Calculating your rate

Office Goddess

New Member
I posted this on another thread, but it was in the bookkeeper forum. So, I am re-posting it here for additional input and a larger audience, hopefully to help those who are struggling with how much to charge! I appreciate any input. :)

* * * * *

Keep in mind, that on top of expenses, you can anticipate (depending on your state) 35-42% of your NET profit will be taken in Federal and State taxes annually.

So the best suggestion is to calc how much you need to live comfortably, then estimate your annual expenses (figure in utilities, marketing costs, supplies, etc.) and then add 42% on top of that. A 40 hr workweek is 2080 hours/year. So for example:

PERSONAL EXPENSES - annual
$14,400 rent/mortgage ($1200/mth)
$4,200 utilities ($350/mth - elec/gas, water, phone, cable/satellite
$10,400 groceries/gas ($200/wk)
$350 prescriptions/dr visit
$1,200 auto insurance/plates/repairs
$1,000 misc

BUSINESS EXPENSES - annual
$1,200 office supplies ($100/mth)
$900 cell phone ($75/mth)
$600 internet ($50/mth)
$100 bus/State filing fees (annual)
$120 post office box (annual)
$1,200 marketing ($100/mth)

= 31,550/yr gross personal expenses
= 4,120/yr gross business expenses

The example above requires that you gross AT LEAST $35,670 to make ends meet. Ideally, you would want at least a 30% profit (10% for savings, 10% tithe, 10% 'fun money') so you now need to gross at least $46,371/yr. But, oh wait! You have to pay TAXES on the profit! Your taxes are approx 42%, but of course the more you earn, the more your taxes! So now you need about 116% profit on top of your expenses ('cuz remember, you can't write off personal expenses) so you now need an income of $77,047/yr.

$77,047 gross profit
less 4,120 bus expenses
equals 72,927 net profit

less 30,629 federal/state taxes
equals 42,298

less 31,550 personal expenses
equals 10,748 (a little over a 30% net profit)

To make the required gross of $77,047/year, at 2080 hours (40 hour workweek) you need to bill $37.04/hour.

*WHEW* Make sense? Obviously, this is a very simplified example and doesn't come close to figuring out accurate expenses. It's just a demonstration of all the financial considerations you need to make when setting rates.
 

lavonjs

New Member
Wow! That really helps put things into perspective!
Thanks so much for posting this, as there were things I hadn't taken into account. Though the rate is pretty close to what I have as my hourly rate, your example breakdown is a great resource.

Thanks again for sharing!
 

Office Goddess

New Member
You are very welcome! The whole "calcing my rates" thing was really a tough one when I started out. I used rate calculators, compared that to the 'going rate' across the country for VA bookkeepers, and then finally just sat down and figured up my actual expenses to finalize my rate structure. I created excel budgets for both personal and business budget calculations, that I can update monthly for actual expenditures. If you would like copies of either one (or both), pm me with your email and I will send them to you.
 

PeppyM

Member
Lily, I am speechless with gratitude and amazement. Your "template" can apply to most, if not all situations. Thank you. :applause:
 

lillie

New Member
This is a wonderful guide. Some rate calculators leave out the part about taxes, but this shows just how important they are to consider! Thank you for sharing this.
 

Office Goddess

New Member
I'm glad this has helped. Figuring out rates can be incredibly confusing and I have often wondered how people manage to survive on really low rates. Probably they don't! I think it's easier to start with a reasonable rate than to try and increase them with ongoing clients... :) (although, of course, that happens, too!)
 

alcbiz

Member
I think it's easier to start with a reasonable rate than to try and increase them with ongoing clients... :) (although, of course, that happens, too!)
I am planning to review my rates yearly or so; consequently, I have included a phrase in my contract that states rates can be increased with a 30 day notice to client(s) at least once but no more than twice in a one year period.

I almost hope I can manage expenses so I don't have to increase my rates at all. Could that be wishful thinking? LOL!

I do have one question though. I've read that new companies should expect to market their business up to 50% of their time so that billable hours really would be much less than 2,080. Any thoughts on this?
 

PeppyM

Member
I am planning to review my rates yearly or so; consequently, I have included a phrase in my contract that states rates can be increased with a 30 day notice to client(s) at least once but no more than twice in a one year period.

