What’s Your Net Profit…Per Hour?
My favorite mathematician is a man named John Allen Paulos. I love his books, especially one titled, “Innumeracy.” Better than anyone I’m familiar with, he helps the lay person to understand how poorly we interpret statistics, and therefore, risk.
He once asked a college class he was teaching this question: “How fast does human hair grow, in miles per hour?”
A few of his students got busy with their calculators, while one incredulous young woman raised her hand and simply stated, “Hair doesn’t grow in miles per hour!”
The point being that we become accustomed to interpreting data in “standard” ways. In this case, perhaps the student would have been happier with something like inches per month. But of course any measurement can be converted to another unit or scale, and doing so might get us out of a rut and help us to see something differently.
So, it occurred to me that it be fun to take a look at your “net income per hour.” And, for this exercise, I would include any wages that you may have taken out “above the line” as an expense, in the bottom line.
So, using a decent but not spectacular benchmark goal of 14% of sales, let’s look at a design practicing with top-line gross sales of $750,000 a year. That equates to a net profit of $105,000. (14%)
Assuming you work “only” 2,000 hours a year (I’ll give you two weeks off for vacation) then you’re actually netting $52.50 per hour. I’m not talking of billable hours, just all the hours in a workday.
Of course if you’re honest, you’ll probably find that your weeks average closer to 50 hours than to 40, which would reduce your net per hour to only $42.
I’m betting that just like the young lady who couldn’t envision hair growing in miles per hour, you may be a bit shocked that you’re earning so little, “net per hour.”
I mean, don’t you bill at an hourly rate of $150? Or $200? And yet I’m saying that you’re only “making” in the neighborhood of $45-50? That all of your time, when totaled, only sums to that amount?
That’s right. And the reason I think this measure could prove valuable is that your “net profit per hour” number includes absolutely everything! It takes into account not only your product sales and time billings, but also your cost of goods sold and all line items expenses!
I hope I’m not ruining your life, but I wonder after doing this exercise, if you’ll ever be able to look at blocks of time on your calendar without putting a premium on that time.
Of course the math works in reverse, too. If you’re currently earning, say, $50 net per hour, and you could raise that to $60, that would be $20,000 more in your pocket at the end of the year. ($10 per hour x 2,000 hours.)
And how might you raise it? Ahhh…I love it when business gets simple because there are only four ways to raise that number:
- Increase the quantity of what you sell
- Increase the prices of what you sell
- Reduce the cost of goods sold of what you sell
- Reduce your fixed overhead expenses.
That’s it. Which of those is most easily done? Always, always, always…raising prices. But the others are worthy of study as well.
And since I know you’re wondering, human hair grows at about .00000001 miles per hour.