Most service businesses charge an hourly rate. Coming up with the right selling price for your service business is essential if you want to be profitable. Figuring out how much to charge per hour is simple. All you have to do is answer a few questions:

How much money do you want in your pocket after taxes (per month)?

How much income tax will you have to pay? All you have to do is find out the mean tax rates for your income bracket. If you have an accountant, he can supply this information. If not, a quick phone call to your local IRS or Revenue Canada office will supply you with this % of income tax.

How much is your monthly overhead? What are the basic expenses (rent, phone, taxes etc.)

Determine your total billable hours per month. In other words, what per cent of your total working hours will you be able to bill each month. Total working hours per month are 160 but few can achieve 100% billable hours. You have to allocate time for record keeping, bookkeeping, phone calls and time you will spend doing marketing and sales.

Profit: this is your working capital or reserve fund. How much profit do you want or need? I suggest for most small consultants or service businesses that building a three month reserve is a good goal.

Billing Rate. Now with two simple calculations you will arrive at the rate you need to charge per hour to be able to pay your overhead and be profitable.

If you follow this chart line by line, item by item using this example, you will at the end have a profitable billable rate per hour:

Sample Calculation...

Item	Example	The Math
1) After Tax Income Goal (ATIG)	$4,000	This is the amount you want left over in your pocket after all the bills, taxes are paid.
2) Determine Income Tax Factor (ITF) the amount of income tax payable i.e. mean % of income tax)	30% $5,714.28	Determine ITF: 1.00 - mean tax rate. Calculation: 1.00 - 0.30 = 0.70 Formula: ATIG divided by Tax Factor Calculation: $4,000/0.70 = $5,714.28 Answer: $5,714.28
3) Add Monthly Overhead	$1,000 $6,714.28	Determine Monthly Overhead Formula: Answer From Step 2 Plus Overhead Calculation: $5,714.28 + $1,000 = $6,714.28 Answer: $6,714.28
4) Per cent Billable Hours (PBHM) per Month.	80% $8,057.13	Determine % Billable Hours Formula: 1.00 plus PBHM = 1.XX Calculation 1: 1.00 + (1.00 - PBHM) 0.20 = 1.20 Calculation 2: 1.20 X $6714.28 = $8,057.13 Answer: $8,057.13
5) Desired Profit (DP)	$1,000 $9,057.13	Determine DP Formula: Answer From Step 4 Plus Profit Calculation: $8,057.13 + $1,000 = $9,057.13 Answer: $9,057.13
6) Hourly Billing Rate:	$70.75/per hour	Formula: 160 hours X PBMH Calculation 1: 160 hours X 80% = 128 Hours Calculation 2: $9,057.13 divided by 128 hours Answer: $70.75/per hour

Note: this example produces $12,000 before tax profit. If you change any of the assumptions, you change the end result. For example, if your billable hours were only 50% instead of 80% you would have to charge $138.39 per hour to pay your overhead and bank $1,000/month.

Before you use this billing rate, other important questions that need to be determined are how competitive is this rate? Will people pay this rate? What are my competitors charging per hour?

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Greg Balanko-Dickson is a Business Performance Coach, Author and Entrepreneur.