Establishing what is the right rate to charge yourself out at is the tricky bit and nobody will get it 100% correct -but how do you know where to start?
Below is an example of how a one man band should approach setting a charge out rate.
My first consideration would be to take the highest outgoing such as the mortgage or rent on your house. Let us say that the expenditure is exactly £12,000 per year or £1,000 per month? Easy peasy, just divide the amount you pay out by the number that you are able to work for the year. If you are setting a target of 2000 hours (50 weeks x 40 hours) then divide £12,000 by 2000 = £6.00 per hour just to pay your mortgage.
Now add in the fuel cost of an arbitrary amount of £2,000 for the year - £2,000/2000hrs = £1.00 per hour to cover fuel. So you can see, it does not take long for your hourly rate to increase. And bear in mind, this is just to pay YOUR essential bills and does not provide for your luxuries or food.
Lets try another one.
If you spend £100 per week on shopping. This equates to £5,200 per year on food. Divide that by 2000 hours and you have another £2.60 per hour to add to what you need to charge. So out of three important costs we have to find £19,200 which equates to £9.60 per hour. (bear in mind, we have not tackled insurance, advertising or any other recurring cost that you might encounter. Can you see where I am going with this? Every cost that you incur needs to be turned around and worked out over your working year to be able to recoup it.
Now lets make the mathematics a little interesting and say that you have two solid weeks of wet or frozen weather throughout the year and we have to reduce the amount of hours that you are able to charge out by 80? So instead of spreading £19,200 over 2000 hours we have just 1920 hours in which to recoup the £19,200. As you can see, the numbers work easily and we have a round £10 per hour now. We need to raise the price of every hour of labour you sell by £0.40 throughout the remaining 1920 hours just to break even on those three basic costs.
Try this exercise for yourself with your three highest overhead costs and take a view on what your target hours are or what you are aiming at.
Many of you will be surprised by your findings and realise that you will only close to break even with no margin to allow for anything not going to plan. Use the mileage formula and the hourly rate spreadsheet to get a picture.
There are many methods that can be used to determine costs and charge out rates and this information is intended as a guide only and anyone seeking to set their rates may need to take qualified advice from an accountant.