Business Opportunities Weblog

September 8, 2004 by Dane Carlson | 3 Comments

Chris Hanson:

For a simple example, start with your base salary. Now tack on 25% as payroll overhead to cover all of the various payroll taxes you’ll have to pay. This may be a little high, but it’s good to create conservative models. It leaves some room to give, and it also makes it less likely you’ll run into unpleasant surprises. (Like, say, losing money even though you’re currently billing.)

Now add the rest your expenses. For example, your software and hardware budget for the year. Your general and professional liability insurance. Your benefits. Travel expenses for conferences. Office rent. Phone and utilities. Training classes.

Then calculate a realistic number for your potential billable hours in a year. I’ve come up with 47 weeks a year with 35 billable hours a week, or 1645 hours. After all, you need some vacation, some sick and personal days, and you can’t bill conference attendance or training either. Again, this is a conservative estimate; while you may plan to work 40 hours a week for your clients, you shouldn’t make financial plans based on this number.

Finally, figure out your likely utilization. Many consultants estimate 50%; that is, they don’t expect to work more than half time, so they need to bill a high enough rate to cover the rest of the year with that. Life will be great if you can get close to 100% utilization, but unless you have a very full sales pipeline or some guaranteed long-term projects, you’re living dangerously if you do any financial planning on that basis.

Once you’ve done all that take your expenses and divide by your potential billable hours multiplied by your utilization. That’s your break-even hourly rate, the rate your company can bill without losing money. If your company wants to make a profit, you need to bill something higher than this or get higher utilization (or both).

In Posts, Sales | 3 Comments