Measure what can be measured, and make measurable what cannot be measured – Galileo Galilei
As the business continues to grow, so too does my income. I thought I was doing pretty well and thought I was earning around $50 / hour on average, until I heard Vicki Robin speak of the hidden costs of employment on a recent Choose FI podcast. Vicki spoke of the actual hourly rate of pay, which she argued should take into account things like:
- Travel to and from work
- unpaid overtime
- cost of sales (sales expenses, lunch/coffee expectations, fancy clothes to look the part)
- time spent working from home or thinking about work.
An example was given that some people, after factoring in the above, realise they earn as little as $2.50 / hour!
So I thought it’d be a cool idea to track my time for a fortnight and create an equation to calculate my actual hourly rate.
Before I track my time however, I needed to go through my expenses and calculate my cost of sales. This figure is quite steady and averages out to $692.80 per month, which includes petrol, maintenance, cleaning consumables, insurances, registrations and subscription fees. I work a total of 121 hours per month, so cost of sales equates to $5.73 per hour.
We can use this information, along with the data from the time tracking experiment to create an equation that calculates our actual hourly rate for any job:
Hourly Rate (HR) = Amount charged (a) / (Travel time (t) + Work time (w)) – Cost of sales (c)
Now let’s compare two commercial cleaning job. I charge $70 / fortnight for the first, which takes 17 minutes travel time and 1 hour 23 minutes to clean.
- HR = a / (t + w) – c
- HR = $70 / (0.28 + 1.38) – $5.73
- HR = $36.44
The second is another showroom that I clean on a fortnightly basis for $120 and which takes 1 hour 40 minutes to clean and 54 minutes travel time.
- HR = a / (t + w) – c
- HR = $120 / (0.9 + 1.67) – $5.73
- HR = $40.96
I guess Vicki was right. Next I’ll calculate the actual hourly rate for all my jobs. From there we can explore ways to increase profit while reducing the number of hours worked.
Why not calculate your own hourly rate? Share your results in the comments!
N.B. – In the above equation, time (t) is a percentage of one hour. Eg. 17 minutes is 28 percent of 60, therefore in the equation 17 minutes would be represented as .28 – One hour and seventeen minutes would be represented as 1.28. No good at figuring out percentages? Here’s an online calculator to help.