When you start out in business, one of the most commons questions you have is how much to charge for your services. We hear that a lot from people who are just starting their own small business.
There is actually a pretty easy formula to follow to figure out how much you should charge.
First, you need to decide what your target salary is going to be. Say at your last corporate job, you made $75,000 a year and you’d like to stay at that rate. So, that’s your target salary.
As a small business owner, you now have all these new expenses. You need to calculate all your expenses.
Here are some that you should consider when looking at your expenses:
Office space rent
Website – cost to get it built, cost for a domain and for hosting
Software: depending on your business, you may need software such as project management software or graphics software
CRM (customer relationship management software to track your clients
Bookkeeping and invoicing software
CPA to do your taxes
You also need to take into account those clients that won’t pay you. That’s approximately 2% of your revenue.
In our model, these expenses add up to $23,000 a year.
Actual Salary You Need
Now that you have your target salary and your expenses, add them together and you’ll come out with an adjusted salary of $98,000. That’s how much you need to take in to give yourself a salary of 75,000 and pay all your expenses.
Now you have to figure out your billable hourly rate to get to your target salary.
There are 2,080 working hours in a year. But you’re not going to work (and bill) each of these hours. You’re working for yourself for a little flexibility, so let’s say you’re going to take 3 weeks for vacation instead of the 2 weeks you used to get at your corporate job. That is 120 hours a year you’re not billing for work.
Then there are seven US holidays each year (Memorial Day, July 4, etc.) which add up to 56 hours of non-working hours. Give yourself five days for sick time. That’s 40 hours. You now have a total of 216 hours a year that you are not working.
You’re left with 1,864 hours in which you can work.
But you need to spend time working on your business. You need to send out emails, do marketing, send out invoices, and network to find your next client. This is approximately 25% of your time. Subtract that 25% and you’re left with 1,398 billable hours a year.
Divide your adjusted salary of $98,000 by 1,398 billable hours and round up. You end up with $70 an hour as your billable rate. That’s what you’d have to charge per hour to make your target salary and pay your bills.
If you bill by project in your business, keep that billable hour in mind. Look at your projects and determine how long each will take and make your project fee comparable to your hourly rate.
Now it’s your turn. Put your numbers into this formula and determine how much you should charge.