hi guys again Johnson from Drive
success calm today I'm going to talk
about how you can go about determining
your hourly rates as a small business
owner or a contractor this is a formula
we're going to go over today that you
can use whether you know your your
contractor or you're charging your
customer hourly services whether you're
like a consultant of some kind it's very
simple and straightforward calculation
it accounts for your salary per hour
your direct expenses per hour your
indirect expenses and your profit now
profit is extremely important and now
this may be you know obvious to some
profit you know everyone knows you have
to have profit in terms of your hourly
rate but it's not obvious to all and I
actually had a friend of mine recently
who hit the ground running everything
was going great then he found out that
he didn't account for profit and you
need profit okay you need profit in
order to finance your growth improve
your products and services improve you
know your your your company's long term
future that type of thing so you need
profit okay you don't want to be
financing you know your future growth
out of your salary okay so we're going
to go through an example today of an
individual who has decided to start his
own painting company he's been asked to
paint three rooms and he knows it's
going to take him 16 hours he's been a
patron please to work for another
company so the first portion of the
calculation is to determine his hourly
salary now this is probably the simplest
part of the entire equation because you
know what you should be paid per hour
you've worked in other companies or
you've worked for other people in the
past you know what that is so in our
example individual was making $18 an
hour he's going to give himself raise
and he's going to say I'm going to make
$20 an hour so right away we've finished
the first portion of the equation $20 an
hour that's what he's going to make now
we're going to move on to the direct
expenses per hour
when you think about direct expenses
think about all of those expenses that
go directly to the manufacturer of a
given product or service in the sense of
a manufacturer it's all the direct labor
direct material in terms of a service
it's all that all the direct expenses
that fork the helps you provide that
service and in terms of a contractor
it's all those direct expenses that are
directly attributed to the job that
you're doing
okay and in this case we're talking
about the direct expenses that go into
the work this individual
doing for this customer which is to
paint the rooms so he's going to total
up his direct expenses okay right off
the bat he says you know what for every
single room I paint I'm going to need
paint I have the two cans of $25 each
total 450 and then the one can of primer
$20 $20 total I'm going to need rollers
and brushes I'm going to buy one pack
for $10 $10 and I need sheets and
painters tape so I'm going to buy one
pack of those it's going to cost me $15
total for 15 so the total direct
expenses for one room is $95 okay for
three rooms it's ninety five times three
two eighty five which is very
straightforward and in order to
determine is direct expenses per hour is
going to take us to 85 in terms of this
total direct expenses and divide it by
the 16 hours and you get this 1781 right
here
okay so now we have filled out the
second portion of the equation direct
direct expenses are $17 and 81 cents so
that's done we've done the salary now
we've done indirect expenses moving on
to the indirect expenses when you look
at indirect expenses think about those
those support expenses that you have
that can't really be charged to any one
customer or or any one product that
you're manufacturing but they're
expenses that you have to support
nonetheless so you know in terms of a
manufacturer these are your
administrative support costs which
includes sales marketing accounting
these type of things in terms of the
painter in this case we're talking about
the cost for gas the cost for insurance
repairs on its truck and these type of
things so what he does is he's over a
period of a week he totals up his dirt
indirect expenses and he says you know
what I spend about $400 a week on gas
and upkeep on my car and everything and
I work a 40-hour workweek so very
quickly
his indirect expenses are $10 per hour
which is simply $400 divided by 40 hours
okay so we've got salary we've got
direct expenses per hour we've got
indirect expenses per hour now we have
to account for profit so what we're
going to do is we're going to add up all
of these inside then we're going to do
20 plus 17 81 plus 10 it's going to give
us forty seven dollars and 81 cents and
now we have to account for profit now
there is no hard and fast rule when it
comes to profit what you need to do is
you need to be
research the type of market you're in
the type of customers you're servicing
there's plenty of information available
on the Internet I can't tell you what
the charge is profit because I don't
know what you're doing but there's
plenty of information that you can
secure again you can look on the
internet you can talk to someone who's
run a similar business you can talk to
individuals that you know that has that
they have done this before so in this
case we're going to assume that this
individual wants to make 15% of the
profits so we're going to take this
forty seven eighty one we're going to
divide it by eighty five okay and doing
this is going to give us an hourly rate
of fifty six dollars and twenty five
cents per hour
now this calculation we thought we've
accounted for hourly salary direct
expenses per hour indirect expenses per
hour we've now got a total per hour in
terms of what this individual can
charges customers and we're going to
take that multiplied by the 16 hours
times 16 equals nine hundred dollars
okay so he should charge his customer
nine hundred dollars to paint all these
rooms so this is a very simple and
straightforward way to determine your
ality rates and this is a good way to do
it when you first start out okay because
it's very straight forward in terms of
direct and indirect expenses as you move
forward in your business
you're going to want to look at what's
called overhead okay you may over time
start hiring other people other painters
or other support people a administrative
assistant these type of things so you
want to basically account for overhead
okay
overhead very simply is indirect
expenses divided by direct expenses and
that's going to give you your overhead
rate okay so that's going to give you
your rate so in our example it's ten
dollars divided by 1781 and that's going
to give us an overhead rate of 0.56
to determine the percentage you simply
take the rate times one hundred
which is 0.56 times 100 which equals 56%
as an overhead rate okay so in this case
we've defined the hourly salary the
direct expenses per hour and indirect
expenses per hour and accounted for
profit we've done it for someone who's
just started out and as you grow your
business you'll be interested in looking
at your overhead and you'll have to
track that on a monthly basis overhead
is simply your indirect expenses divided
by your direct expenses that gives you
the rate in this case it's ten dollars
divided by 1781 which is 0.56 take the
rate multiplied by 100 to give you a
percentage and you got your overhead
percentage right there or 56% so in this
case this individual has accounted for
an hourly rate that takes care of the
salary expenses per our indirect
expenses per hour and profit so that's
it Ian Johnson driver success com bye
bye