The formula
rate = (target + costs) ÷ billable hours a year
Where it comes from
The sum almost everyone does the first time is dividing what they want to earn by the hours they expect to work. That produces a rate that is too low, because a good part of the week goes on work nobody pays for: finding clients, quoting, invoicing, learning and admin. What you have to divide by is billable hours, not hours worked.
How to work it out by hand
- Add your business costs to your annual target
- Multiply your weekly hours by the weeks you work in a year
- Apply the percentage of hours you actually manage to bill
- Divide what you need to bill by those billable hours
What is worth knowing
A realistic billable percentage is between 50 % and 70 % for someone working alone, and it is lower in the first years, when a lot of time goes on winning clients. At 60 %, the correct rate is the naive one divided by 0.6: 67 % higher. The other blind spot is costs: insurance, equipment, software, accountancy and cover all come out of what you bill rather than out of the target, so they are added on.