More often than not, the true cost of time, that is, the hourly rate of each person working on a project has never been accurately calculated and therefore not factored correctly into the quotation price, including overheads that are paid annually and profit. Owners forget that they too are selling time in managing the project, but more often than not, include the cost of their time as part of the profit.
Many business owners do not realise that part of what they do is sell time and they do not consider calculating how much their hourly rates and those of their employees are. For example, take a small artisan ice-cream producer who has two employees who mix the ice-cream ingredients and place the mixture into ice-cream machines all day, while the owner spends half of every day supervising this process.
The employees are selling time and the owner is selling a half day of her time every day. They are not just selling ice-cream. These costs should be factored into each ice-cream tub’s selling price.
In simple terms, hourly rates are calculated using the employees’ annual remuneration package, including benefits such as medical aid, provident fund contributions and travelling allowances, company contributions to statutory obligations and overheads plus profit divided by the average labour capacity in a year.
To simplify this, here is the equation:
Annual Remuneration + Benefits
+ Company Contributions
+ Annual Company Overheads + Profit
If the owner of the business is providing the service personally, the remuneration should be market related and relevant to the years of their experience as well as the skill level and risk attached to the actual service being provided. For example, in the medical profession a cardiac surgeon provides more complex services and carries more risk in his work than a general practitioner and would therefore have good reason to demand a higher fee or hourly rate.
Depending on the industry, some element of an employee’s day will be unproductive as it is unreasonable for any person to be productive for a full eight hours, particularly in a high-skilled industry.
That leaves just 14 working days a month when averaged over a year. That’s right, less than three weeks a month.
Make sure that you recalculate your hourly rate and that of your employees each time there is a change in remuneration or benefits. The remuneration paid to employees who do not directly generate income, such as receptionists, administrators and sales personnel should be included under overheads.
If the hourly rate costing is correct, each employee’s true productivity can now easily be measured against the income they directly produce or have contributed when compared to their remuneration package. This provides useful information when conducting employee appraisals and addressing pay rises.
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If your business is selling a service or any part of a service, when last did you ask your accountant to assist you in checking your hourly rate and that of your employees?