Whether you are starting a new SME or own a SME with 20 service technicians, it’s extremely important to truly understand what your costs are for each person in order to bill your clients appropriately – allowing your business to grow without being greedy or making a loss.
Calculating your hourly rate when working in the service industry where you either sell your own skills or that of others can be rather challenging, as there are no physical products involved. By accurately calculating your total labour costs and overheads, you can divide it by the number of hours these employees are doing billable work giving you the basis of what you need to charge.
We’ve taken the time to not only provide you with a detailed-break down of the various factors and expenses that affect your hourly rate, but we’ve also prepared an excel template already setup to calculate your hourly rate. All you need to do is fill in the values.
Calculating Labour Costs
Labour rates or costs are employee-based expenses, these expenses do not only include the salaries paid to employees but also their health benefits, vacation pay, pension and retirement payments, social security, PAYE, etc.
To accurately calculate the labour cost of your employees you need to add up all annual payroll-based expenses and divide them by the number of months the employee is actively working per month.
It is important not to include support personnel, like accountants, office manager, or receptionist as they form part of your monthly (or annual) business overheads.
Kindly Note: The iWits SME Hourly Rate Calculator does not include a detailed Labour Cost Calculator; this calculator will be made available on this blog in due course.
Calculating your Overheads
Overhead represents all of the expenses a company must pay over and above Labour Costs. To determine annual overheads, add all of your company expenses, like building lease costs, property taxes, utilities, support staff salaries, etc.
There may be overhead costs related to specific service projects, like equipment rentals, but these should be kept separate from the businesses overheads as they can be included in an invoice as an independent cost, similar parts used in a repair.
Total Billable Hours
If you run a one-man show, doing all of the service work yourself, you can calculate your total billable hours by multiplying 6 workable hours per day with the number of days per month you are able to work. International standards state that the average days worked per month is 22. (E.g. 6 Hours per day * 22 Days per Month * 1 Employee = 132 workable hours per month)
If you run a business with several employees performing the service, you need to calculate each employee’s workable hours by multiplying the number of employees by 6 hours per day with the number of days per month. (E.g. 6 Hours per day * 22 Days per Month * 5 Employees = 660 workable hours per month)
In addition to calculating your hourly rate based on your total Labour Costs and Overheads, it is important to add a sensible profit margin to your rates. The profit margin is it assists in the growing of your business.
Determining your profit margin is, unfortunately, not as straight forward as the rest. Profit Margins depend on the industry you are in and the skill levels you offer. If you are starting a new business using junior technicians your profit margin will be lower than that of an existing business using skilled technicians.
Calculating your Hourly Rate
To calculate your hourly rate we are going to convert all figures to annual figures, ensuring that one unit of measurement is being used. By basing the calculations on annual expenses and profit margins you are sure to cover all expenses (the expected and un-expected).
When you add your Annual Labour Costs and Annual Overheads together, you get your total Annual Expenses. Once you’ve determined your expenses you can calculate your profit by adding a set percentage to your annual expenses. (e.g. N$ 10,000.00 Annual Expenses + 10% Profit = N$ 11,000.00)
By adding your Total Expenses and Total Profit you can determine what your Annual Turnover should be. After calculating this you can determine your hourly rate by taking your Annual Turnover and dividing it by the total billable hours for all employees.
iWits SME Hourly Rate Calculator [Services]
Not in the mood to create your own excel sheet to calculate your businesses hourly rate, why not use the iWits SME Hourly Rate Calculator.
We have formulated a SME Hourly Rate Calculator Excel Template which will assist you in making the hourly rate calculation.