All time based businesses should understand the hourly cost of their employees.When bidding for new clients or reviewing client profitability knowing the break even hourly cost is the bottom line below which you can’t make a profit.
These are the raw elements:
- Cost of employment
1. Cost of employment
Building up your hourly (or daily rates) starts with the individual cost of employing each member of staff delivering work on behalf of clients. These costs should include the whole package: gross salary, employer’s national insurance, the company’s pension contribution, health insurance, annualised value of a car, life insurance etc.
The billable rates need to take into account your company’s overhead costs. In this context overheads should include all costs; don’t forget to include depreciation and interest. The cost of employing staff who don’t deliver client work, for example, marketing, finance and HR should be included in overhead.You need to apportion the total overhead across all of the staff who deliver client work, person by person. Do this on a simple pro rata headcount basis or pro rata to salary.
The cost of employment and overheads can only be recovered by your company from hours spent delivering to clients. For each employee you need to calculate the realistically expected number of billable hours (or days) per annum. This means deducting from the total annual working hours holidays, bank holidays, time for training, non-client administration, new business generation and an allowance for sickness. By dividing the total cost of employment and overhead by person by the time available for delivering to clients you will calculate the hourly cost you need to recover to break even as a business.
You should now add an element for profit to the break even hourly rate. If your profit mark up target is 20% then add 20% to the total of the cost of employment and overheads to calculate your hourly billing rate. Round the answer up. Obviously compare with market rates.
It is common for businesses to use banded hourly rates rather than specific rates for each person. Once you have calculated the specific rates you will be able to band these by employee level, junior, assistant manager, manager etc. If you do this, it is also common practice to band the cost rates. Banding enables you to ensure that individuals are less able to make salary comparisons across their peers.
As a first step, why not pick the phone up and call John or email him and arrange to meet up. John's website is: http://www.nomizon.co.uk His credentials: http://www.linkedin.com/in/johntoppin