Toolboxplaybook-back-btn Playbookplaybook-back-btn Chapter 5

CHAPTER 5

Setting a Path to Maximum Profitability

To understand where you are and where you need to go to truly influence the bottom line requires an up-to-the-minute knowledge of your financials. It also requires a financial plan that leverages that data for profitability and growth.

SECTION 7 OF 7

Billable Labor Rate for Profitability

To find your profitable labor rate, you divide the break-even billable labor rate by the percentage of cost in your projected budget—which is the counterpart to your desired net profit percentage. So, if your net profit goal is 30 percent, you divide by 70 percent or 0.70 to get your billable labor rate to reach desired profitability. 

Business Math Tip: Don’t multiply the break-even hourly rate by 30 percent as you’ll get a lower labor rate total. You divide by 70 percent to take into account a markup to calculate the percentage of cost that is profit, versus the percentage of the price that is profit—also known as the profit margin.

How to calculate direct labor rate for profitability:

(Break-even rate per billable hour) ÷ (1 - desired net profit expressed in decimals) = Profitable billable labor rate

$62.29 per hour ÷ (1 - 0.30)

$62.29 ÷ 0.70 = $88.99 billable hour rate to reach 30 percent net profit

Go to Chapter 6: Billing Structure: Determine Your Pricing