Are you charging enough? June 2019
We are now in June and 2019 is in full swing. I’m writing this in May and many of us have started the financial year with some goals, but without fully understanding our 2018-2019 financial result and what we need to focus on to improve performance.
Its true that time = money
Recently, I’ve been working more with clients and their financial advisors / accountants and the subject of hourly charge out rate has come up every time. Labour is usually our single biggest cost and the thing we have the most control over, if we put our minds to it.
In doing this exercise, it has been surprising to find that the charge out rates these companies are using is close to their actual cost per hour! This is once the hours lost due to leave, statutory holidays, sick and other leave and downtime are taken into account. We can then see that the profits generated are coming from material mark-ups and other gains, not from the value adding labour which is the very thing we generally love to do!
To be clear; what we are trying to establish is the rate we need to charge to recover all the costs in the business, (excluding materials)
If you wish to do this exercise yourself, then add together your expected wages costs and your fixed costs for the year and then divide this number into the available chargeable (productive) hours. This will be the average hourly rate you need to charge to recover these costs.
Total wages Cost + Total Fixed Costs
Chargeable hours
For example
| Wages | 400,000 |
| Fixed Costs | 250,000 |
| Total Costs | 650,000 |
| Chargeable Hours | 9,152 |
| Cost Per hour | $71.02 |
To establish your available, chargeable (productive) hours per year; remember to take into account all the non-workdays. You may be surprised to find you only have around 80% of your direct labour hours to charge out, see below:
| Hours Paid ( 1 person example) 40 hours x 52 weeks = | 2,080 | ||||
| Less Non Work-days | |||||
| Days | Type | hours (8 hr day) | |||
| 11.00 | Public Holidays | 88 | |||
| 20.00 | Leave | 160 | |||
| 5.00 | Sick leave | 40 | |||
| 2.00 | Other leave | 16 | |||
| 38.00 | Total | 304 | |||
| Number of chargeable hours at 100% Productivity | 1,776 | ||||
| Less Downtime (examples only) | |||||
| Maintainance, factory cleaning tasks | 3% | ||||
| H&S / toolbox meetings / training | 2% | ||||
| Re-work, errors & unaccounted time | 2% | ||||
| Other, leadership tasks, improvement projects | 2% | ||||
| Total | 9% | 160 | |||
| Number of chargeable hours | 1,616 | ||||
| % of Chargeable Hours of Hours Paid | 78% | ||||
Once you have established the cost per hour, you can then refine your pricing methodology, material mark ups and create a budget to work to. This exercise will also focus you on the value of the downtime. Remember every hour saved, can be re-sold to another customer, so the value of labour-saving initiatives is double the hourly rate you charge!
Make a note to discuss this at your next meeting with your accountant or business advisor.