I almost hope I can manage expenses so I don't have to increase my rates at all. Could that be wishful thinking? LOL!

I do have one question though. I've read that new companies should expect to market their business up to 50% of their time so that billable hours really would be much less than 2,080. Any thoughts on this?
I recently read the following, and it seems to be sensible and straight forward:

A normal work week for most jobs is 8 hours a day for 5 days. There are 52 weeks in a year but most workers get a two week vacation. So, 8 X 5 X 50 = 2000 hours worked in a year.
Many companies also give 10 holidays, which brings it down to 8 x 5 x 48 = 1920.
Many companies also give 5 days of sick/personal time per year, which brings it down to 8 x 5 x 47 = 1880.
Finally, if you are calculating how much time people actually spend on their job (as opposed to company meetings, bathroom breaks, surfing the Internet, etc.) a common metric is 80%. Therefore, if you are looking for how many hours you can expect someone to actually be productive in a year, 8 x 5 x 47 x .8 = 1504 hours is a reasonable maximum. This is an important number when you are dealing with billable hours in a consulting environment.
 

Office Goddess

New Member
Great information, Peppy! That definitely changes the calculation, doesn't it? :)

To make the required gross of $77,047/year, at 1504 hours (per Peppy's above post) you need to bill $51.23/hour - an increase of $14.19/hr over the original calculation.

Example:

Need: $77,047/year to make ends meet
Billable Rate $51.23/hr
Required billable hours: 1,504/yr
47 weeks/yr = 32 billable hours/week required (2 weeks vacation, 10 holidays, 5 sick days)

So - you can still work a 40 hour workweek and cover the income/expense needs (32 hours) and have 8 hours left per week for marketing, networking, etc. If you work more billable hours than that per week and put the extra income aside each month, you have padding for the times you don't have 32 billable hours/week.

FYI - after calculating what I needed to earn, I compared it to the going rate for my 'job title' and ended up charging a higher rate. However, I was then confident that I would be earning enough even if my billable hours weren't as high as I hoped and I knew the minimum hours I had to bill to make ends meet were actually 2% lower than my estimate. On an average year of 1504 work hours, 2% works out to 30 hours of 'lost' billable time; good padding for the lean times.
 
WOW.....I am just starting and the whole "figuring out the hourly" has me in a frenzy. My husband is full time employed, and doing pretty ok. So this is something we hope to BUILD together. But I never considered that GIANT percentage taken by the govt. Thank you so much for that!! (PS....I don't even know how to "PM" yet, took me a second to figure out what that was. But I am very interested in any further number-crunching you have to offer.) Thanks again!
 

burneyvoa

New Member
Thanks to you both, Lily and Pepe. I have been having a difficult time figuring this rate thing out. I want to be fair, but not short-change myself in the process. Your posts will be a great help.
Wendy Burney
 

Office Goddess

New Member
(PS....I don't even know how to "PM" yet, took me a second to figure out what that was. But I am very interested in any further number-crunching you have to offer.)
I believe you need to have 25 posts on VAF to be able to pm. Nonetheless, I have a free budget spreadsheet download on my book site. Click on the link below my signature and at the bottom of the page click on "I want the sample" to get the budget spreadsheet.
 

Paulette

New Member
Thanks for this! I was actually planning on charging what I was making hourly at my fulltime job, but I decided to up it by $5 after this, especially considering that I'm responsible for my own taxes.
 

Office Goddess

New Member
Thanks for this! I was actually planning on charging what I was making hourly at my fulltime job, but I decided to up it by $5 after this, especially considering that I'm responsible for my own taxes.
You must make more than I do at my 9-5, then. :incazzato: I have to charge $20 more/hour as a VA to cover my taxes and (eventually) pay my own health insurance. I decided to start higher rather than trying to up my rates down the road. :rolly:
 

alcbiz

Member
Thanks for this! I was actually planning on charging what I was making hourly at my fulltime job, but I decided to up it by $5 after this, especially considering that I'm responsible for my own taxes.
Will $5 cover advertising, supplies, marketing, etc. plus give you a profit?
 
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