How much should you charge per hour to be profitable?
This freelance calculator allows you to calculate the minimum rate you should charge in order to cover your business expenses and get an additional revenue. It relies upon the idea that what you charge should equal the sum of the salary you would obtain in a comparable job plus the expenses arising from your business and an eventual revenue. The rough incidence of income tax is also taken into account in the calculation of your fee.
As a freelancer, you should know your hourly rate in order to be profitable or, in other words, the exact value of your time. An accurate calculation of this price will not only allow you to create better estimates, but also it will serve you to better prioritize the projects you take on; By knowing exactly how much an hour of your time is worth you can decide more easily which projects to devote your efforts to.
How to calculate your hourly rate
A possible formula to calculate your hourly rate would be to set a price that allows you to cover the costs of your activity plus a profit. Dividing this amount by the billable hours (the hours worked that you can bill your clients) you would obtain the hourly price of your activity.
As for costs, you should include all those generated by your activity.
On the one hand, there would be costs such as rent, social security (self-employed), counseling, electricity, cleaning, etc. You should compute these costs without VAT, since the VAT is not an expense itself, as it is deductible in its corresponding tax declaration.
Another type of expense to consider would be the amortization, that is, the loss of value experienced by your assets over time due to deterioration or obsolescence, etc.
For example, if you buy a phone for € 250 and you expect to replace it in 4 years time you will have to amortize its cost at 25% per year, meaning an expense of 25% * € 250 = € 62.5 per year.
You also have to take into account the cost of your work itself, your salary. You should include what you can call an equivalent salary: a salary similar to what you would charge if you performed our activity as an employee. Notice that the fact of not having a payroll does not mean there is no expense behind. To see it more clearly, you just have to think that if you did not do the work yourself you would have to hire someone.
Finally, personal tax should also be considered, since the income derived from an economic activity is taxed annually by said tax. As it is a progressive tax, the marginal rate should be used as a tax rate, that is, the rate at which the last earned income is taxed.
The concept of benefit refers to the difference between income and expenses. The price should allow you to obtain a certain profitability above your costs. The amount to include will not only depend on your ability to manage your business profitably, obtaining revenues at minimum cost, but also your prestige, the market situation, demand and competition, etc.
c. Billable hours
Finally, you should determine the number of billable hours, the hours you can actually bill to your customers. Not all your activity is directly related to the services bought by your clients. Activities such as business management (including accounting, billing, etc.), marketing, or your own training can not be explicitly included in the invoice you issue to a client.
You can only invoice those hours in which you do an activity directly related to the service you are being paid for.
To determine the number of billable hours you need to calculate the number of hours you work per year and the percentage of those hours that you can invoice.
The number of hours worked can be easily found out by multiplying the average number of hours you work per day by the number of days actually worked per year.
To know the average number of hours we work per day, you only have to divide the number of hours you work per week (your work week) by the number of days of your work week. For example, if your work week is 5 days and 50 hours you work an average of 50/5 = 10 hours a day.
To calculate the number of days you work per year, you have to multiply the number of days you work per week by 52 (number of weeks that the year has) and discount holidays, sick days, vacation days or days you do not usually work during the week. For example, if you work 5 days a week you will be working a total of 5 * 52 = 260 days a year. If you take 22 days of vacation a year and expect to be sick 3 you will be working really 260-22-3 = 235 days a year.
The number of hours worked per year will be the result of multiplying the hours worked per day by the number of days we work per year. Following the previous example would be: 10h/day * 235 days = 2350 hours/year or, what is the same, 2350/12 = 195.8 hours/month.
To determine the percentage of billable hours, you would have to estimate the percentage of time you dedicate to the work commissioned by our clients, excluding the time allocated to activities that do not directly add value, such as accounting, sales, training, etc. For example, if you work 5 days a week and 2 of them are devoted to manage your activity, sales and the like, you will be using 40% of your time (2/5) in activities that are not billable and 60% in activities that are.
The number of billable hours will be the result of multiplying the number of hours worked by the percentage of billable hours.Following the example, if you work 195.8 hours per month and only 60% can be invoiced, you will have a total of 117.5 billable hours each month.
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