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How To Calculate A Minimum Fee For Your Services

Written by: Susan Regier

Article Overview: Many newly started service businesses run into financial trouble due to a failure to properly calculate the minimum fees they need to charge to remain viable.

How To Calculate A Minimum Fee For Your Services

Many newly started service businesses run into financial trouble due to a failure to properly calculate the minimum fees they need to charge to remain viable.

The following method is particularly suitable for sole traders and home based businesses, where there are no business partners to share the workload.

Part 1: Annual Constraints

To begin with, every business operates under the following annual constraints:


Total available weeks in the year: 52
Less:
Annual holidays 4 (in weeks)
Public holidays 2
Sick leave 1
Professional development 1
Subtotal -8 weeks
Number of sellable weeks per year: 44 only.


Part 2: Available Time

A typical working week is reckoned at 38 hours. So if you are working for yourself, you have 38 hours, times 44 weeks = 1672 hours, = approximately 1700 hours for sale each year.

However, service businesses typically average only 65%-75% paid hours per year.

There are many essential tasks such as book-keeping, marketing, answering and responding to inquiries, business networking, market research etc., that do not directly generate income.

Taking 70% paid hours as a realistic maximum figure, your income estimate should be based on 1700 x 70% = 1190.

In round terms, then, 1200 paid hours per year is a realistic practical target for an established service business.

Part 3: How To Calculate A Minimum Fee

There are three steps:

(1) Divide your total annual operating costs by your projected paid hours, based on a maximum of 70% paid hours. In this example, we will work with a projection of 1200 paid hours. This gives your hourly overhead costs - in other words, what it costs you to operate your business.

(2) Nominate the salary equivalent you require, and divide by 1200 available hours. This gives the hourly rate you want for yourself from your business.

(3) Divide the potential interest on the total amount of capital invested in your business by your projected available hours. This gives the opportunity cost per hour - in other words, the amount that this money could otherwise be earning for you if you had chosen to use it as a financial investment.

Adding the per-hour cost of each of these components will enable you to calculate your minimum, base-line fee per hour.


A worked example:
Sample
Figures: Your
Figures:
Annual operating costs $10,000 $ ___________
Salary equivalent required $60,000 $ ___________
Capital investment $5,000 $ ___________
Potential interest return on capital invested = 10% = $500 $500 $ ___________
Sellable hours 1200 hrs hrs
The Calculation:
Overhead cost component: $10,000 divided by 1200 hours $8.33 $ ___________
Salary equivalent: $60,000 divided by 1200 hours $50.00 $ ___________
Opportunity cost: $500 divided by 1200 hours = $58.75 $0.41 $ __________
So the minimum hourly rate here is: $58.75 $???

In round figures, the sample minimum hourly fee is $59.00. And yours is: $__________

If you are working on an hourly basis, charging less than this will produce a direct loss.

Now consider what will happen based on only 40% paid hours (= 680 hours p.a.).

Using the figures in the example above, you must charge out at $90 p.h. minimum rate. Unless you already have an established client base, this is where you may have to start.

And more importantly, you may also find that your operating costs rise as you become established.

You may need to cover the costs of in house or out-sourced book-keeping, secretarial and order taking, marketing, promotional, and other services, to grow your business as you wish.

The lesson here is that it is most unwise to drop your desired rate to "get a foot in the door", to "get known", etc.

It is likely that those businesses charging what at first may sound like "high rates" for their services do so because this reflects the real cost of providing them.

Many people who shudder at the price of services forget that someone is paying their superannuation, holiday pay, work insurance, business perks and office amenities for them.

Service providers will often lower their rates to get some business, especially when first starting out. I've done it myself - and I think most people providing services have.

But while there may be some flexibility in your rate scale, you can never afford afford to charge less than the minimum needed to keep your business viable.

And that must be determined by mathematical calculation, not by hopes of "getting a foot in the door". You must know your costs. There is never any point doing work at a loss.

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