What is your hourly rate as a business owner?
Here is a “motivating” exercise for you….. calculate your hourly rate. I’m not talking about what you charge per hour for a service (if you sell services), I’m talking about what you end up getting paid per hour. For those following my regular posts, I eluded to it in a prior article.
So here is what I recommend all business owners do…. its not hard, so get to it.
Take your accounting profit for the year per the Financial Statements prepared by your accountant. I recommend accountant figures, as they will be accurate… so for most people that will be the 2015 financial year.
Add back owner wages and superannuation (not drawings or dividends, only wages recorded as an expense in your Profit and Loss)
Add back any items your accountant has claimed as Depreciation or “immediate write-off depreciation”
This is your Adjusted Net Profit.
For example, imagine the profit per the Profit and Loss Statement for the business was $18,000. The wages and superannuation included in the Profit and Loss Statement to the single owner were $40,515. A 2nd hand car was purchased for $10,000 but the accountant claimed that as an immediate deduction in the Profit and Loss Statement. Then the Adjusted Net Profit is $18,000 + $40,515 + $10,000 = $68,515
Now add up all the hours you worked in and on the business for the year. In most cases an estimate is fine – for example say 50hrs a week @ 48 weeks a year = 2,400 hrs (Most of you are thinking… disappointingly…. gezz if that was all I worked I would be happy). Do this for each owner and add them together. The total is your Owner Hours.
Take your Adjusted Net Profit and divide it by the number of Owner Hours = your Hourly Rate.
In my example, that would be $68,515 / 2,400 hrs = $28.55
Importantly, now compare/benchmark this to your most senior employee, your last paid position or the market hourly rate for someone doing your role (Typically an Award rate)…….
Is it higher or lower than the benchmark? Is it a fair reward for your time and effort…….. and compensate you for the risk you take and stress you absorb. Remember my prior article, as a small business owner you need to be compensated not just for your time, but the risk you are taking.
If is not higher than the benchmark, or you simply want to improve it, all is not lost. Holmans can help you monitor this and put in place strategies to improve your average hourly rate. I have deliberately kept the formula above simple, but if it is too complicated or you think there are other important adjustments, talk to your accountant. Hopefully they have raised this sort of thing with your previously.
One more key thing…… Try not to get depressed by this calculation….. instead use it for motivation. Put in place some strategies and monitor it each year to see if it is improving. I will be going through some profit improvement and growing your business strategies in some upcoming articles.