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Why Knowing Your Costs Matters
With the increased cost of running a business, knowing how much it actually costs to keep your doors open is crucial. Many businesses fall into the trap of guessing their charge-out rates based on market prices or what competitors are charging. This approach can lead to cash flow issues and anxiety, as undercharging means working harder just to stay afloat, while overcharging might mean losing potential jobs.
Understanding Productivity and Costs
Productivity plays a significant role in your costs. For example, if your productivity is at 90%, every 10 hours worked translates to 9 billable hours. If your business is running at this efficiency, your operating costs per hour might be around $111.50. However, if productivity drops to 75%, where only 7.5 hours out of 10 are billable, the cost per hour could rise to $134.20. This increase happens because your fixed costs are spread over fewer billable hours.
Calculating Your True Costs
Here’s a straightforward method to calculate your costs and set your pricing:
1. Determine Available Hours. Calculate the total number of hours your team is available in a month. Exclude hours not spent on billable work.
2. Calculate Operating Expenses. Add up all your operating expenses, including loan repayments, taxes, employee costs, and other overheads.
3. Account for Productivity. Multiply your total operating expenses by the productivity rate you’re achieving. For instance, if you’re working at 90% productivity, apply this rate to your expenses.
4. Include Holidays and Downtime. Factor in any non-billable hours for holidays and downtime, adjusting your calculations accordingly.
5. Divide by Billable Hours. Finally, divide your adjusted operating expenses by the total number of billable hours to find your true cost per hour.
The Importance of Adjusting Your Charge-Out Rate
Many businesses struggle with cash flow because they either undercharge or miscalculate their expenses. By accurately understanding your costs, you can set a charge-out rate that ensures profitability without compromising your competitive edge. It’s not about working more hours to fix cash flow issues; it’s about pricing correctly and improving productivity.
Take Control of Your Financial Future
If you’re finding that your cash flow is tight or you’re struggling to cover expenses, it’s time to get a clearer picture of your costs. Understanding and managing these numbers can lead to a more profitable and stable business.
Want to make sense of your numbers and boost your profitability? Book a free call with us.
