||$293,893||This is the amount required to be charged out in labour|
The required hourly charge out rate…
|Bill||$140.92||Hourly charge out|
|Ben||$97.63||Hourly charge out|
|Bill||$140.92 x 1,232 hours = $173,613||Labour income generated|
|Ben||$97.63 x 1,232 hours = $120,280||Labour income generated|
Final point: your take away:
- Ask yourself the four key questions.
- Calculate your hourly charge out rates per employee.
For more information on our programs to develop your business skills,
call us on (02) 8011 4855 or 1300 665 922 or request a free strategy session