We don’t talk as much as we should about what an hour costs our agency. Maybe that will help inspire you to look at raising your rates. So the poor man’s way of figuring that out is you need four numbers. Number of hours, number of employees, total salary cost, and your overhead cost.
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Hey, everybody.
Drew McLellan here from Agency Management
Institute this week coming to you from Jersey City.
You know, we talk a lot about how much we should bill by the hour
or how much we should bill for an hour.
Not that we actually bill by the hour anymore.
We talked a lot about moving from $150 an hour to $175 an hour.
But what we don't talk as much about is what an hour costs our agency.
Maybe that will help inspire you to look at raising your rates.
So the poor man's way of figuring that out is you need three numbers.
You need the number of hours.
You actually need four numbers.
Number of hours, number of employees, total salary cost –
so that's going to be salary and benefits – and total overhead cost.
So for the year.
So go back to 2023 and gather up
number of employees at the end of the year
– and we can adjust for 2024 if you've added or subtracted staff
– total loaded salary for the year, total overhead for the year.
And then we're going to take that number – so we're going to take 1920
which is 48 weeks at 40 hours.
So we assume that most employees
between holidays and vacations and sick time work about 48 hours a week.
So we're going to – and again, remember, this is the poor man's way.
If you want to talk about the the very technical,
detailed way to do this, we can have a different conversation.
So I'm going to take 1920.
I'm going to multiply it by the number of employees that I have.
And that's going to give me my total hours for the year.
Then I'm going to add my salary, total salary –
so salary and benefits – I'm going to add my total overhead number.
And I'm going to divide that
total cost by the total number of hours
that I had when I multiplied the number of employees by 1920.
And that's going to give me an hourly cost.
So every hour cost me this much money to run the business.
And now remember,
you want to – you want to make sure that you have at least 20% margin
between what an hour costs and what we're charging an hour.
And also remember, you are not billing all 1920 hours times every employee.
So that's a whole different discussion.
But let's start with what does an hour cost my agency for every employee.
And then let's figure out from there
what our actual realized rate is of what
when we look at all the hours we don't bill and all the other things
that get in the way of us charging for all our people's time
like they're unbillable, like maybe they're an accountant.
And then we can kind of compare the two.
But for today, 1920 times the number of employees.
And then I'm going to take my total loaded salary costs
and my total overhead costs for 2023.
I'm going to divide that big number, that big cost number
by the total number of hours.
And that's everybody. By the way.
It's every employee, anybody who gets a W2 whether they're billable or not.
And that'll give you your per hourly cost per employee.
All right? I'll see you next week.
