How much is your time worth as a business owner?
Did you start your business with the dream of having a flexible schedule, great salary, annual dividends and a legacy that could one day be sold – only to find out that you’re working harder and longer hours than ever before, for less pay, just to make ends meet?
I see this all the time. It goes something like this.
“I’m stuck in the start-up phase at the moment. I’m so busy trying to manage my staff, do business development, manage my cashflow… and do the work!”
Days are spent fulfilling a multitude of roles, with the belief that hard work will eventually yield a financial return. But rarely is there a correlation between time spent and cash in the bank.The quicker you can stop working in your business and start working on your business, the quicker you will realise your dream as a business owner. And the key to being able to do that is understanding the true value of your time.
In this article:
- Stop working in your business and start working on your business
- How much we think our time is worth
- How to calculate your new hourly rate or value
Stop working in your business and start working on your business
The most common error business owners make is that they are too focused on working in their business, rather than in their business. To be blunt, they’re spending time doing sh!t they shouldn’t be doing.
Things like filling forms, bookkeeping, chasing debtors, paying the bills, fixing the IT system.
Most entrepreneurs already know they shouldn’t be doing these sorts of tasks… but the excuses I always hear are:
I can’t afford to pay myself, let alone another person!
I can’t justify the cost to employ or even contract someone to take care of it because it’s easy and I can do it myself.
The second excuse is most common. Profit margins are front of mind when running your business and sometimes we just can’t shake the mindset of saving every last penny with the hope to pocket it later on.
And while this may be helpful in the true startup stage of your business when you’re bootstrapping to make ends meet, it’s easy to get stuck in the trap of doing everything yourself despite it not being the best use of your time.
The key to changing this behaviour is understanding what your time is worth.
How much do we think our time is worth?
In a survey by eVoice (j2 Global, Inc.), 400 small business owners were asked the question: “How much is one more productive hour in your working day worth to you?”
In the results, 30 per cent indicated $100 per hour, while another 24 per cent said $200 per hour.
But what was interesting to me was that 25 per cent of respondents believed an hour of their time to be worth over $500.
Fascinated by the survey, I took the time (pun intended) to calculate what my hourly rate would be. So now I’m going to share this formula with you, and we can work it out as we go.
Three steps to calculating how much your time is worth
I did some brainstorming and research and arrived at the following approach as the most accurate method for valuing an hour of your time. I also explored how that time can be maximised.
It involves three steps:
Based on your company’s most recent financial year, add your share of annual net profit together with your total annual remuneration (annual salary, car allowance etc.). Then divide that sum (adjusted net profit) by the total annual hours you devote to the business.
The resulting dollar amount per hour serves as a baseline reference for your hourly rate.
Example: $150,000 salary + $50,000 dividend / 1920 hours (40 hours per week for 48 weeks per year)
Now that you have a base hourly rate, begin to question what ‘non-value-adding’ activities you could potentially reduce or eliminate from operating your business.
These things could be administrative tasks such as phone calls, emails, marketing, payroll – essentially anything that does not directly correlate to maximising the value and profitability of your business. Once you have identified these non-value-adding tasks, estimate the total number of hours you would typically spend doing them annually.
Example: 80% of 1920 = 1536 hours of non-value-add tasks
Subtract the non-value-adding task hours from the total hours you spend on your business, and recalculate your hourly rate.
Example: 1920 – 1536 = 384 value-add hours
Do this by taking your adjusted net profit and divide it by your revised productive hours spent on your business. The result is the hourly rate you should aspire to be generating.
Example: $200,000 / 384 = $520 (aspirational hourly rate)
I make a habit of keeping a personal timesheet, tracking all the time I spend working on my business, and recording all the specific activities that I am doing.
I review this timesheet every three months to ensure I’m maximising my time and my hourly rate isn’t being diluted with tasks that don’t add value to the business, like extraneous admin or meetings that really could have been an email.
I encourage you to do the same.
Start by making a list of everything you spend time doing for your business over a normal daily/weekly/monthly cycle.
Rank the list starting with tasks that have the most impact on increasing profitability, working your way down to those with the least impact.
Then starting from the bottom up, ask yourself: “Given what an hour of my time is worth in profit-making potential, which of these tasks can I eliminate from my day, with that effort instead being redirected to activities that will yield a greater return on my invested time?”
Focus your valuable time and energy on the things that really add value to your business, like training and nurturing your staff, developing great relationships with your customers and constantly innovating. Consider outsourcing, or even just delegating the non-value-added tasks, and you’ll be surprised at the results.
And that’s how you make your business work for you – not the other way around.