Nobody likes evaluating their worth, particularly when it comes to money! When you become self-employed, this process becomes a complex part of your life. Not only do you need to value the service you provide to customers, you also need to assess how this cost will affect your own standard of living.
You need to take into account, not just your hourly wage, but your taxes, your travel expenses and various things you’ll need to purchase in order to complete your work – like software or transport.
In this article, we’ll cover our five-step process for calculating your hourly wage as well as telling you some things you should avoid!
Calculating your rate will also depend on the service your provide and your place in the market – i.e., how do your prices compare to your local and online competitors? You might find that some ‘competitors’ charge next-to-nothing for the same service you provide! On the bright side, this isn’t your concern – whilst some ‘competitors’ may have significantly reduced prices, this isn’t always a guarantee of quality. So, whilst it’s important to keep in mind the market you’re in, calculating your self-employed hourly rate relies on some other factors, too.
Before we go any further, there are some things you need to keep in mind and they’re not particularly nice to hear:
- Pricing – no matter how reasonable your prices are, some customers will always want to pay less for the service they’re provided with. It’s just a reality of the market. It can be quite difficult and is often a cause of frustration for many self-employed businesses.
- Undervaluing – if you focus too much on the rates charged by your competitors, you might end up undervaluing your business and appearing like you deliver a worse quality service than you actually provide.
- Exposure – the promise of ‘exposure’ doesn’t pay the bills. This is quite a common one in the arts industry but isn’t exclusive. Like we said above, some customers will always want the cheapest deal – even enough to ask for free work in return for ‘exposure’ or reduced costs through promises of referrals. It’s another awkward one to get around.
- Awareness – it might take some time to pick it up, but understanding your clientele is an important part of being self-employed. Some of your clients will never be happy with the rate you charge – they’ll always be looking for a discount. It’s important you don’t take this to heart, whilst still ensuring you’re delivering a high quality service.
Getting over these realities and keeping them in mind is a good way to prepare yourself for potential client reactions.
How NOT To Calculate Your Hourly Rate
Before we get to the what you should do, let’s first take a look at what you need to avoid. Something we see a lot, particularly with new small businesses, are calculations based on your desired salary. When calculating their hourly rate, many people will take their desired salary, divide it by their weekly hours and end up with a figure way below their living rate.
You need to stop thinking like an employer, and start thinking like a business owner. Your hourly rate isn’t just covering your costs, it’s also covering your taxes – for which you’ll need to complete a Self Assessment – and your pension costs! When you’re calculating your hourly rate, you need to keep things like this in mind. Being a small business owner comes with a range of costs that will affect how much money you take home.
Let’s take a look at how to calculate your hourly rate.
A Five Step Guide to Calculating Your Hourly Rate
The First Step: Your Personal Expenses
To begin with, you need to consider what amount of money you would need to bring in to pay your personal expenses. Those personal expenses could be a range of things, usually those considered ‘living costs’. If you have a mortgage, or live in rental accommodation, you would need to take this into consideration when calculating what you need to charge.
Our first piece of advice is to total up all your personal expenses, from food and maintenance costs to travel and leisure activities. GQ, using figures from the Office for National Statistics, estimated that the average take home pay for a UK resident is £31, 461 per year. For the sake of this article, let’s say it’s £25,000.
The Second Step: Business Expenses
Once you’ve added up all your personal expenses, you should then turn to your business expenses. This can be a long and varied list – running a small business can include a lot of costs! From marketing costs to bank charges, travel expenses and office supplies, your business expenses can really add up!
Whilst there may be a lot of costs, they might not quite be as costly as personal expenses – particularly for a small business. So, suppose these costs total £10,000.
The Third Step: Your Total Costs
When you’re calculating your hourly rate, you need to take into consideration the previous two steps. Your hourly rate needs to take into account your cost of living and the cost of running your business. Remember when we told you earlier not to just factor in your desired salary?
If you don’t take into account your business costs, too, you might end up running at a considerable loss. You could devalue your business and leave yourself without money for personal expenses.
So, before you calculate your hourly rate you need to calculate your total cost of living and the cost of running your business. For the costs we’ve outlined, this value would be £35,000. That’s the £25,000 for personal expenses plus the £10,000 for business expenses.
The Fourth Step: Your Working Days
Your penultimate task is to work out how many working days there are in the calendar year. Safe have a pretty hand calculator that can help. We’ll give you a hand, too. There are 52 weeks in the year, meaning there are 52 weekends. So, that’s 104 days off! As well as weekends, there are 8 bank holidays in 2021 – there will be 9 in 2022, so if you’re calculating for next year, keep that in mind.
As well as those 8 bank holidays, you’ll want to factor in potential sick days to prevent lost income. According to the CIPD, the average number of sick days taken in 2020 was 5.8 days per employee – let’s call it six.
As well as the bank holidays and the sick pay, you should also take into account any holiday you may want to take during the year. According to the government, employed individuals are entitled to 5.6 weeks, or 28 days, if you’re working 5 days a week. Taking this as an average basis, let’s say, as a self-employed person, you’re entitled to the same amount.
Now, take all these ‘days off’ and add them together. Throughout the calendar year you would be entitled to 104 (weekends) + 8 (bank holidays) + 6 (sick days) + 28 (holidays). That would equal 146 days.
So, your total working days for 2021 would be 365 minus 146 = 219 days.
If calculating all this financial data is a little too much for you, take a look at Count’s services to see what we can do for you!
Let’s get back to it. At this point, you need to decide how many hours per day you’ll be working across the year. Full-time hours are usually 8 hours per day – that might be 9 in total with a 1 hour unpaid lunch break.
With that in mind, you would have (219 days x 8 hours per day=) 1,752 billable hours. With that in mind, we’re at the final step!
The Final Step
This stage is probably the easiest bit. You’ve calculated all the information, from your costs to your billable hours. Now, it’s time to put it all together – to do so and calculate your hourly rate you’ll need to divide your total costs by your billable hours.
So, for our example, the hourly rate would equal £19.98 – 35,000 divided by 1,752. This value would be the total cost you would need to charge in order to cover your living and business expenses!
The Bottom Line
Calculating your hourly rate is not an easy process. Not only do you have to value all your expenses and the quality of your business, you also have to do a painful amount of market research and – even worse – maths!
We know you didn’t start your business to spend most of your time calculating expenses and filling in financial documents – but we did! A professional bookkeeping and accounting service like ours can help you monitor and track your financial data, as well as manage and produce financial documents for you.
If you feel ready to outsource your financial management to a professional, get in touch with one of our financial specialists to see where we can help you!