When you do the math
In a TABLE meeting this week we got on the subject of pricing and profitability. I asked the question “do you know how much it costs you to operate on an hourly basis?”.
This was something that was obsessed over in my former life. The boss would always be like “It costs us $XXX every hour to just to have the lights on!”.
While, as an employee, I found this annoying — I took this lesson into my own business and it’s been invaluable.
Even if you don’t charge hourly, understanding your hourly operating costs is crucial for making informed decisions, managing resources, and ensuring the financial health of your business.
After the conversation, it dawned on me that there might not be a lot of people doing this in their business, so I thought I’d share how I go about this.
Before we dive into the math, I just want to encourage you not to get hung-up on things if you don’t know the exact figures down to the penny. This is more “scientific estimating” than it is exact figures — and that’s okay. An estimate is going to be a lot better than having no clue!
So… Here’s what you need:
- Your monthly fixed costs: These are things like rent, insurance, salaries (including your own!), software, etc. The things that have the same cost every month. Don’t forget about annual costs, which you can divide by 12 to get the monthly cost.
- Your monthly variable costs: This could include things like cost of goods, utilities, hourly wages, commissions, etc. Because these change from month-to-month, it’s good to look over longer periods and get a decent “average” to work off of.
- Working hours per month: Estimate how many hours you business is operation per month. For example, if you work 9-5 M-F, then you should be at 160 hours.
With these numbers, you’re ready to go.
Add together all you fixed and variable costs per month and then divide it by the number of total operating hours.
For example: If you’re fixed costs are $4,100, your variable costs average out to $500, and you operate 160 hours per month, here’s what you’d do:
- Add $4,100 + $500 (which totals $4,600)
- Divide the total ($4,600) by 160.
In this example, the hourly overhead costs would be $28.75.
Keep in mind, that number does not account for your business actually making a profit — that’s just your break-even costs. You’ll want to make a profit, account for taxes, etc.
When you do this math, you might realize your hourly rate needs a bit of a bump (at least, that’s the realization I always come to)!
If you’re not paying yourself a regular salary, then there are some ways to tweak this to help set some goals on what you should charge in order to make your desired income. If that’s something you’d like to learn more about, hit reply and let me know.Read the Full Newsletter