For over 2 years the doors to my accounting services office in Perth opened to many small business owners, in all stages of growth.
Working with small businesses have always been a passion of mine and during meetings I canâ€™t help to provide more than just financial advice.
Blurting out business growth advice, sticking my foot into new ideas to consider and listening to woes and challenges became synonymous with the words of â€œI am off to see Nathan.â€
So, over time I got to pick up one common and costly mistake repeated by small business ownersâ€¦NOT valuing their time hence not charging the RIGHT price.
When you come to me for advice on becoming a profitable business, one that you can live off, enjoy and be your own boss in, I sit down with you and talk about:
- Reducing salaries and contractor expenses;
- Negotiation with suppliers for better prices or sourcing cheaper prices;
- Reviewing hourly rates and cost per job
So more often than not, from my experience, most business owners are reluctant to change the first two points. Mainly because this would either mean they cannot fulfill or complete the work without these people or the quality that they offer will be affected if they went with a cheaper supplier.
Customer service and quality work is integral to my business values and I commend everyone who wants to employ the right people and maintain the high standards that their clients have come to know.
BUT, and itâ€™s a big but here, if you are to make money, keep people employed and adequately service clients, i.e. survive and succeed, you need to do something to reduce costs and charge the RIGHT price.
There is an easy solution to this problem and that is to review your pricing. The best way to find out what is the right pricing for your business services or products is to determine your hourly rate. Once youâ€™ve done that you can use it to charge the right price that will pay you adequately, give back to the business and allow you to pay suppliers and salaries at a rate that you have correctly calculated.
Hereâ€™s seven simple steps to calculate your hourly rate:
- Ask yourself what is your current hourly rate?
- How many hours do you really work, including the work you donâ€™t actually charge for i.e. quoting, admin, networking, invoicing, follow ups, pitching, etc. etc. â€“ the things no-one else sees (but we know you do) and multiply that (your hourlyÂ rate XÂ actual hoursÂ worked in a year) to get a per annum figure.
- How much profit (income) did you make last year before tax? This can usually be found at the bottom of your last yearâ€™s assessment notice or tax return.
- Now check your actual hourly rate by dividing your actual hours worked, by your profit (income) before tax.
I have done this with hundreds of businesses and 95% are not happy with the number they get, as it doesnâ€™t add up to the hourly rate they provided originally.
If yours does then that is great and donâ€™t waste your time reading on.Â Â If you fall within the 95% then read on, as I will now show you a simple way to fix this.
- What are your fixed expenses i.e. rent, registrations, insurance, tools, salaries, advertising etc. etc. per annum which youÂ can ascertain from your most recent profit and loss statement.
- What profit (income) do youÂ wantÂ to make this year before tax?
- Now add the fixed expenses and profit (income) figure together and divide that by the amount of billable hours you/your staff do.
Now you have your new hourly rate before tax.Â Â You will need to consider whether you gross this figure up to allow for tax or you are happy to pay tax on this figure – which in every circumstance is individually decided.
If you are not comfortable with working this out, I suggest you seek professional advice from your accountant or registered tax agent.
About the author
Nathan Kerr has started and exited 2 startup companies and is the founder of Australiaâ€™s newestÂ instant payment and invoicing system that puts yourÂ office in your pocket click for info.Â Dukbill is designed to help small businesses work the way theyâ€™ve always wantedÂ to, with access to the best value mobile system forÂ quotes, invoices and on the spot payments.Â A continuation of Nathanâ€™s desire to create products andÂ services that aim to be precisely what people reallyÂ need to run their businesses better â€“ ultimately beingÂ more productive, more profitable and having less greyÂ hairs!