Over years of running service departments and coaching service businesses, I have seen businesses struggle to get over the breakeven point, let alone make a profit. When we investigate their business, we find that the hourly charge out rate is way below what it should be, and on a number of occasions, I have seen businesses that charge an hourly rate that is well below their true hourly cost of running the business. In simple terms, it cost more to run their business than what they invoice. Going broke.
Why, because a lot of business owners calculate their hourly rate by adding the hourly rate of their technicians, adding car cost, mobile phone and a few other items to find out their cost and then add what they believe is their profit margin. A recent example is a client who had calculated their hourly cost to be $45.00 added $20.00 for profit, so was charging $65.00 per hour. When I calculated his true hourly cost, it was $75.59 per hour. They were losing $10.59 per hour and couldn’t understand why they were going broke.
So how did I calculate their true hourly cost?
The first thing you have to understand, is that you need to determine how many revenue generating hours you have to generate your revenue from each year. To do this, you have to first understand that your revenue is generated by your field or workshop staff only. Admin, management, tech specialists etc. are not revenue generators. You need to calculate the hours that your technical staff work each year, how many hours are lost over the year due to training, holidays, sick etc. (you still pay for them) you will then need to calculate 85% of the time they actually work. Once we achieve this point, we now have the actual Revenue Generating Hours. You then divide your total expenses (excluding cost of goods) by the number of revenue generating hours to determine what your true cost per hour is to run your business.
Once you have calculated the true cost of running your business per hour, you can then add your profit margin to the hourly rate.
If each of your service technicians work a 37.5 hour week, 7.5 hr day, the calculation is;
37.5 hours X 52 weeks = 1950 hrs paid for per year
Hours paid for but not available for billing
Holidays, 4 weeks X 37.5hrs = 150 hrs
Sick leave, 9 days X 7.5 hrs = 67.5 hrs
Training, 20 days X 7.5 hrs = 150 hrs
Public Holidays, 10 days X 7.5 hrs = 75 hrs
Total Hrs 442.5 hrs not available to generate income
Hours worked 1507.5 hrs work time
Productivity at 85% of time worked 1281.4 hrs Available to generate revenue.
From this calculation, you can see that although you pay for 1950 hours per technician per year, you only have 1281.4 of those hours in which you can generate revenue from. That’s 67.7% of what you pay for.
Now that we have the amount of hours available to generate the income, we need to divide this into the total expenses of the business excluding cost of goods.
Calculate your true hourly cost:
A business with 3 technicians will have a total of 3 X 1281.4 = 3844.2 Revenue generating hrs.
If the businesses total expenses are $294,427.00 we divide the expenses by the hours.
$294,427.00 / 3844.2 hours = $76.59 cost per hour to run the business.
At this point you now know that the True Cost of running your business is $76.59 per hour.
Calculate your hourly charge out rate:
The hourly charge out rate will be the cost per hour multiplied by the target profit percentage.
$76.59 per hour X 25% = $95.74 per hour charge rate.
What you charge out per hour is up to you, the key here, is that you clearly understand how much it truly cost you per revenue generating hour to run your business.
If you work a 40 hr week, change the hours to 40 and 8 hours per day.
If you have rostered days off (RDO’s) you will need to add them to the not revenue generating hours.
I have allowed for 20 days training. This is because the best team is a trained team and you need to ensure that your staff are constantly training. I found that 20 days per year is around the optimum balance of training versus productivity that will ensure you have a highly productive team.
Peter Johnson has over 35 years’ experience as a technician, state and national service manager, business owner and business coach. To find out more about managing your true hourly cost of running your business contact Peter at www.timeretrievers.com.au .