A simple guide to knowing your hourly billing rate

What should be your hourly billing rate as a Freelancer or an Independent Professional? Here's a mathematical way to figure it out:

This is a question faced by almost everyone who starts an independent practice or freelancing, but can't figure out a mental model for building a Fee Chart. Most simply end up charging what their competitors are charging.

To logically assess if your billing rate makes sense or not, you should know five things:

1. Your market rate of salary.
2. Your desired risk premium.
3. Your net profit margins.
4. No. of days you work per week.
5. No. of productive hours per day.

It all starts with how much would you *realistically* be making, if you chose a corporate job over professional practice. As a fresher Chartered Accountant, I think one can realistically get worth INR 60K per month working in some BigFour organization.

Now, that's your opportunity cost. But, you don't start a business to simply cover your opportunity cost. You've taken a BIG risk. And you deserve to be adequately compensated for that risk. Financiers call this 'Risk Premium'.

As a professional service provider, I think you deserve to make at least 2X your market rate of salary. That's your Risk Premium. So, in our above example, a fresher Chartered Accountant, who makes 60K pm in a job, should make at least 120K pm in his practice.

Most people figure it out till here. However, this figure of 120K, is supposed to be your 'Profit'. Not your 'Revenue'. Even if you work from your home & use your personal laptop & phone, you incur costs. They may be invisible now, but will prop up later.

Here are some costs everyone will incur:

1. Office Rent
2. Staff Salaries
3. Electricity & Telephone

These costs may not be visible now, but they'll be huge part of your overheads once you start scaling.

Another very important invisible cost is: Interest. You will want to keep at least four month's worth of staff salaries, rent & utilities in your bank account. This will be financed through working capital. Whether your borrow working capital or not, it carries a cost.

You'll also be investing in Furniture, Laptops & Cell phones. The Interest on this investment will also be a cost. Accounting for these costs early on is important because their real brunt is felt after you've built a sizeable organization.

Once you've accounted for all of these costs, you'll realize an important metric: your Net Profit Margin (NPM). This figure is important because it tells, out of the value you created what is the value retained by you.

As an Independent Professional, once you account for all the invisible costs, you'll realize that your Net Profit Margin is somewhere between 40% to 50%. Which means you won't pocket even half the revenue you generate.

Continuing with our example, if you're to make a profit of 120K & your NPM is 40%, you'll need to make 300K in revenue. Now, assuming you work 25 days every month your daily discharge rate comes to around INR 12K.

No one works for 8 hours productively every day. The figure caps at around 6. Rest is called 'Normal Idle Time'. If you work 6 hours, productively every day, your billing rate should be somewhere around INR 2000 per hour.

As a professional practitioner, any work you undertake will require some amount of time / effort / attention on your part. For every hour you spend on an assignment, you should charge at least 2000 Rs. to the client.

What if there is a disparity in the time spent on a particular assignment - between your staff & you? This happens a lot - your staff spends 5 hours on an assignment and then you spend 2 hours reviewing the work. How should you bill then?

Well, since your NPM is around 40%, your staff's discharge rate should be the rest 60%.  That means, for every hour of your staff's time, you should charge at least 60% of your personal discharge rate, which, in our example would come to INR 1200 per hour.

Thus, an assignment which might take your staff's 5 hours & your personal 2 hours, should entail a Fees of Rs.10,000. At least.

This model works great for building a Fee Chart - you just need to know how much of your personal time and your staff's time will be involved in a particular task.