Setting your hourly rate: why your old salary is no help

It’s the first number anyone asks you for, and usually the worst reasoned. “What do you charge an hour?” – and because you have to say something, you quickly divide your old monthly salary down to an hour and add a bit on top.

The result is almost always too low. Not slightly: by half.

Why your employee salary is the wrong starting point

Your former gross salary was never the price of your working time. It was the portion of your working time that got paid out to you, after your employer had already carried everything else:

• the employer’s half of the AHV, which you now owe yourself
• paid holiday, around five weeks in which money arrived without you working
• continued salary during illness, public holidays, training days
• the pension fund contributions your employer co-financed
• and the time that wasn’t client work: meetings, administration, acquisition. You were paid for it without anyone buying it as a service.

On your own account all of that falls back on you. An hourly rate is therefore not a converted salary figure, but a price that has to carry an entire business.

Step 1: billable hours, not working hours

On paper a year has roughly 2,000 working hours. Rather fewer of them are billable.

First deduct what disappears anyway: five weeks of holiday, public holidays, a week or two for illness and training. That leaves about 1,800 working hours.

Then deduct what is work but nobody pays for: writing quotes, winning work, issuing invoices, capturing receipts, phone calls, looking after your own marketing. Depending on the trade, 55 to 70 per cent remains as billable time. Be conservative in your first year – the acquisition share is at its highest at the start.

We’ll continue with 1,100 billable hours.

Step 2: work backwards from your target income

Don’t take your old salary as the target; take rather more. You now carry the full AHV and your own provision alone, and nobody pays you for holidays.

An example for someone who last earned CHF 7,000 a month, so CHF 91,000 gross a year:

And for comparison, the naive calculation: CHF 91,000 divided by 1,800 working hours gives roughly CHF 50. Anyone who prices that way works for half, and only notices when the first final AHV assessment arrives.

That target profit is the figure both the AHV contributions and income tax will later be charged on. It is not your disposable income, but the amount both still come out of.

Step 3: test the number against the market

A properly calculated number is not yet a price you can charge. Two questions belong with it:

What does your market pay? Look at what comparable providers in your region and your specialism charge. Not to attach yourself to them, but to know where you stand.

Why would someone book you rather than the competition? If you can’t answer that in one sentence, you’ll be compared on price – and that is the one contest a single person doesn’t win against larger providers. A sharp specialism carries a higher rate than a broad description of yourself.

If your calculated number is far above what the market will bear, that’s a result, not an error: the business in this shape doesn’t support the planned number of hours, and what needs changing is the positioning, the scope of the service or the utilisation – not the calculator.

Step 4: finance the start

The hourly rate covers ongoing operations. It doesn’t cover the weeks in which you are already working but no money has arrived. Budget for purchases and fixed costs before the first revenue: hardware, insurance, software, a web presence, the first AHV instalments. Depending on the trade that runs to a few thousand francs – plus a cushion for the period in which invoices have been issued but not yet paid.

Plan that requirement for two phases separately: the start, and growth. The second is regularly forgotten, even though a phase that is going well is precisely what ties up money – in work done in advance, in materials, in invoices still outstanding.

Step 5: don’t leave your rate to your customers’ payment habits

A good hourly rate is worth little if the money arrives late. Two things belong to it from the outset: an invoice that goes out immediately after the work, and a clear payment term. Switzerland has no statutory 30-day term – the term that applies is the one you print on the invoice. What follows from that is covered in the article on invoicing and dunning.

VAT belongs in the pricing discussion too: once you become liable it is added on top of your rate and makes you noticeably more expensive for private customers. From when that applies is covered in the article on VAT registration.

The rate isn’t a decision, it’s a figure you keep updating

The calculation above rests on assumptions: 1,100 billable hours, CHF 12,000 of expenses. Both turn out to be too optimistic or too cautious in the first year – and you only see that if you measure them.

That’s exactly the point at which bookkeeping stops being an obligation. If your expenses are captured as they arise and you keep your billed hours and revenues in view, you can repeat the same calculation after a year with real numbers – and know whether your rate holds up, or whether you have spent twelve months cross-financing your own administration.

Conclusion

Don’t carry over the hourly wage from your employment. Work backwards: target profit plus business expenses, divided by the hours you can actually bill. Test the number against the market, plan the capital requirement for start and growth separately, and check the assumptions after the first year.

With bookkeeping kept up to date and properly issued invoices, after twelve months you won’t have an estimate – you’ll have figures.