In previous articles we have talked about entering our time into QuickBooks. So now what do you do with the information after it is entered? How many of you actually know what your profitability is per client?
One of the most common things I see among business owners is that they do not put a value to their time. Most business owners are DBA’s or LLC’s. As you know, these types of businesses do not take paychecks, they take draws. So how do you calculate the value of your time?
Another important aspect of knowing the value of your time is making sure that your billable rates are high enough. If you are covering overhead and actual cost, but don’t know how much you are “paying yourself” or if money is short when it comes time to take your draw, these steps will allow you to see in “black & white” just how much you need to raise your rates, why you’re not able to take your draw, and what steps you should take to be sure it doesn’t happen again in the future.
Before we get started with this, you need to think of how much money you want to make this year and break it down to an hourly rate. If you typically spend 40 hours in the office, use that as a basis. Use this formula: Annual Salary divided by 2,080 (52 weeks X 40 hrs a week) = Hourly Rate. Be sure to factor in vacation time, and extra hours if you need to.
The next step is to set yourself up as a vendor and set a rate in the item to code what you provide services for. Link the expense side to a payroll account or an owner’s wage account.
Step 1: Create a check and allow it to pull your time from your timesheets. If you notice all the detail posts to the item tab, just keep in mind that we are not going to pay all of this to ourselves.
Step 2: Click on the expense tab and post a negative dollar amount to the payroll account.
Step 3: Save and close the transaction.
Now when you run your job profitability summary, you have actual cost for your time and you can see if your margins are within 70% of what you billed. If they are not, your pricing is not high enough. Always keep in mind 1/3 cost goes to overhead, 1/3 cost goes toward direct cost and the remainder 1/3 goes to you, the owner.
Check out other articles discussing how to streamline your invoicing process all from recording your time.