Sunday, 17 December 2017

Information and commentary for the small business banking industry

Help your small business customers calculate a charge-out rate

14 Oct

Profitable and realistic

An all too common mistake small business owners make is not properly calculating a rate for their service. This is especially important if their business offers a service that sees the business owner and their employees most often at their clients’ homes.

You might have a small business customer who’s concerned that they haven’t figured their charge out rate correctly – they might be just using a rate that everyone else charges, instead of actually figuring it out correctly. It could be that increasing that price just by a small amount could make all the difference, but there’s a few things to take into consideration first.

What to take into account

One of the first questions to ask your small business customer is what income they want. They should think about the standard of living they want, or what they might make elsewhere. Using that information you can help them decide on an annual salary. We’ll assume a base salary of $80,000.

It’s time to crunch the numbers to find out if what they want is realistic:

  • The first thing to decide is how many hours they can work in a year. A base number of 40 hours a week, 52 weeks a year (2080) is not feasible because it doesn’t take into account holidays, sick days and all the hours they’ll spend on administration and travelling. Deduct 160 for 4 weeks holiday, 40 hours for one week of sick days, 450 non-chargeable hours (travel, admin etc), and you’re left with a more realistic figure of 1430 hours. That means they’d charge $55.95 per hour… but that’s just covering their income.
  • Then it’s time to factor in the cost of overheads vand all other costs that have to be covered by the charge-out rate. We’ll assume a figure of $50,000 for the year (power, rent, advertising, expenses, marketing, repairs etc). $50,000 divided by 1430 hours means you need to add another $34.96 to your income charge, bringing your new hourly rate to $90.91 per hour.
  • Finally, there’s the profit margin. There’s not much point in figuring out the rest if there’s no profit to be made – your customers aren’t in business for themselves just to break even. So if we assume a profit margin of 15% the final charge-out rate should be (rounded up): $104.55 per hour.

Using these figures you can then help your small business customers decide on a new charge-out rate that will see them achieve their goals. Is that rate competitive? Does it compare to others in the industry? If they’re lower than average, then there could be an opportunity to increase the rate even more. But if the rate is higher than average, a review of the figures is probably a good idea to decide if everything is realistic.

With your help, calculating an accurate charge-out rate doesn’t have to be a daunting task, and no-one needs to be a mathematical whiz. However it’s important that time is taken to work out the figures properly. The better these calculations are, the more accurate the charge-out rate will be.

Here at TSBC, we can offer you great content around calculating charge out rates, pricing strategies and more. Contact us on sales@tsbc.com to find out how we can help you.

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