Rates and Billing

Discuss setting rates and find billing resources and information.

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Old 08-31-2011
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Default Calculating your rate
I posted this on another thread, but it was in the bookkeeper forum. So, I am re-posting it here for additional input and a larger audience, hopefully to help those who are struggling with how much to charge! I appreciate any input.

* * * * *

Keep in mind, that on top of expenses, you can anticipate (depending on your state) 35-42% of your NET profit will be taken in Federal and State taxes annually.

So the best suggestion is to calc how much you need to live comfortably, then estimate your annual expenses (figure in utilities, marketing costs, supplies, etc.) and then add 42% on top of that. A 40 hr workweek is 2080 hours/year. So for example:

PERSONAL EXPENSES - annual
$14,400 rent/mortgage ($1200/mth)
$4,200 utilities ($350/mth - elec/gas, water, phone, cable/satellite
$10,400 groceries/gas ($200/wk)
$350 prescriptions/dr visit
$1,200 auto insurance/plates/repairs
$1,000 misc

BUSINESS EXPENSES - annual
$1,200 office supplies ($100/mth)
$900 cell phone ($75/mth)
$600 internet ($50/mth)
$100 bus/State filing fees (annual)
$120 post office box (annual)
$1,200 marketing ($100/mth)

= 31,550/yr gross personal expenses
= 4,120/yr gross business expenses

The example above requires that you gross AT LEAST $35,670 to make ends meet. Ideally, you would want at least a 30% profit (10% for savings, 10% tithe, 10% 'fun money') so you now need to gross at least $46,371/yr. But, oh wait! You have to pay TAXES on the profit! Your taxes are approx 42%, but of course the more you earn, the more your taxes! So now you need about 116% profit on top of your expenses ('cuz remember, you can't write off personal expenses) so you now need an income of $77,047/yr.

$77,047 gross profit
less 4,120 bus expenses
equals 72,927 net profit

less 30,629 federal/state taxes
equals 42,298

less 31,550 personal expenses
equals 10,748 (a little over a 30% net profit)

To make the required gross of $77,047/year, at 2080 hours (40 hour workweek) you need to bill $37.04/hour.

*WHEW* Make sense? Obviously, this is a very simplified example and doesn't come close to figuring out accurate expenses. It's just a demonstration of all the financial considerations you need to make when setting rates.
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Old 08-31-2011
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Default Re: Calculating your rate
Wow! That really helps put things into perspective!
Thanks so much for posting this, as there were things I hadn't taken into account. Though the rate is pretty close to what I have as my hourly rate, your example breakdown is a great resource.

Thanks again for sharing!
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Old 08-31-2011
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Default Re: Calculating your rate
You are very welcome! The whole "calcing my rates" thing was really a tough one when I started out. I used rate calculators, compared that to the 'going rate' across the country for VA bookkeepers, and then finally just sat down and figured up my actual expenses to finalize my rate structure. I created excel budgets for both personal and business budget calculations, that I can update monthly for actual expenditures. If you would like copies of either one (or both), pm me with your email and I will send them to you.
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Old 08-31-2011
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Default Re: Calculating your rate
Lily, I am speechless with gratitude and amazement. Your "template" can apply to most, if not all situations. Thank you.
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Old 08-31-2011
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Default Re: Calculating your rate
This is a wonderful guide. Some rate calculators leave out the part about taxes, but this shows just how important they are to consider! Thank you for sharing this.
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Old 08-31-2011
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Default Re: Calculating your rate
Great post, Lily! Well done! I've liked it to my FB page. (So glad you are back! )

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Old 09-01-2011
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Default Re: Calculating your rate
I'm glad this has helped. Figuring out rates can be incredibly confusing and I have often wondered how people manage to survive on really low rates. Probably they don't! I think it's easier to start with a reasonable rate than to try and increase them with ongoing clients... (although, of course, that happens, too!)
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Old 09-06-2011
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Default Re: Calculating your rate
Helpful post! I had know idea until now how I was calculate my budget.
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Old 09-08-2011
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Re: Calculating your rate
You are truely your namesake! Thank you'n
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Old 09-08-2011
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Default Re: Calculating your rate
Originally Posted by Office Goddess View Post
I think it's easier to start with a reasonable rate than to try and increase them with ongoing clients... (although, of course, that happens, too!)
I am planning to review my rates yearly or so; consequently, I have included a phrase in my contract that states rates can be increased with a 30 day notice to client(s) at least once but no more than twice in a one year period.

I almost hope I can manage expenses so I don't have to increase my rates at all. Could that be wishful thinking? LOL!

I do have one question though. I've read that new companies should expect to market their business up to 50% of their time so that billable hours really would be much less than 2,080. Any thoughts on this?
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