It isn't always easy to define charges and there must always be room for some leeway.
No two examples are the same but, as a businessman or women, the all important bottom line is a major factor in making your business a success.
I have heard before in the past from one-man-band's, the cry, 'I don't need to make a profit, I just need to pay my bills'. This is complete twaddle as I hope to demonstrate below.
Jane has just left Horticultural College and, for the purposes of this exercise, she has no debts nor does she have a mortgage. Jane pays £200 per month to her Mother for rent.
Jane decides that to get some experience that she wants to start a garden maintenance round. Jane only wants to do a 40 hour week and take four weeks of holiday.
Jane now has a maximum potential to sell 1920 hours of her time (48 weeks x 40 hours).
Jane owns a car and does on average 12,000 miles per year at 35 miles to the gallon. Following the example here we know that is will cost Jane £1388 per year in fuel.
Jane needs a small trailer to go on the back of her car to carry her tools and mower so she borrows £5,000 from her mother at zero interest which she agrees to pay back over two years on a weekly basis. We know that Jane is only able to work 1920 hours a year so if we multiply this by two and divide the £5,000 loan into it it gives us a figure of £1.30 per hour that Jane needs to charge out just pay back her loan.
If we summarise Jane's overhead costs at this point and what she need to charge per hour to pay her way:
Rent per year = £2,400/1920 hrs = £1.25 Per hour.
Fuel per year = 12,000 @ .90ppl = £0.72 Per hour
The loan of £5,000 payable over 24 months which is the equivalent to 3840 hours (1920 per year times two) = £1.30 per hour.
At this point Jane needs to charge her clients £3.27 per hour.
Of course there are so many other costs to take into consideration. Jane needs to advertise otherwise she will not get any work at all, so she agrees to put an advert in the local paper at a cost of £10 per week, making a total cost of £520 for the year or an increase on her chargeable hourly rate of £0.27. Car Tax and insurance come to £850 per year or an overhead cost of £0.44 per hour.
This brings the total that Jane needs to charge herself out to £3.71 but by adding vehicle servicing and sundry vehicle charges of £900 per year this hourly figure that Jane needs to charge (£0.46per hour) has risen to £4.17.
As a contractor you will also need to have a third party insurance and maybe some private cover so we are going to take a view of £600 per year or charge out rate of £0.31per hour.
Can you see how these costs are rising and the only way Jane can meet these costs is by adding this to her hourly rate.
Now the tricky bit. Jane needs to eat and she needs her recreation and some clothes. It is worth remembering that businesses also need to build up some fat for the unforeseen items - for example her mower, car, tools will need to be replaced at some point so Jane needs to make a provision for this for the future.
Assuming that Jane needs £100 per week for her food and recreation and also needs to accumulate at least £2,500 per year of savings we find we have to make a provision for charging back to the business another £7,500 or £3.90 per hour.
So where are we? In this very simplistic view, Jane needs to charge out her hourly labour at £8.38 and to cover all of her costs she needs to achieve 1920 hours of charged hours to meet her goal.
Beware though, these figures are based solely on meeting the 1920 hours and if for any reason you cannot do this then these figures will change. It is therefore very prudent to add a 10-20% contingency to the rate for safety which tops the rate up to £9.21 and £10.04 respectively. After one year of trading you can analyse your assumptions against actual figures which means keeping accurate records.
If you have made a healthy profit and you are finding that there is no shortage of work then that is a good sign. If you feel the market for your services will tolerate a rise in your hourly rate then you will have more flesh on the bone for improved equipment or maybe expansion.
As your business develops and expands it is important that these costs are monitored and kept in check. When you need to incorporate a proper salary for example to cover a mortgage of family costs then your hourly rate will need to rise accordingly.
I know it seems like a minefield and there are no two examples exactly the same - it pays to to seek advice from an accountant (don't forget to calculate his fees back into hourly rates) as you move forward.
There will also be a cost to the inland revenue in the form of tax, mobile phone rental and usage, reference books and clothing to take into consideration and every time you incur a cost you need to adjust your rates going forward.