One of the (many) great things about being a business owner is that you get to name your salary. Not in the “I want to make $1 million right out of the gate” way, but you really do get to own your salary.
But it’s a tough place to get to, especially if you’ve never had experience with pricing. It’s easy to forget all the things that go into your salary, because it’s so much more than your accounts receivable.
Unlike a corporate job where you get paid for the hours you work, you need to make sure your business as a whole is profitable. Your expenses to run the business, savings for growth, taxes and any additional staffing needs are all part of your business expenses. And don’t forget that you also need to factor in retirement savings and personal taxes too.
You can’t equate your salary with what you earned in the corporate world. This is probably one of the biggest mindset hurdles for new business owners.
How to Determine Your Personal Salary
As a business owner, your salary comes from what you make in business. So we need to start there.
When you think about what salary you want to take home, think about how much you need to make each year that will allow you to feel comfortable. Consider the home you live in (or want to live in), your transportation, vacations, household expenses, etc. Whatever makes up your ideal life, include it in your calculations.
- Figure out all the business expenses you have. This includes monthly subscriptions, legal and accounting fees, website maintenance, marketing, coaching, everything you spend money on in your business. A good way to ensure you’re not missing something is to review your business bank statements from the last 12 months and come up with a total amount. You can exclude any one-time expenses (as we’ll account for those in number 2, below). Stick to your recurring expenses for the business expense total.
- Next, add your business expenses to your ideal take-home salary, then add extra to account for savings and growth (I recommend about half of your combined salary and expenses). This is the total amount you need to bill in your business every year.
Now we need to determine how much you want to make per hour. This is a good exercise to go through, even if you don’t bill hourly. Your “hourly” rate can help you price packages and individual services.
Decide how many hours you want to work each week, or month. Remember that not all of your hours will be billable. Many of those hours (I’d estimate about half) go to marketing, bookkeeping and other administrative tasks you need to do to keep the doors open. If you plan to work full time in your business, only count about 20 hours per week as billable. This is a conservative number, but it’s a good starting place.
You also need to take into account vacation time, holidays and other days you’ll be away from billable work, like conferences. Of the 52 weeks in the year, two of those might be for vacation and two might be for holidays and other time away.
This leaves you with 48 billable weeks, at 20 hours per week (because the other 20 hours you’re spending on running your business). That’s a total of 960 billable hours. Divide your total in #2 above by 960 and you’ll find your ideal hourly rate. If your total above was $120,000, your hourly rate is $125.
Putting Your Hourly Rate to Work
A lot of business owners understand the concept of determining an hourly rate, but few actually put it to work. Part of your job as a business owner is to sell yourself. You need to understand what your costs are so you can get compensated for them. The more aware you are of your expenses and needs, the easier it is to say, “This is my pricing. This project costs $X.”
At the same time, those who may hire you as a contractor don’t necessarily understand the pricing structure you use. They think $125 per hour is too much because they don’t think about all the expenses that you must incur as a contractor–health insurance, marketing, taxes, Social Security, payroll, etc.
You don’t necessarily have to tell clients your hourly rate if you’re working in a project-based format, but you do need to keep it in mind so you avoid discounting your rates. When you undercut your own services, you’re not building the wealth you want and you make it more difficult for other business owners to build the wealth they want. But that’s a conversation for another time.