How to determine your hourly rate as an entrepreneur
It’s time to set your emotions aside to rationally calculate your hourly rate as an entrepreneur.
“What’s your hourly rate?” That is the million-dollar question for entrepreneurs torn between asking for a low amount in order to obtain contracts and requesting a rate high enough to turn a good profit. But what if you simply calculated your optimal hourly rate?
This is what Valérie Parizeault did about five years after launching her business, Studio Rose Flash, a company specializing in websites and brand image. She decided to share the strategy she used for calculating her rate on her blog.
“Money is a sensitive issue, but at some point, the problem needs to be viewed from a mathematical perspective,” states the entrepreneur.
1- Estimate your business costs
First, calculate how much it costs to run your business. Depending on the legal status of your company, costs vary.
For example, if you decide to create a company, the initial incorporation fees cost $325, plus nearly $100 in annual costs to maintain your company in good standing. You also need to set some money aside for extra accounting fees since you will need to file both your personal and business income tax returns.
You should also determine whether you will occasionally require consulting services or if you will need to hire employees, along with the associated payroll taxes they entail for a pension plan (if required) and employment insurance, for instance.
It is also important to take into account everything on top of that: costs for an office space, transportation, equipment, furniture, office supplies, telecommunications, insurance, advertising and business development, etc.
Let’s say you are not hiring any employees for now and that your expenses are about $25,000 per year.
2- Estimate personal expenses
You then need to ask yourself how much you’d like to earn per year.
“I recommend that entrepreneurs determine both the salary they need to cover living expenses and the amount they would be happy with, in order to get a good idea of the wiggle room,” indicates David Decary, a consultant/trainer at the École des entrepreneurs | MTL.
To do so, you need to analyse your yearly costs. This of course includes your housing and groceries, but also transportation, vacations, and other personal expenses such as sports and outings. And don’t forget your contributions to your registered retirement savings plan (RRSP).
Let’s say that you can live on $40,000, but to really be comfortable you’re targeting $60,000.
3- Don’t forget income tax
An important mistake to avoid: forgetting you need to pay income tax! The amount varies case by case, but David Decary recommends setting aside about 20% of your income for taxes. So in order to earn $60,000, you should aim for about $75,000.
A tip from Valérie Parizeault, a seasoned entrepreneur: plan for a profit margin that you can reinvest in your business, like to redesign your website, purchase a new computer, go on a business trip, or work for a few months on a project that may not be profitable but is important to you or will give your business exposure.
If you think 15% is sufficient, you are now up to $86,250 per year for a happy entrepreneur.
David Decary, who teaches the Financial Planning course in the Starting a Business program at the École des entrepreneurs | MTL, recommends setting aside this 15% to avoid spending it on anything else.
“If you know you need to buy new equipment or finance an expansion, plan your budget accordingly,” he notes. “It’s easier to set money aside when you have a tangible objective.”
You can also simply deposit these amounts into a working capital account that you would contribute to regularly.
In sum, you need to earn a salary of $86,250 + $25,000 for the annual business costs calculated in point #1. You are now up to $111,250.
4- Estimate your billable hours
Earning a good salary is nice, but it’s also important to make sure you won’t need to work 80 hours a week to get there. So you need to estimate the number of hours worked annually.
Even though many entrepreneurs go into business without taking any vacation in the beginning, this shouldn’t last! A month off per year is not a luxury. And let’s add another week for legal holidays because you will also want to take advantage of these days off at one point.
You are now up to 47 working weeks per year. Let’s say you would like to work 40 hours a week. Count at least 5 hours that are not billable, for example reserved for business development and bookkeeping. You are now at 35 hours. Since we always tend to work more hours than planned, give yourself some leeway by under-estimating. So 30 hours a week for 47 weeks equals 1,410 hours of work per year.
The final calculation
To earn $111,250 in 1,410 hours of work, you need to charge $80 an hour.
If you compare this with the minimum required to get by, specifically $40,000 in earnings rather than $60,000 at the end of the year, the rate would be around $58 an hour.
Now you need to ask yourself whether it’s realistic for your market and how much your competitors charge their clients. If your result is too far from this supply-and-demand reality, you can try to reduce business costs or your own personal expenses. Or simply plan on working more hours.
“Making these calculations can seem daunting for entrepreneurs in the beginning because they realise that it takes a lot of money to make ends meet, but it quickly reassures them since they can see things as they are and look for concrete solutions to problems,” notes David Decary.
Don’t worry if your business model is not yet optimal! At first, many entrepreneurs charge rates that are too low. This was the case for Valérie Parizeault, who often spent double the number of hours estimated on a project during her first years in business.
“But through trial and error, you gain experience and are better able to evaluate your time,” she explains. “Eventually, you want a house, a family, so it’s important to have a business model that works.”
“It’s not enough to have a profitable business,” shares David Decary. “The income generated needs to meet the needs of the entrepreneur.”
Then, you have to learn how to communicate your hourly rate without making it a big deal.
“You shouldn’t be shy, or say that you don’t know, or that it depends,” states Valérie Parizeault. “Money is one of the most important aspects to succeeding in business.”
- A) Calculate the annual operational costs of your business.
- B) Calculate the gross salary, including income tax, you need to earn per year.
- C) Calculate a profit margin on your income to reinvest in your business.
- D) Calculate your billable hours per year.
(A + B + C) ÷ D = the hourly rate of a happy entrepreneur
Here are a few examples of hourly rates for certain industries:
Osteopath: between $80 and $140
(National Academy of Osteopathy)
(Canadian Institute for Health Information)
Freelance writer, advertising material: $75 to $150
(Professional Writers Association of Canada)
(Canadian Institute for Health Information)
Safety consultant: $150
(Canadian Occupational Safety Magazine)
Edited on 30 October 2018