How Much is Your Time Worth
If you are starting an independent business one of the most valuable productivity tools you can develop is an accurate hourly rate. Not only will it help you establish a proper price for your goods or services but it will also help you figure out how to best prioritize your time.
So what should your hourly rate be? That is something you will have to figure out on your own, but here are some helpful guidelines. Do you need specialized equipment? Did you have to learn how to operate that equipment? Did you go to school or have to study to acquire your skill set? Are you proficient? Do you provide a level of service that goes above the standard? If you could answer yes to most of these questions then you qualify as a tradesman. You studied to use a specific set of tools and skills that apply specifically to your field. So if you need a starting point think about what your mechanic/plumber/electrician/web-designer charges for labor. Then comes the big debate and a little honesty. Are you a novice at your trade? Do you work at or above the level of your peers in your trade? How much overhead is required for you to do your job (overhead = cost of rent, insurance, equipment, packaging materials, branding... anything you have to pay for that doesn't directly go into the product you are making). Adjust your rate accordingly. This is not set in stone either. Hopefully you are getting better as you gain experience and your rate should reflect that. This also assumes that you are selling all that you make. If you are making a bunch stuff that isn't getting sold you need to reexamine your product and pricing (to be covered in a later post).
So now you have come up with a number. Great, you made up an imaginary number. What do you do with it? Your hourly rate can be used as the fixed variable in any number of situations. It's the difference between a+b=50 and a+25=50.
Here are some examples. For arguments sake let's say that you set your rate at $30 per hour. Say you need to order some supplies. You find them online but shipping is $12. You can go pick up the supplies from a specialty store on the other side of town and save on shipping. It takes you 1.5 hours to drive to the store and back. You just saved $12. What if you had just stayed in your workshop and had it shipped? In 1.5 hours you should have been able to produce at least $45 worth of labor towards your product. So by driving to the store to save on shipping you are actually losing $33.
Here is another good one, and a pill that most of us really need to swallow. You need to update your website. Nothing complicated, you just need to update your product listings and event schedule. So you spend the day fixing up your website because you are a boot-strapper and you wear all the hats in you business. At the end of the day you spent 8 hours getting everything sorted out. Had you spent that time in your workshop you could have produced $240 worth of labor. That is a ton to spend on such a simple task. Had you paid a friend or freelancer to do it (at $15/hr) you would have ended the day ahead $120 and not spent the day zonked out in front of a computer screen. Had you hired someone that knows what they are doing they will also get the job done in less time so your profit would have been greater.
Knowing your hourly rate is also useful when pricing your work and when collaborating with others. Let's say a couple asked you to make a bench out of a tree that fell in their backyard. What do you charge in a situation like that? If you priced your goods based on cost of materials you would be working for free. If you set your prices based on gut feelings (it happens a lot) you would have to try to figure out how much you might sell a bench like that for and then go from there. If you know your hourly rate to be $30 per hour and it's going to take you 20 hours to make the bench then the bench costs at least $600.
Having a solid hourly rate can be used in a myriad of other situations. What price you charge for your final products, what products are worth producing, when to hire employees and how much to pay them, and when to invest in equipment just to name a few. Also, being able to assign a value to your time can provide you with a little bit more confidence and a little solid footing in a your decisions as a business owner. A position that frequently calls on you to make choices based on your gut.