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Cost of Running a Business
When you are asked about the hourly cost to run your business, the first thing you might think is what your hourly pay rate is. Someone in retail may think this is enough. Many people who run service businesses don't think in terms of hourly cost. Unfortunately, to run your business you need to know this information to understand where your break even cost is going to be - this is the minimum charge you must have per customer to maintain your business. There is a simple formula which can easily determine the hourly rate to keep the business open.
The formula below uses four parts to come up with the hourly cost to run your business:
(Your Pay + Your Overhead + Your Profit Margin) / Working Hours = Your Hourly Cost)
We'll dook at each part of the formula so you can understand why you need to know that number. Use a weekly average for each number to get the hourly cost.
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This is the hourly cost to pay yourself to run your business, or what you would pay an employee to do your job. This number could be based on what you made at previous employment before opening your business, or it could be based upon industry standards. This is the number needed to pay personal expenses and bills each week.
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This is the amount needed to keep your business running properly. To find the hourly cost of your business overhead, you will need other numbers. Some of the numbers to include would be cost of utilities, taxes, insurance, maintenance, fuel, Internet access, and any other expense for items which are used on a near daily basis to maintain your operation.
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Profit margins are the amount above basic operating costs to build revenue. Figuring your profit margin is accomplished by using a percentage, which is is based upon the sum of the previous two items above. To find the hourly cost to run your business profitably you need to take your hourly pay plus your overhead, then divide that by a percentage to find a number for your profit margin.
I'll use a contractor job as an example. If I wanted to earn $15 per hour, and a job took me an hour to finish, I'd make $15. The supplies I used to do the job would include materials, gas, permits, insurance, and so on. Let's use $50 to cover overhead for the job. It looks like this: $15 + $50 = $65. If I want a 20% profit I would take 20% of 65 which is 13 – this would give a profit of $13 per hour.
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To find the hourly cost to run your business you will also need your hourly pay; but you also need to calculate an approximate number of hours of work each week. You need a best guess for an average work week to “be" at your business.
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Let's plug in numbers to show how the formula works.
- We'll go back to the contractor job at $15 per hour at 40 hours a week. This gives us $600 per week.
- Use the overhead cost estimate from above of $50 per hour and do the same math (50 x 40 = $2,000 per week).
- Take the $13 per hour profit and do the same thing (13 x 40 = $520).
- Add the totals (600 + 2,000 + 520 = 3,120).
- Divide the total by the number of hours worked (3,120 / 40 = 78).
You would need $78 per hour to run a profitable business in this example. You can use this formula for any business.
Image Credit: Wikimedia Commons