Calculating Your Billable Rate
How much do you really need to charge for your labor, products, or services? Everything you do requires the consumption of a limited resource: your time. If you're an independent contractor, it's sometimes easy to overlook underlying costs and time requirements necessary for conducting your day-to-day operations. However, it is these items that frequently account for the constant feeling that you're working long hours with little to show for it.
As small business owners, self-employed consultants, or just freelance operators, it's also fairly common to face questions about the rates we charge. Is it too much? Too little? What is a fair rate that covers our expenses AND pays a competitive salary? Often, we simply set our rates according to what our perceived competition charges and how we see ourselves fitting into that market space. That gets you started, but it doesn't provide any background or personal confidence when asked to justify the rate. Sure, you can say, 'because I'm worth it.' But, there's no real-world numbers behind it that qualifies the rate and helps you determine if it will work for you.
If you'd like to get a better understanding of how these unique time and expense factors affect you, give the following calculator a try. It was originally created by another company to help determine the employment cost for computer programmers. I rewrote it to use in helping freelance creatives in the marketing/advertising industry figure out their billable service rate. The calculator is divided into two sections. Use the first section to calculate the operating expenses for your business. The second section is used to calculate your minimum hourly rate based on your expenses and productivity data. Sample data values pulled from the US Bureau of Labor Statistics are pre-entered to get you started. (Explanations for the values are included at the bottom of the web page.)
One great way to use the calculator is to enter all of your expenses and productivity data and then set the salary amount to zero. Doing this gives you your internal cost of operation per billable hour. (i.e. the resulting value is what all of your expenses costs YOU on an hourly basis. Multiplying the hourly value by 8 can give you your nominal daily operating cost. This information can be especially helpful in situations where you are considering donation of your time, volunteering, or otherwise offering your services at a discount.
For example, the common thought is that volunteering can be done at no cost. But as revealed by the calculator, there is actually an underlying out-of-pocket expense associated with any time you spend doing whatever job you do. If your cost of operation value is $25/hr and you donate 10 hours of your time, you have incurred $250 in real, out-of-pocket expense for providing that 'free' service. To be clear, I'm certainly not advocating against donation or volunteerism. This is just one example where having an idea of what your costs are can empower you to make better business decisions that support your long-term stability.
A second example use for the calculator is reverse determining your net salary based on whatever your current billable rate is. For example, let's say you charge $35/hr for your time and the cost of operations figure is $20/hr. The general public (and even you) will assume you're getting the full $35/hr. When in reality, you're actually only earning $15/hr. Understanding this relationship between billable rate and net income is very important.