Mistakes I Made

Mistakes I Made #3 – Not understanding how much I really cost. It makes all the difference.

So, by now you know that I love expressions and positive quotes, it gives me a bit of nourishment for my soul.

So, on that note- have you ever heard the expression, “Until you value your time you’ll do nothing with it”?
Well my version is a little bit different, it goes something like this; “Until you know the value of your time, you won’t charge the right amount for it.” Jot that down why don’t you… It’ll come in handy in a minute.

When I started with my business, I wanted to make $100,000 per year. To me, if I did that, I made it.

But let me show you the math:

• Goal: $100k per year.
• Divided by 52 weeks a year = $2,000 a week give or take.
• Divide by 45 working hours a week = 44 bucks an hour.

So, in my mind, if I could charge $100 per hour I’d make $200k per year!

That sounded like a lot to an 18-year-old. I thought 38 hours a week, the standard ‘working week’ here in Australia multiplied by $100 per hour = $4k a week and $200K a year. Whaaaatt. I was off and running to becoming a super successful businessman!

Boy how I was wrong. (Facepalm).

Having now realized the mistake I made, I realized my maths was way off.

Why, because a lot of business owners calculate the hourly rate by adding the hourly rate of what they want to earn and then adding a bit extra for things like cars, mobile phones and a few other bits & pieces to find out their cost and then add what they believe their profit margin should be.

I had employed a designer who was being paid $60,000 a year.
At $100 per hour and 38 hours a week, 52 weeks to a year, my ‘scribbled’ math put that as 3 to 1 so plenty of room for profit. Right?

Wrong! Turns out he was pretty much a ‘break-even’, and if we had to do a job twice, aka what I call ‘mess-up time’ we were losing money.
And that happened more often than you would expect. Not always due to our error, but clients change their minds, add requirements etc. etc.

So how did I calculate their true hourly cost?

Crunching the Numbers.

Step 1:

• I worked out how many hours I needed to bill my clients to meet my wages goal.
• First, I had to understand what the non-revenue-generating positions in my business were.
• To do this, I also had to understand that our revenue is generated by me.
• On top of that I realized that admin, management and tech specialists etc. are not revenue generators.
• You need to calculate the hours that your technical staff work each year but also factor in how many hours are lost over the year due to training, holidays, sick leave etc.
• Whether your staff are there or not you still pay for those hours lost, therefore you will then need to calculate 85% of the time they genuinely work.
• Once we achieve this point, we now have the actual Revenue Generating Hours.

Step 2:

I then divided my total expenses by the number of revenue generating hours to determine what your true cost per hour is to run your business.
Once you have calculated the true cost of running your business per hour, you can then add your profit margin to the hourly rate.

The Calculation:

• If you work 8-5, that’s 9 hours a day. 45 hours a week, 2340 hours a year. Right?
• Wrong, no-one can be at their desk working dedicated and at full speed from 8-5 every day, 5 days a week, 52 weeks of the year and bill for that time.
• But let’s dig a little deeper to make it clear.

You might be there 8-5 Monday to Friday but consider the following lost time:

Holidays = 4 weeks annual leave	= 20 days a year gone
Sick leave = 2 weeks sick leave	= 10 days a year gone
Training = say 1 day per month	= 12 days a year gone
Public Holidays = 10 days per year	= 10 days a year lost

Thus far we’ve lost a whopping 52 days, that’s 444 hours. Bet you didn’t think about that!

But we’ve not yet taken into account the little things, i.e.: staff toilet breaks, trips to get a latte, lunch with the wife, the constant unplanned interruptions we all get, the phone calls, emails and we’ve got to squeeze a bit of time in for a Facebook check or two.

None of that can or should be billed to a client.

I’m pretty good at staying focused and I can work a solid 90 minutes every two hours without needing a coffee or a trip to the loo, so let’s use that as our baseline (click here to read my 90-minute hour).

Or if I’m out on the road visiting clients, that is my travel time away from my desk.

That means I’ve got 6.75 hours for every 9 hours that I can bill clients (9 divide 2 x 90 minutes).

Let’s recap;

• I’m at my desk 8-5 Monday to Friday.
• I take the usual holidays, sick leave & love having my public holidays off.
• I spend a day a month out of the office ‘working on the business’ or having drinks with a mate because I’m living the dream and all that…
• I can work a solid 90 minutes every 2 hours.

That means I’ve got 208 days at 6.75 hours per day that I can realistically charge a client for.

Grand total = 1404 hours.

OK, let’s go back to my original goal of making $100k a year.

While I thought the sum should be $100k divided by 2340 hours = only $42 per hour, turned out that it should have been much greater than that, $71.22 per hour to be exact, which means $100k divided by 1404, that I need to be able to extract out of the business for every hour that I work.

Ultimately, what you charge out per hour is up to you, the key here, is that you clearly understand how much it truly costs you per revenue generating hour (including your expenses) to run your business.

Click here to download my “Value of Time” calculator to work out your true cost.

To get started, ask yourself these questions:

• How much do you want to earn?
• What time do you want to start each day?
• What time do you want to finish each day?
• How many days a week do you want to work?
• How many weeks of annual leave do you want each year?
• How many weeks of sick leave are you likely to need each year?
• How many public holidays do you take each year?
• How many days per month do you want to ‘work on the business’?
• How many days do you want off because you’re living the dream?

Based on that, Calculate:

Output =
Based on your inputs, you’re able to bill clients X hours per year or X hours per day.
If you want to earn Y, then you’re going to need to charge at least Z per hour.

It truly is a numbers game, but if you master the art, you will have the most accurate numbers to ensure you are billing the true value of your time and expertise.