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Tips for calculating an accurate charge-out rate print Print

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It’s important your charge-out rate is competitive but still sees you making a profit. Figuring out that rate just got easier with these handy tips.

Calculating an accurate charge out rate


What you should consider

Here are five steps you should take to help you work out your charge out rate:
 

1. What income you want

Take into account the standard of living you’d like, what you might earn elsewhere, or what gains you might make from investment. For practical purposes, we’ll assume an annual salary of $80,000.


2. Hours you can work per year

You can take a base number of 40 hours per week, 52 weeks a year, which is 2,080 hours. However, this isn’t really feasible. You need to take into account holidays, sick days, and all the hours you’ll spend on non-chargeable tasks, like administration, meetings, travelling, breaks etc. Keep a diary for a week where you record all non-chargeable time so that you can factor it in.

So, realistically you might only be able to invoice clients for 1,350 hours, not 2,080 (unless you work longer weeks and don’t take holidays, which isn’t always recommended):

Total Year 2,080 hours
Deduct
4 weeks holiday 160
2 weeks statutory holidays 80
1 week sick days 40
Non chargeable hours (25% of time at work) 450
TOTAL NON CHARGEABLE 730
BALANCE OF CHARGEABLE HOURS 1,350


3. Covering income requirements

Now that you know how many hours you can realistically charge out for, you can work out what rate you’ll need to charge to cover your income. 

Make sure you include the appropriate ACC levy for your line of work. Your accountant can tell you what this should be, but we’ll make an assumption here of 4%.

Using our hypothetical $80,000 figure, you’d need to charge $59.25 per hour ($80,000 divided by 1,350 chargeable hours), plus 4% which is (rounded up) $62.00/hour.

But that’s only covering your hopeful income.


4. Overheads

Now you need to factor in your overheads. You should have a good idea of what these are from your business plan and cash flow forecasts. We’ll assume a figure of $50,000 for the year (power, rent, advertising, expenses, marketing, repairs etc).

$50,000 divided by your 1,350 hours means you need to add another $37.00 to your income charge, bringing your new hourly rate to $99.00 per hour!


5. Profit margin

So far, we’ve covered required income and overheads. Now we need to factor in a profit margin, otherwise the business won’t be able to grow. So if we assume a profit margin of 15% your final charge-out rate should be (rounded up): $113.85 per hour.


Is this competitive?

What you need to do now is work out if your rate compares to others in your industry. You might have to work within an industry scale of fees, but even if you don’t, you should still be aware of the average or you might not get much work.

    • If you are lower than the average – you don’t have a problem, you have an opportunity. You can look at increasing your charge-out rate and improving your income. Or you could decide to charge less than your competitors and steal some of their customers. 
    • If you are higher than average – it could be that you need to review your figures. Have you been honest and realistic about everything? Alternatively you could look at emphasising the value-added components that justify the higher rate, such as guarantees, superior quality and customer experience. 

Calculating an accurate charge-out rate doesn’t have to be a daunting task, and you don’t need to be a mathematical whiz. However it’s important that you take the time to sit down and work out your figures properly. The better these calculations are, the more accurate your charge-out rate will be.


Tools and resources

    • Interactive cash quiz – see some of the different ways you can generate cash for your business.
    • Business plan – how to write a simple business plan so you have an idea of costs.
    • Cash flow forecast – an important tool to help ensure your forecasts are as accurate as possible.
    • Workshops on a range of finance topics.


       

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