Why your business isn’t making money

Are you charging out the correct rate for your services? If not, you could be losing money… Here’s how to calculate your charge out rate.

Many small business owners work long hours and seem to be endlessly busy. There is no doubt the modern lifestyle screams along at a hectic pace. Often business owners are so caught up in the ‘doing’ of their business, that the fundamental basics are not visited and crucial core decisions are based on “airy fairy” planning if on any planning at all!

No matter what your business, knowing how many productive hours you have available to deliver your product or service is important. Knowing what overheads (i.e. costs of runing the business) need to be paid is vital.

Determining a ‘rate’, should your business be in service delivery, is the bare bones of planning for the profits you will make. Once you know the minimum you must recover, you have a basis to work out what you actually will charge out at.

Many women business owners seem to undervalue their services. By this I mean they err on the light side in price setting - almost afraid to differentiate their service and charge a higher rate per hour accordingly.

A BASIC FORMULA TO GET YOU STARTED

You are seeking two main areas of information:

what costs need to be covered (including for example some profit for yourself, wages, rent, insurances, interest, training, acc levies, accounting and legal, stationery and printing, advertising and marketing etc).
and how many productive hours are available to recover these costs.

The cost side is generally fairly straight forward so long as your budgeted costs are real. If in doubt, add 15 percent to all your expected expenditure (believe me, there are always more costs than you think …)

Finding how many productive hours you have begins by determining the total amount of hours.

So for example

However, you need to provide for sick leave, training, administrative time, building your business time etc, so the actual hours available to recover your costs will be less.

To continue the example:

To work out how much time is spent on administrative or office duties, you really need to keep some form of timesheet. The timesheet records how the day has been spent - over a period of time, you may find the business owner spends 40 percent of her time on administrative duties and the assistant 20 percent.

THE DANGER WITH SUCH A FORMULA IS THAT IT DOES NOT BEAR IN MIND:

Your business usp (unique selling point) and the reason why you can justify a higher rate;
Often a range of prices, with a bottom price you never go below, gives short term flexibility;
The fact that business expenses and available hours are not static during the course of the year you are planning for
The life cycle of your product or service i.e. how new or mature;
That a fixed price rather than a charge per hour may give a better financial return and scope for delivery of superb service;
What price or rate your target market are prepared to pay;
The positioning of your business, and your competitors, in your market.

Many accounting software packages provide job costing modules that prove a useful tool in getting your charge out rate right.

SOME “DON’TS”

Don’t be afraid to raise your rate or price. If you own a restaurant and serve 400 main meals a week, increasing your price by $2 per main meal potentially increases your profit by $41,600.
Don’t be afraid to be bold in your point of differentiation and price accordingly.
Don’t be afraid to survey your customers to determine how price sensitive they are. Often they are not as price sensitive as you are.

You must measure the real costs and real productive hours if this is a key performance indicator for your business. (A key performance indicator is any thing you measure, financial or not, that is critical to achieving your planned target).

You must get out of your comfort zone…

By Fiona Calderwood

Originally published in Her Business magazine. Copyright ©2008-2009 flokka.com and ©2008-2009 herbusiness.com. Article material on flokka.com is copyright. Reproduction in whole or in part without advance written permission is prohibited.