This is the second part of a seven-part series designed to help creative professionals succeed in doing their life’s work…for a living. New here? Start at the beginning. The second deadly sin we are discussing is…

Not Knowing Your Hourly Rate

How much are you worth? How much is your time worth? Do you know? If so, are you confident that you are charging the right rate? If not, we’re going to help you find out. (The advice I’m giving is heavily adapted from Cameron Foote’s formula in his book, The Business Side of Creativity. This is the most comprehensive resource I have found for creative professionals.)

Step one: Figuring out your annual salary

What do you need to make per year? You may already have an idea in your head (a million dollars, right?), but if not, here are several factors to consider:

• What do you need to pay your bills?
• What do others in your field earn?
• What is your skill level/level of experience?

Ask yourself these questions and determine your annual salary based on a combination of the answers. Be realistic, but don’t cut yourself short. After you have that figure nailed down, add in what you expect to pay in federal and state taxes.

Step two: Figuring out your annual overhead and expenses

Do you rent office space? Buy supplies? Spend money on monthly mailings? Write down a budget for the year. It doesn’t have to be perfect, but try not to leave anything out. Here are a few things you might consider including:

• Monthly expenses (internet, office phones, cell phones)
• Equipment (computers, cell phones, PDAs)
• Furniture (desks, chairs, lamps, filing cabinets)
• Rent and utilities
• Mileage or transportation expenses
• Travel expenses
• Mailing expenses (supplies, postage)
• Website expenses (hosting, domain name)
• Outsourced work (marketing, web design, print design)

Your needs will obviously vary, but that will get your brain started.

Step three: Figuring out your annual billable hours

Not every hour you spend working will be billable. In other words, you aren’t going to spend every working hour creating. You also have to spend time marketing, presenting, doing administrative tasks, and on and on. Most creative professionals spend anywhere from 50-75% of their time actually doing work that is “billable.”

To figure out your billable hours, simply multiply the number of working hours in a year by the percentage of hours that are actually billable. For example, most people work a total of 1,920 hours every year. This assumes that you work 40 hours per week for 48 weeks, taking 4 weeks off for vacation/sick time. If you work 1,920 hours in a year and expect 60% of that work to be billable, multiple 1920 by .60. That gives you 1152 hours billable hours per year.

Step four: Figuring out your minimum hourly rate

First, divide your salary (plus expected taxes) by the total billable hours you have available to you. For example, let’s use $65,000 per year ($50,000 plus a good chunk for the government.) Divide $65,000 by 1152 billable hours, and you get approximately $56.50.

Second, divide your annual overhead and expenses by your total available billable hours. For example, let’s say you plan on spending $25,000 in business expenses. $25,000 divided by 1152 equals approximately $21.75.

Now add those two numbers together ($56.50 + $21.75) and you get a grand total of $78.25. But we’re not done yet.

Step five: Add in room for growth

I’d imagine you are interested in growing your business — not just maintaining the status quo. To do this, you will have to add in a profit factor. Foote recommends a goal of 25%. This money is for putting back into your business so that you’ll be continually growing and improving, as all viable businesses need to do.

In our example, we would multiply our minimum hourly rate ($78.25) by 1.25. That gives us our final rate — approximately $97.75 (I deal in quarters to make it easier). You can round up or down to further simplify things.

So, how’d you do?

Were you fully aware of the value of your time? Are you charging enough for your work to not only pay your salary, but to be profitable? If not, make it your goal to ante it up. If you don’t feel like you can charge that much, either increase your game to make your work more valuable to your clients or come up with a more efficient way of working. When you under-price your work, you decrease its perceived value — definitely not good for the ongoing health of your business.