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Do You Know What You’re Worth?

How to determine your hourly rate.

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We’ve all been there. Maybe you’re there right now. You charge out your work at a certain hourly rate, but you’re suspicious that you’re either a) being ripped off or b) hitting above your weight.

It’s more than likely that the only way you judge if your pricing model is accurate is against what you think your competitors are charging.

When a prospective client walks in with a quote from across the street to see if you can do the same – for less – you carefully examine that quote for clues as to what you should be charging.

More than that, there is often a real fear near the end of the month that you might not cover your running costs.

You hope and pray for a big job to come in soon so that you can charge a big deposit and at least pay salaries.

I’m here to bring you good news today; there is a better way.

Determining Your Hourly Rate

Knowing what your true hourly rate should be in order to cover your overheads and expenses will give you a clear path to business control, growth and potential profit.

So how do we do it? Initially it takes a bit of work, but after it is calculated it is relatively low maintenance and will ensure you run your business smarter.

Related: How Can You Compete Without Discounting Your Price?

Start With Your Cost Centres

cost-business-centres-separate

Aside from making up the basic framework and substance of a business, and being the basis for creating a profit, cost centres are what we use to determine hourly rate.

A cost centre is used to break the business into measurable portions in order to determine if that portion is profitable. A cost centre could be your design team, your delivery fleet, or your expensive machine that fills one third of your factory floor.

The reason we break up a business into cost centres is to better identify and isolate variables to determine how efficient they are. This is less overwhelming than trying to improve efficiency as a blanket rule across the entire business.

If you have an ERP or BOS system in your business that handles your business admin and quoting, then make sure you understand how to set up your overhead and production cost centres in that system.

We like QuickEasy BOS for this as it has a handy cost centre Wizard that allows business owners to have full control and clarity into this step. Alternatively, if you do not yet have ERP software, this will be a more manual process for you.

Every business has two types of cost centres:

A business has direct and indirect costs, and these require two different types of cost centres.

Production cost centres

These are the direct costs. These contain expenses such as equipment or computer costs, monthly maintenance and production salaries – costs directly associated with the production of a product or service that you sell.

  1. Machine costs: The total replacement value of a machine or computer or equipment, broken down to a per-month value.
  2. Maintenance costs: Does your equipment need monthly maintenance? This must be included in your calculation – perhaps this is your IT maintenance contract or your vehicle’s service fees. Provision must also be made for breakdowns and repair.
  3. Labour costs: Only salaries directly associated with production are to be added here. The machine operator and his assistant, the driver, the designer using his Mac book – their weekly or monthly salaries will be included in this cost centre’s cost.

Related: What Is The Real Cost Of Your Time?

Overhead cost centres

These are the indirect costs. These contain expenses that are not necessarily directly recovered from the sale of your product or service, but are necessary to support the business.

These are expenses such as electricity, rent and admin salaries. Essentially the ‘expenses’ from the Income Statement, less the production salaries.

There are typically many production cost centres in a business, and only one overhead cost centre.

Overhead costing models

When considering how to cover overhead costs, there are two models that can be implemented.

The first approach splits the overhead costs across the business’s cost centres, and includes them in the hourly rate. This ensures that every estimate and quote covers a portion of your Overhead expenses. Each production cost centre accounts for a percentage of the overhead expenses – the larger the production cost centre, the greater portion of the monthly overheads is allocated to it.

Alternatively, overheads can be excluded in the hourly rate and added as an adjustment or markup in your quote.

Productivity

Determining the hourly rate depends on the productivity within a cost centre.

Knowing how many productive hours are available for work to go through that cost centre will help you determine what each hour should cost.

  1. Weeks per year: With 52 weeks in a year, not every week is productive for your staff members. There are two weeks of public holidays every year, and three weeks of annual leave. That leaves 47 productive weeks in a year.
  2. Hours per week: With 40 hours typically available per week, in reality most people are only productive 80% of the time. That leaves 32 productive hours per week.

To calculate the productive hours per month (which you will use to calculate hourly rate) take weeks per year, multiplied by hours per week, divided by 12. Or:

Hours per month = (weeks per year x hours per week) / 12

Note: Be attentive when it comes to your productivity calculation; not all cost centres are as productive as the next. If after a while you notice a cost centre only sees 20 hours of work a week for example, then the calculation will reflect a higher hourly rate.

