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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.

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Making Money Online: 10 South African Entrepreneurs Doing It

You don’t need an eight-to-five job or stacks of capital as the launch-pad to start a business and create your own source of income. Here are 10 entrepreneurs who’ve found some unconventional ways of making money online using common platforms.

Diana Albertyn

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Fintech And Small Business Success: 5 Tips For SA’s Fintech Start-ups

Let’s look at what the future holds and how small businesses can benefit.

Colin Timmis

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Around the world, the fintech revolution is disrupting our relationship with money, both in our personal and business lives. This global market is expected to be worth $10,499m by the end of 2018 – and digital payments account for much of this growth. This means it’s an exciting time for small businesses looking to get ahead. Whether they’re fintech developers, users or both, these businesses are putting new technologies to work and benefitting hugely.

South Africa’s small business community, like elsewhere, is embracing fintech with enthusiasm. To make the most of  this energy, new incubators and accelerators are setting up shop across the country. Cape Town, for example, hosted its first ‘Startupbootcamp’ which focused on creating scalable technology solutions for financial services and related industries. At Xero, we recently launched a virtual hackathon to enable South Africa’s technology entrepreneurs to compete with other forward-thinking developers on a global scale.

Against an energetic business landscape, fintech presents an attractive market for SA’s budding entrepreneurs. In today’s competitive business environment, new technologies are key to meeting your target audience’s needs and expectations.

So, how can entrepreneurs take advantage of what fintech promises? Let’s look at what the future holds and how small businesses can benefit.

Think smart, grow fast

The range of available fintech solutions and tools is vast. However, new technologies alone are not enough to get your business off the ground – and keep it there. Here are five tried and tested tips for small business owners to keep in mind at all times.

Related: Fintech: Fusing Finance And Technology

1. Have an idea

Entrepreneurs first need an idea, then a plan supported by realistic goals. Your idea has to be good: ask yourself what you’re going to sell, and why. Once inspiration has struck, subject your idea to some hard scrutiny. Chances are someone else is already doing something similar – which is fine if you can do it better.

2. Build a plan

Your business plan is your map. It will help you launch your idea with structure and thought, and guide your company’s progression. You don’t need to stick to your plan like glue: Flexibility is certainly a virtue. A new twist or turn – as long as it’s on the right track – could take the business forward faster.

3. Be flexible

Of course, if something isn’t working then don’t be afraid to abandon it and move on. Fear of failure often results in entrepreneurs throwing good money after bad. Know when to scrap an idea, take what you’ve learnt and focus on something new. Remember, there’s no point crying over sunk costs.

4. Stay alert

When it comes to new ideas, look at what’s old and needs refreshing. Keep a constant eye out for ways to disrupt the status quo and offer people a better way of getting what they need. Even if your business is running smoothly and doing well, if you don’t stay alert, you could lose out on some low-hanging fruit to a competitor.

5. Use technology

Startups are typically constrained by limited resources – namely time, money and labour. A solid plan will help allocate your resources effectively. Fintech solutions can provide a strong backbone that helps you enhance your capacity, manage your cash flow better and improve productivity.

Related: 6 Lessons The Founders Of iKhokha Used To Launch An African Fintech Start-up

The future of fintech in SA

South Africa is fertile ground for fintech. A lack of legacy infrastructure – particularly in outer lying areas – has created a large underbanked rural population hungry for financial services. What’s more, a growing urban middle class is demanding more sophisticated solutions to outdated forms of payment processing.

Fortunately, these demands are not falling on deaf ears. The local tech community is part of a dynamic development ecosystem that is working hard to innovate tools that provide greater financial access. With a clear gap in the market and an eager target audience, the future for fintech developers and users in SA is looking stronger than ever before.

Regardless of what your business offers, where it is based, it’s size or age, it’s time to join the fintech revolution. By embracing relevant solutions, your business will become more agile, efficient, responsive and ultimately, more successful.

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Loan Scams: How To Protect Yourself From Loan Scams

My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

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The current economic situation we’re experiencing in South Africa has created a strong appetite for credit. Often consumers need to borrow money out of desperation just to help them survive. It is here where scam artists and unscrupulous marketers prey on the public, signing them up for services they do not need, with monthly debit orders adding to their woes.

It’s a tactic that we’re seeing more of these days: A company advertises that they can help you secure a loan, even if you’re blacklisted. They charge you for this ‘service’ and at the same time sign you up for a bundle of monthly paid-for add-ons, hidden away in the Terms and Conditions (T&Cs).

They are doing this despite the fact that it is illegal to advertise loans to those who are blacklisted (according to the National Credit Act), and that a company cannot charge to facilitate a loan (according to National Credit Regulator [NCR]). To make matters worse, in 99% of cases, the applicant is turned down, and now has to continue paying for services that they were unaware of signing up for in the first place.

Related: The Definitive List Of South African Business Incubators For Start-Ups

This is criminal behaviour, but for some reason it does not get acted on by relevant authorities (such as the NCR) which should be protecting consumers. With an estimated one million South Africans being preyed upon like this annually, those who are tasked with watching over the consumer should not shake this responsibility. That’s not to say the marketing industry is blameless – far from it, but without a regulatory body, there’s very little to be done to act on these rogue companies. Even Google benefits from these loan scammers – just type in “bad credit loans” and see how many ads pop into the paid search results.

My advice would be for consumers to be vigilant in managing their financial affairs, especially when it comes to “too good to be believed” offers. Here are some pointers to help consumers protect themselves:

  • Never give your bank details to an unknown brand or marketing company that is not your own bank or insurance company.
  • ALWAYS read the Terms and Conditions before signing up for anything. Most of these scams work because the extras you sign up for are buried in the T&Cs, making them part of the contract.
  • Never agree to pay someone to find you a loan. The service provider is conducting an illegal act, since they cannot charge consumers for loan finding services according to the NCR.
  • As difficult as it can be, do not apply for loans if you are blacklisted as there is little chance you will qualify. These scams are run by people who feed off/take advantage of people’s desperation, so rather speak to your bank to get advice about your situation.
  • Sites such as Hellopeter are a great resource to check if companies are offering fraudulent services. It will only take a few minutes, but could save you years of problems.

As for what to do if you have fallen victim to these scams, complain in writing to the Credit Ombudsman (ombud@creditombud.org.za) as soon as possible. At this stage, we’ve lost faith in the NCR or the Consumer Protection Act stopping these types of scams. Rather get in touch with Carte Blanche, your local or national newspaper, and note it on Twitter and Facebook. My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

Related: Seed Capital Funding For South African Start-Up Businesses

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