Micro Business School - How to Calculate Your Hourly Rate

The thinkVAULT Micro Business School Step Two: Calculate Your Hourly Rate.  

In Step One, you determined exactly what business to go into. You met the first basic criterion: You're good at it. The second key factor: Someone else will pay you to do it. Keep in mind that if you wouldn't pay you for it, odds are that few other people would either.
There are a few exceptions to this, but your mindset about your product or service will affect your ability to market and sell it.

The next critical question for you to answer is:

How much revenue do I need?
This is the "quick and dirty" rule is this: You must cover all of your living expenses. If you have no savings - a common shortcoming in this society - then you must plan to cover your expenses quickly. This may mean incorporating a Plan B into your strategy.

Calculate your annual financial needs by starting with your pre-business-owner family budget:
  1. Include housing, food, household supplies, and utilities.
  2. Next, add transportation expenses - car payment, gasoline/fuel, maintenance, parking, etc.
  3. Remember your "hidden paycheck" as well.
    • health and dental insurance.
    • life insurance.
    • formerly reimbursed expenses, such as cell phone, internet access, etc. 
  4. Do you have growing children
    • They'll need clothes and shoes
    • Are they under the age of 12? Include childcare costs.
  5. Add in other essentials and discretionary expenditures. 
    • Savings - emergency fund and retirement. 
    • Clothing for you - over the course of a year. 
    • Cash donations to church and charities.
    • Vacation - plan for it, whether or not you get to take one.
    • What else do you need? Record and plan for it.
  6. Total the numbers and multiply it by 1.30 - about what you'll need to cover taxes.
The list can get long and detailed. I recommend using a spreadsheet for the process. Remember not to cross-mix weekly, monthly, and annual numbers. You are calculating what you need for an entire year.   

Your Real Hourly Rate:
It's higher than you think.

You should now have a total amount for the year that may scare you a bit.
  1. Calculate the number of days you will work.
    • On average, start with 240 days. Or... 
    • If you checked the calendar for exact Monday - Friday working days, then subtract your planned vacation days.
      This may be 5 or 10; remember this in Year One. 
    • Decrease the number further by 5 more days - a "fudge" factor. 
  2. Now... divide the financial needs amount by the number of days above. That's your minimum DAILY rate. 
  3. NOTE: You have yet to calculate the needs of the BUSINESS
  4. This first number is just what YOU need to live.
If you have not already begun, immediately gather and record what your necessary business expenses will be. Carefully managing your revenues and business expenses will govern the availability of the cash you calculated above as family needs. 

Necessary business expenses, and exactly what to include, will be covered in another entry -- Step Four!

Step Three: The first 5 tasks you must do to gain momentum. Check the next blog entry.

E-mail us if you have a question about calculating your hourly rate. 
This Micro Business School series is for new and emerging business owners: Those people who neither have the time nor an immediate need for a formal business plan.

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