Initially you may have to do some thumbsucking to start the ball rolling; feel free to use these values (above) for your baseline productive hours as a start. Alternatively, your ERP or BOS system should show you monthly cost centre recovery so that you can adjust productivity accordingly. Once again, we like QuickEasy BOS for that.

Related: How Salary Transparency Empowers Employees – And When Not To Use It

Calculating Hourly Rate

We’re almost there – you’re about to find out what you should charge per hour for each of your cost centres.

To determine your hourly rate, total your monthly costs (equipment, maintenance, labour) and divide this by the productive hours of the cost centre, or:

Hourly rate = monthly cost / hours per month

 Apply this to each of your cost centres. There you have it! Rinse and repeat. Now that you know what hourly rate is required, you can recover the costs of operating each cost centre.

Once you have implemented this don’t just leave it there – salaries increase, equipment is replaced, electricity goes up – so be sure to review your cost centres from time to time to make sure your expenses are up to date and reflecting accurate costs.

After that, it is up to the business owner to determine if the cost centre should charge a flat hourly rate, or what markup or adjustments should be made to the calculated hourly rate in order to make a reasonable profit.

The guesswork is removed, anxiety is replaced with clarity and the business owner can make price-decisions based on fact.

Heinrich is the owner and founder of QuickEasy Software, a proudly South African software company based in Cape Town with a national footprint, focused on simplifying business processes by integrating every aspect of the business cycles into one, easy-to-use system. Heinrich is passionate about releasing business owners to run their businesses efficiently through this affordable ERP software that improves efficiency at every station; from leads, CRM, quotes, job tracking, time tracking, stock management, invoices, and reports - effectively freeing them from the drudge work of running a business in order to grow their business.

How to Guides

6 Hacks For Getting Clients To Pay You Faster

Almost everybody pays eventually but almost nobody pays sooner than they have to. That’s a problem.

John Rampton

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Getting your clients to pay you on time is a real hassle. After a sale, it is easy to think you did your job and just relax. Nothing is set in stone until the payment is final.

Not getting your payment on time can be detrimental to your company. This is especially so if you need or were expecting that money to come within a certain timeframe. It is frustrating, and there is a fine line because often you are working with people who could be recurring, valuable customers.

Therefore, it is critical to you find ways to get paid on time. Here are seven hacks to avoid the hassle and get paid faster:

1. Set payment expectations early and give gentle reminders

From the onset, ensure that your clients know what their cost and payment schedule look like. You do not want to give them any reason for confusion or an excuse not to pay on time. Make it crystal clear when they need to pay by and how much they will need to pay. It will properly set their expectations to avoid surprises.

Related: 4 Types Of Clients Your Growing Business Can’t Afford To Work With

Offering gentle reminders about an upcoming payment can continue to keep their expectations in check. They might not be prepared to pay if they signed their contract three months ago and forgot that their payment date was tomorrow. Instead, put the pieces in place to ensure, with total certainty, that they know how much they will owe and when they will owe it.

Poor communication also sets a poor standard with your clients. It will give them the message that they can receive your services without having to pay on time. It is hard to change this precedent. Therefore, being consistent and straightforward from the very beginning will help you keep these payments coming.

2. Follow up

Do not hesitate to follow up after sending the invoice. Your clients are busy. They likely overlooked a payment if they did not make it. You can send friendly reminders to pay after a few days have gone by. No one minds a gentle follow-up as it demonstrates your ability to act professionally. I built my calendar app for this very reason. Follow up frequently till they pay.

Streamline the payment process as much as possible. There are some awesome tools to help collect payments today. The less time it takes your customers to make the payment, the faster you will get paid and the less hassle you will deal with. It is worth the upfront investment to set up the right systems in order to get faster results.

When possible, take the payment upfront, too. This way there will not even be an issue of getting them to pay. Today, people are more comfortable paying for a service before they see its full value in. Take advantage of that.

3. Offer small incentives for quick payment

Offering incentives for quick payments will speed up the process and build customer loyalty. Customers know they are going to have to pay at some point. If they know that making the payment immediately will give them an additional benefit, then they will often do so.

