Cost rates are crucial when it comes to estimating your profit margin under a job. So, it's important to keep those costs up to date for each team member. In the rare cases, you will bill clients hourly, then you may choose to use different rates or a blended rate for their invoices, but you should still know your true hourly rate for internal purposes. This helps you understand the value of your (your team's) time.
Here's a basic formula to help you calculate your team's actual rates (might need to involve your accountant or bookkeeper to help with some figures).
Determine your team member's salary.
$75,000 per annum (salary of an employee)
2. Working Hours
Figure out the total number of man-hours that your studio bills each year.
8 hrs per day
x 5 days per week
x 52 weeks
x 1 employee
Obviously, not one person is expected to be charged for every single hour of their time, so some allowances have to be made for vacations, public holidays, sick leave etc..
7 legal holidays
14 x vacation days
5 x sick leave days
8 x hrs per day
1 x employee
= 208 hrs off
2,080 - 208 = 1,872 (working hours minus hours off)
Please ensure that you also make allowances for non-billable hours, such as marketing, admin, sales etc
1,872 (working hours) - 468 (25% of 1,872, non-billable time)
= 1,404 billable hours.
3. Hourly rate considering working hours
Divide the number of billable hours into the annual cost of salary, in order to get the "per-hour" cost of labour.
$75,000 (salary) / 1,404 (billable hours) = $53 (cost of labour per hour)
4. Hourly rate + overhead hours
It's crucial to determine your overhead costs. Overhead costs are all costs that are required to run the business such as electricity, rent, equipment etc. Essentially, those are all costs except salaries. These expenses are passed on to a client indirectly building an add-on percentage into billable time. Divide your annual overhead costs by total salary to determine overhead percentage of salary costs.
$25,000 (yearly overhead costs) / $74,000 (employee salary) = 33% (overhead %)
*The yearly overhead costs number should reflect your studio's total overhead costs divided by a total number of billable employees
$53 (actual hourly rate) + 33% = $70 (p/h rate to break even )
*This is the price per hour to recover the cost of salaries plus overhead expenses
5. Final cost rate calculation
If you sold every possible billable hour @ $70 p/h, you'd only break-even. It also need to make a profit (lets hope so!). Profit gets your business through rainy days, whether its pandemic or quiet period. It provides a cushion for slower days. So, add a desired profit margin to the price per hour.
$70 (p/h rate to break even) + 25% (profit margin) = $88 (actual cost rate).
*This hourly rate represents the minimum rate you can charge to cover your costs of labour and overhead with a profit margin of 25%. Use this rate to determine your in-house budgets.