Is your business working to your expectations? One thing is how you feel about it. And it’s another to have facts and figures. In this article, you’ll find inspiration for a few simple calculations that are worth doing from time to time.
1. Minimum hourly rate
When you’re selling products, pricing can be based on things like the purchase price or the cost of the labor and materials you need to produce them. But how do you do that when you’re selling services?
Personally, I recommend starting with a minimum hourly rate. This will give you a clear bottom line that you shouldn’t go below in your pricing. It doesn’t include any profit. It is the amount necessary to cover your costs. This means you have to add profit when you are pricing.
How to calculate it
To figure out your minimum hourly rate, you need to carefully calculate all of your labor and personal costs, and divide them by the number of billable hours in a month. It’s best to take an Excel or Google spreadsheet to your expenses, where you can add up all your costs nicely.
If you just need an outline, this interactive calculator is the best way to get it.
What is it useful for
- Defend your price to the customer (when you know what your minimum is, it’s easier to argue)
- Deciding which jobs to take and which to politely decline (all of which are lower than your MHR per hour)
- Determining which jobs to outsource (generally those that you can get for less than your MHR)
2. Ideal hourly rate
In my opinion, pricing is primarily a tool to set your life on your terms. Having enough money and time to do what you personally consider important. For this you need the ideal hourly rate. Or the amount you want to earn per hour of work in the optimal case.
How to calculate it
To calculate your ideal hourly rate, you first need to be clear about three things: how much money you want to make per month, how many hours per day you’re willing to work, and how many days per month you want to work.
IHR = EA/(HD*WD)
IHR – ideal hourly rate
EA – expected earnings
HD – hours worked per day
WD – working days per month
What is it useful for
- Calculating the ideal hourly rate is the best first step you can take when creating a price list or pricing a new service.
- You may find that the resulting amount is not realistic at the time. Then it makes sense to set it as a goal and determine a specific strategy to gradually reach that hourly amount.
- It will also help if you feel there is something wrong with your pricing but don’t know exactly what it is. Maybe you feel like you’re working a lot but not making enough, or you’re often sought out by a group of customers you don’t really want to work with.
3. Break even point
The term break even point refers to the sales volume that exactly covers costs. Each additional product sold or hour billed already generates a profit for you.
How to calculate it
To calculate the break even point, you need to know three variables:
- Fixed costs – these are the ones you pay every month, regardless of what you earn (rent, flat rate phone, social and health insurance).
- Variable costs – the ones that change with the number of products or services you sell (e.g. massage oils, jewelry making materials, envelopes and postage in an e-shop, shampoo and styling in a hair salon)
- The selling price of your product or service.
BEP = FC/(SP-VC)
BEP – break even point
FC – fixed costs
SP – selling price
VC – variable cost
What is it useful for
- You set a price that will earn you a cost with a realistic and manageable number of clients.
– When you run a training course or other event, you calculate how many people need to sign up for the course to even take place. - For products such as an e-book, you calculate how many units you need to sell to recoup the upfront cost.
- You figure out how many units (units, hours) of products or services you need to sell to make the expected profit.
4. Manday Rate
Manday (or Womanday) is the daily rate or the amount you earn on average for one full day of work. It applies to one person, so if you work one day with a co-worker, that’s 2 mandays.
How to calculate it
To calculate this, you need to know your gross turnover for at least three completed months. You can simply take the last three. But it will be more telling if you pick one when you had a high season and really a lot of work, one when there were fewer orders or you had a week off, and one average.
Use your calendar or diary to see how many full days you worked in those months. A full day means your usual workload. Which is 8 hours for some people, maybe 4 for others. Add up the days when you were only partially at work (for example, two half-days add up to 1 day).
Divide the turnover for one month by the number of days worked. Repeat the same for the next two months. Finally, average the result (i.e. add and divide by three).
What is it useful for
- You will find it easier to price longer-term contracts. If you know your day rate is, let’s say, EUR 200 and the job will take 8 days, you’ll quickly get a ballpark figure of how much you need to charge.
- You can compare the pricing of the different services you offer. For example, if one of them is a massage that costs EUR 60/hour, you can do 3 in a day, and your daily rate is EUR 200, it doesn’t work out. That means that you are subsidizing massages from other more profitable services and it probably makes sense to make them more expensive.
- It will be easier for you to turn down contracts or tenders where the bid price is lower than your manday.
- If you find that you’re not happy with your daily rate, it will probably motivate you to start doing something about it.
- And you’ll probably also stop forgetting to include preparation and travel time in your cost estimates.
5. Yield of individual services
Most entrepreneurs nowadays offer various services and products. If this applies to you, it is worth finding out how much each activity contributes to your overall turnover.
You can also compare the resulting figures with the time you spend preparing and providing the various services. You may be surprised to find that some services may not be as profitable as they used to be.
How to calculate it
In this particular case, systematic record-keeping rather than calculation will help you. I personally use an Excel spreadsheet for this, where I write down every job I complete. It has a total of 7 columns: calendar month, name of the customer or company, amount, form of payment (cash, bank transfer, payment gateway), invoice number, indication of payment (yes/no) and what I invoiced for.
I have divided my services into groups for these purposes, such as consulting, mastermind, online courses, e-books, etc. When you use the filter function in such a spreadsheet, you can easily see how much any product, service or group brings you.
What is it useful for
- You’ll find out which business activities really make you a living, and what’s more of a hobby.
- The numbers will help you decide what to devote more energy to, and what to tone down or cancel altogether.
- It will also make it easier to determine which services or products need price adjustments.
- The share of each activity in earnings can also serve as a great sub-goal in your marketing plan (for example, I spent several years increasing the share of consulting versus teaching).
6. Best clients
Have you ever thought of finding out how much money each client spends with you each year? And what percentage of your total revenue does it represent? In my experience, a situation where 20 percent or more of your revenue comes from a single customer is quite risky. If you lose that customer (and it can and does happen in business), it will ruin your cash flow and possibly your entire business.
How to calculate it
Simply add up all the invoices you’ve issued to each client over the last 12 months and compare the resulting amounts to your total turnover.
What is it useful for
- You’ll find out who your real VIP clients are that it makes sense to look after.
- You can adjust your marketing strategy to favor the best clients and attract more of the same.
- If your income is too dependent on one source (i.e. 20% or more), you can start doing something about it.
- Conversely, you may discover a customer who has a lot of demands on you but contributes a negligible amount to your revenue. For such a person, you can either adjust the terms and conditions, or it will be easier for you to part ways with them.
Foto Karolina Grabowska, Kaboompics