You can even form these incentives around your product or services. It could be sending company stickers, access to an additional feature, or a free week of service. This will reward them for paying on time and give them further reason to continue coming back.

4. Send the invoice to the right person

At larger companies, it is crucial that you send the invoice to the right person. When your clients are originally agreeing to pay, make sure they know how that payment will take place. It takes two minutes to discuss who will be making the payment, and it will save you significant stress on the back end.

Related: Great Places To Take Your Clients When Networking

5. Establish personal connections with clients

You might not always have the bandwidth to do this, but getting to know your clients will give you a much easier route to payment collection. In the case that someone has not paid, you will feel more comfortable asking them. It is easier to send a quick reminder to someone that you know than it is when you feel like you have to be more formal. Personal connections with your clients will ensure you get your money faster.

6. Think about the little things

There are a variety of small factors that add up to improve the speed in which you receive payments. Think about the time of day that you are sending the invoices out, the styling of the invoices and the actual content within them.

Related: How to Get Clients When You Hate Asking for Business

You can streamline the process with a clean and concise invoice. Make it visually appealing and include descriptions of what they are paying for. The process will slow down if you make mistakes. Instead, take the extra time to make sure that everything looks as it should.

This article was originally posted here on Entrepreneur.com.

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How to Guides

Why Bartering Can Be Your Untapped Revenue Source

More organisations are experimenting with cash-free solutions. Here’s how bartering may drive the future of B2B commerce.

Andrew Medal

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Many small- to medium-size business owners have begun to barter, trade and swap goods and services without any cash involved.

Take the city of Portland for example. Unsurprisingly, the culturally tight-knit and self-proclaimed weird city has given rise to a thriving underground bartering network. A recent Rolling Stone article showcased the colorful personalities and supportive business community that is Portland’s bartering economy. Some of them call themselves “swappers,” others simply identify as community-oriented business owners. All of them share a common bond of exchanging goods and services to help each other grow.

The trouble with traditional bartering like this is that it’s incredibly difficult to scale. The idea of a coffee shop exchanging beans for fresh food from a local grower is nice, but any business looking to expand can’t possibly expect that kind of barter to lead to scalable growth.

That’s what gave Bob Bagga, CEO and founder of BizX, the idea to create a community that enables businesses to turn their excess capacity into potential capital. Bagga explains:

“By using the BizX dollar, businesses are able to turn extra business capacity and assets into cash flow, which can, in turn, be spent at member businesses without any cash involved. The goal for us is to reduce waste, maximise member potential and help companies earn new customers.”

Related: 5 Research-Backed Strategies To Increase Your Sales Revenues

By creating a complementary currency to power commerce through the sharing of excess goods and services, Bagga and his team have given business owners a chance to create cash-free lines of capital for little more than their incremental cost of goods sold.

Cash-free capital

Most business owners have plenty of great ideas to grow, but lack the capital and cash resources needed for those growth initiatives. Take a restauranteur, for example. Expanding or upgrading the restaurant may be their desired path for generating increased revenue, but the cash required for such an undertaking might not be readily available.

What if that same restaurateur was able to exchange empty seats and excess food for a shared currency that they could then spend at other businesses in the network? While trading one meal with a contractor might not result in enough capital to exchange in return for a major overhaul, many units over time will eventually add up.

That’s precisely why business owners are looking for alternatives to traditional financing and venture capital raising. Those models, though effective, often edge out small- to medium-size businesses in favour of rapid growth SaaS companies or user-heavy business models.

As a result, businesses looking at growing should explore growth opportunities that require little to no upfront investment.

The future of B2B commerce

B2B companies often operate at less than their full potential. Bagga pointed out that small businesses in the United States, on average, only run at 80 percent capacity. In many cases, this is simply because connecting with new customers presents a real challenge.

Also, most B2B companies have excess business potential because they offer products or services that could field more customers at a small marginal cost of goods sold. As such, many can afford to accept an alternative form of payment, as long as they can use it for other practical applications.

Related: 5 Strategic Steps to Help You Double Your Revenue Next Year

While traditional bartering usually doesn’t result in additional cash flow, companies that are able to exchange services based on a shared or complementary currency can determine when and how to spend their newfound capital. Many will use that for marketing, advertising and public relations services that would otherwise have been too costly.

