Getting Paid: How To Set Your Small Business Hourly Billing Rate

Plumbers, lawyers, executive coaches and many other small business service providers typically bill by the job

. Job costing is the foundation for determining how much to bill your customers. Are you billing your customers the right amount for the work you do? This article explores the components of customer billing to determine an accurate billing rate and achieve acceptable business profitability.

Direct and indirect costs are the two primary components of client billing. Direct costs can be traced to a particular job. For example, the number of hours an attorney works on a client matter can be recorded on a time log and traced directly to that job number. Indirect costs for a service provider are the business overhead costs usually described as operating expenses. These costs cannot be traced to any particular customer but are an annual cost of servicing all of the customers. We will take a closer look at each of these cost pools below.

Professional labor is usually the biggest direct cost for a service provider. Sometimes a small business pays an annual salary instead of an hourly wage. A law firm is a classic example of taking an annual compensation figure and calculating the hourly billing rate for clients. For example, an attorney that is paid a $100,000 annual salary and is expected to bill 2,000 hours per year would have a $50 base hourly rate.

Other direct costs for a service company may include supplies and materials used for a specific job. Overnight shipping, shop materials, parts and supplies, mileage and travel expenses are a few examples of directly traceable job costs.

Indirect costs cannot be traced to a particular client job. The costs of operating office space, labor costs for support staff and other general business overhead is allocated to every job using a predetermined overhead rate. Follow these four steps to calculate your overhead allocation rate:

Prepare an estimate of the total annual overhead costs. At the beginning of the year make an estimate of the indirect costs of the company for the next twelve months. This is an estimate so it is subject to change during the year and will most likely not match the actual results of operations when you tally the total costs at the end of the year. Make an educated estimate using historical financial information and applying an inflation factor if warranted.

Determine the cost driver for overhead. Labor hours is the typical driver for small business overhead. The more hours worked usually equals more lighting, heating, air conditioning and supplies used. Next determine the total amount of labor hours or other cost driver in your business plan for the upcoming year. This becomes your business overhead allocation base and and essential element of calculating the predetermined overhead allocation rate.

Calculate your predetermined overhead allocation rate. You can easily determine the indirect cost allocation rate using the two pieces of information covered previously. Simply divide the expected total annual business overhead costs by the planned labor hours (or other cost driver).

Apply the predetermined overhead rate to each customer job. If your cost driver is labor hours, the last step is to multiply the overhead allocation rate per labor hour based on the number of hours actually worked on each job. This allocation of overhead takes place throughout the year as clients are billed for work completed.

Tack on profit. You are in business to make a profit not for charity so make sure you build-in an acceptable profit margin. You select the percentage markup based on a number of factors including the expected rate of return on equity, your debt yield and the profit percentage earned by your competitors. Multiply the total direct and indirect costs by one plus our markup percentage (i.e. 1+ markup %) to get the gross hourly billing rate for your customers.

What does the client see on its invoice? When it is time to bill the customer for a job the only number they see is your marked up hourly billing rate times the number of hours spent on the job. Some service providers separate labor and materials for a more detailed bill. The client does not see your markup percentage or the overhead allocation rate per hour.

You have discovered how to make an accurate calculation of your small business billing rate including direct and indirect costs plus a profit markup. Do this important step to stay in business and earn an acceptable return on your business investment (ROI).

by: Michael Shelton

POST COMMENT

Exclusive Dining Places For Business Travellers Close To Central London Hotels Is Plr Still A Profitable Business Model? Seven Essential Tools For Small Business Debt Management Fulfill Your Business Needs Via Virtual Assistant Services Advantages Of Installing Aluminium Bi Fold Doors For Both Businesses And Homes Custom Website Design Helps Establish Your Business Better Impact Of Mobile Sites On Growth Of Online Business Distribute Jubilee Mugs To Get Business Recognition Starting A Legitimate Home Business Online Using Real Estate Data Services To Develop Business Relationships Software Application Developmentan Essential Step For Business Growth A Brief Overview On Obtaining The Finest Tools For Business Sdvosb Ensures Your Small Business Success