Pricing Your Products or Services 2
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
What is nonbillable time?
Nonbillable time is the time you spend doing work you can't charge your customers for Typically such work includes writing proposals; making business contacts; answering customer questions; doing your own filing, typing, and bookkeeping; and learning to use new computer programs.
Why is nonbillable time considered an expense?
In a service business, earnings are tied to the number of hours devoted to income-producing work. In some small service businesses one-third or more of the total working hours each week may be spent doing work that can't be billed to any client. In fact, it's not unusual for the owner of a one-person business to work from early in the morning until late at night without directly producing a cent of income.
Under such circumstances, time is a commodity with a significant value. For instance, assume you work a total of 40 hours a week in your service business and on average you make about $25 an hour on time spent on client work. If you spend 10 hours a week doing nonbillable jobs, you have only 30 hours a week left for paid client work. Thus you are losing $250 a week in sales (the 10 nonbillable hours times $25 an hour). If you normally charge $50 an hour for your time, those 10 hours of nonbillable time will cost you a whopping $500 each week.
How can I factor the cost of nonbillable time into my fees?
Calculate what your expenses will be for a month. This figure should include a salary for yourself, plus all other expenses including loan payments, if any, allowances for equipment upgrades and repairs, and so on (see list on page 122). Add in an amount for profit. (Your own salary is not profit. Profit is what the business makes over and above your salary and all other expenses.)
Multiply this figure by 12 to determine what the gross yearly income of the business should be. Then divide the gross yearly income by 48 to determine the amount of money the business will need to make per week. (The reason for using 48 instead of 52 is to allow 4 weeks for vacation time, holidays, and sick days.)
Once you determine the amount of money you need to earn per week, divide that amount by your billable hours. If you plan to work 40 hours a week but will spend 10 of them on your own accounting chores or other nonbillable work, divide the weekly gross income needs by 30 to get the hourly fee you should charge.
For example, if you determine you need to bring in $5,000 per month to cover your salary and other business expenses, here's how you would calculate hourly fees:
$5,000 (monthly income) x 12 (months) = $60,000 (gross yearly income)
$60,000 (gross yearly income) ÷ 48 (weeks) = $1,250 (per week)
$1,250 (per week) ÷ 30 (hours) = $41.66 (per hour)
I'm thinking about hiring an employee. How do I figure out how much the employee will cost me so I know how to bill my customers for the employee's time?
Depending on benefits, training, productivity, and other factors, the cost of an employee varies from around 1.5 to 2 times the employee's annual salary. If a worker works 1,864 hours during the year, at an average efficiency of 75 percent, the worker's billable hours for the year are 1,398 (30 hours a week). If you are paying the worker $35,000 a year, and your overhead costs are twice salary, the total cost of that worker is $70,000 for the year. That makes your cost per billable hour $44.87 for that employee. That's just for their labor. You have to mark up that hourly cost a sufficient amount to make a profit on their time.
What about independent sales representatives, distributors, agents, and others who work on commission only? How do they make sure they'll make enough to cover expenses and make a profit?
If your business will be some type of agency, brokerage, or distributorship, the commission you can charge will have to conform closely to industry standards. The way to make this type of business profitable is to know your industry inside and out, maintain close contacts with buyers or purchasing agents, and have top-notch sales skills. Whether you plan to be a print broker, distributor for industrial filters, or a literary agent, you need a good handle on:
- which companies are buying what type of products
- how much they are paying for them
- who makes the buying decisions
- how many sales you can realistically expect to make
- how long it will take you to make the sale
- what it will cost you to make the sale
- how long it will be from the time the sale is made until the time you collect your fee
- what the likelihood of repeat sales is
Since the amount of money you make will be limited to the commissions you make on each sale, add your estimated expenses and the after-expense income you want to achieve, then choose clients whose goods or services will sell at high enough prices and/or in sufficient quantity to produce the income you want to achieve.
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