Cash flow isn’t always confined to exchanged services either. In many cases, these unique partnerships result in cash business resulting from direct referrals from services rendered in exchange for other goods.

This article was originally posted here on Entrepreneur.com.

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The Steps Involved In Joining An Investment Holding Company For High Growth

There are many growth capital avenues available for established entrepreneurs. One of those is joining an investment holding company. Is this the right move for your business?

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Let’s say you’re a high-growth, high-impact business that’s reached a ceiling; a point at which you need to seek investment partners as a growth tool. Many mature businesses approach an intersection at which it becomes clear that they need to unlock capital, identify mentors, or collaborate beneficially with other subsidiaries.

If your goal is to join an investment holding company, what are the steps involved and what can you expect from the process?

Sustainability and scalability are the key

To begin with, it’s important to clarify the difference between a private equity (PE) investor and an investment holding company. PE investors need to go into an investment knowing what their exit strategy will be, while groups choose to invest in businesses that have shown themselves to be sustainable and scalable. As long as they continue along that road, the group is more likely to hold onto them. You are also a member of that group, and subject to its board.

In the case of MICROmega, we seek first to understand the business. If we are able to do that, we look for sustainability and scalability, and if these characteristics are clearly evident, we go on to pursue an investment opportunity. This is typical of investment holding companies.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

Once we become the investment holding company, we try to remove as many of the subsidiary’s distractions as we can: Alleviating administrative and financing burdens so that business owners are free to focus on growing the business. In our experience, growing businesses become more and more administratively intensive, which can bog entrepreneurs down.

This is ultimately a partnership, so everyone should benefit from the association. At the same time, you need to be sure that the investment holding company shares your values — this is a long-term relationship, and you need to know that you’ll be happy down the line.

What would-be subsidiaries need to do

business-subsidiary

1Define exactly what you want

While there are some basic strategic values that any partner should be able to bring to the table — namely, access to capital, industry-specific networks, and economies of scale — it’s wise for an investor-seeking business to have a predetermined idea of the specifics that they require from a potential strategic partner.

2Research, and research again

Any long-term investment relationship should begin with extensive research on the investment partner universe. There are many potential investment partners out there, but each has specific investment mandates, sector or industry preferences, and value preferences. Ensure that you can identify and understand these.

3Be clear on your own risk profile

The quantum of funding required will impact the choice of funding partner. When you understand your risk profile relative to the type of returns on offer, you’ll be able to determine, and strive to seek out the most appropriate funding source.

Related: Common Mistakes SMEs Make When Looking At Growth Opportunities

4Unpack your plan for the capital

Businesses seeking to be acquired should be clear on what they will do with the capital to be contributed by the investment partner, and how growth will be achieved.

5Ask the investor the right questions

I’m a firm believer in would-be subsidiaries ensuring that they adequately evaluate potential investors. The starting point is to ensure that the interests of both parties are aligned.

Thereafter, further questions should cover:

  • Investors’ detailed track records
  • Their investment mandates
  • The returns that they target
  • Their typical risk profiles
  • The origins or sources of their funding.

6Ensure a sense of shared spirit

It is essential that the investor and the organisation’s priorities and approaches are aligned at the outset; that they are on the same page. Many things can go wrong between entrepreneurs and financial partners, and the worst outcome is that the investor crushes the entrepreneur’s pioneering spirit.

Related: What Type Of Growth Funding Do You Really Need?

In such a scenario, no one wins. This is why I believe that both parties should be happy, with a sincere sense that they have entered into a partnership that will create value on both sides.

Regardless of who your investment holding company is, you should expect it to provide access to capital and support throughout the business; provide mentorship and ideas around innovation; and help you to create an environment in which you are able to focus on innovating, and not on administration management.


Checklist

  • Do you know what you’d like from an investment partner?
  • Have you thoroughly researched potential partners in your sector?
  • Have you determined your risk profile versus potential returns?
  • Do you have a plan on what you intend to do with any capital raised?
  • Do you have a clear list of questions to ask any potential investors?
  • Have you evaluated whether there is value-alignment?

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