How to work out your real hourly rate
Ask a self-employed electrician what they charge and you get a number. Thirty-five an hour, say. Ask what they earn and you get a different number, a worse one, and usually a pause first.
The gap between those two is not a mystery and it is not bad luck. It is arithmetic that almost nobody does, because the headline rate feels like the answer and the sum that gives the real one takes twenty minutes and is slightly depressing.
Do it anyway. You cannot price a job properly without it, and every pricing decision you make until you have done it is a guess dressed up as a rate.
The sum, on a real week
Take somebody working a genuine 45 hour week, 46 weeks a year, allowing for holiday, illness and the fortnight in August when nobody answers the phone. That is 2,070 hours in the year.
Now the part that hurts. Not all of those hours are billable. Quoting is not billable. Driving between jobs is not billable. Ringing the merchant, chasing a delivery, doing the VAT return, going back because the tiler was not finished, sitting in traffic on the M5. For most one person trades the billable share lands somewhere between 55 and 65 per cent, and 60 is a fair middle.
Sixty per cent of 2,070 is 1,242 billable hours. At £35 an hour that is £43,470 of revenue for the year.
Then the costs. Van, finance and fuel and servicing, call it £4,800. Insurance £1,200. Tools and replacements £1,500. Phone and software £600. Accountant £700. That is £8,800 before you have bought a single fitting.
£43,470 minus £8,800 is £34,670. Divide that by the 2,070 hours you actually worked and you get £16.75 an hour.
Not £35. Under half of it, and that is before tax.
Why the billable percentage is the number that matters
Most people who do this sum for the first time reach for the rate. If £35 gives £16.75, then £50 must fix it.
It helps. But look at what actually moved the number, because it was not the rate. It was the 40 per cent of your working life that nobody pays for.
Push billable hours from 60 per cent to 70 and the same £35 an hour produces 1,449 billable hours and £50,715 of revenue, which is £7,245 more for no change in price and no extra hours worked. That is a bigger swing than most people would dare put on a quote.
Which tells you where to look first. An hour saved on quoting is worth the same as an hour billed, and it is a great deal easier to find.
Where the unbillable hours actually go
Track it for a fortnight and the pattern is always roughly the same three things.
Quoting comes first, and it is worse than people think because most of it is wasted by definition. If you win one job in three, two thirds of every hour spent quoting produced nothing. That does not mean quote less. It means quote faster, and get the acceptance rate up, because both do the same thing to this number.
Driving is second, and it is the one people accept as fixed when it is not. Two jobs the same day in the same postcode is one drive. Two jobs on different days at opposite ends of the county is four. A diary arranged by geography rather than by who rang first is worth several hours a week, and it costs nothing but the willingness to say "I can do Thursday" instead of "I can do tomorrow".
Third is admin, and specifically the version of admin that happens twice. Writing the job on a pad, then typing it up in the evening. Working out a total on a phone calculator, then working it out again because you cannot remember whether the first one included the tax. Every job that gets written down twice is a job priced at half what you thought.
What to do with the number once you have it
Two things, and the first is not raising your rate.
The first is that you now have a floor. Any job priced below your real hourly cost is a job you are paying to do, and you can now say which ones those are instead of feeling vaguely that some of them are bad. Usually it is the small ones: the hour of work that takes forty minutes of driving and a phone call to arrange. Price those with the driving in, or stop taking them.
The second is that a rate rise is now a decision rather than a hope. If you need £45,000 of profit and your costs are £8,800 and you can bill 1,242 hours, you need £43.32 an hour and you can say so without flinching, because you have seen the working.
The number to write down and keep is not your hourly rate. It is your billable percentage, because that is the one that moves and the one nobody else is tracking.
Doing it on your own figures
Open last year's accounts, or a year of bank statements if there are no accounts. Add up what came in. Add up what went out that was not materials bought for a specific job. Then estimate hours honestly: a week of actual hours worked, times the number of weeks you really worked.
Revenue minus costs, divided by hours worked. That is the number.
If you are doing this before your first year is out, the sum runs the other way round and starts from what you need to earn.
Most people find it is between 45 and 60 per cent of their headline rate, and the ones at the top of that range are not charging more. They are wasting fewer hours, which is a thing you can start fixing on Monday.