This is a message for business owners in the service/contracting industry: ensure you have reviewed your chargeable hourly rate. Inflation is easily noticeable and has been all over the news, and New Zealand’s Consumers Price Index (CPI) increased 4.7% in the 12 months to the December 2023 quarter[i], and 7.2% in the 12 months to December 2022 quarter[ii].  

Inflation may have you feeling the pinch and finding yourself in a position where not only is cash (the lifeblood of any business) getting harder to find but there’s also a squeeze on the net profit ‘bottom line’ which is the reporting body of a business. 

The bottom-line figure in the Profit & Loss Statement is helpful for planning and decision making because it’s the starting point for knowing how much to allocate for;

• drawings,
• tax payments,
• paying back debt, and
• reinvesting back into the business.

And it’s a common mistake to let the bank account balance be the leading guide for those decisions.
So, what measures could you take to relieve some of the pressure?

You can review the spending in the most recent cashflow statement and put steps in place to reduce unnecessary expenses, and you can work with us to set a business expense budget to keep you aware of future spending.

However, the reality is that while these exercises are extremely helpful for tightening the belt on spending, it’s just kicking the can further down the road unless you’re also reviewing the most powerful tool your business has at the same time: Income.

Reflecting on the CPI statistic, if the chargeable hourly rate does not at least match the inflationary increase, then the business is losing spending power and risks losing some of its freedoms – Time (need to work more to compensate), Financial (less to spend on the things you need and want), and Mind (disrupted sleep worrying about cashflow).  Simply put, if everyone else around you is increasing their price points, you need to, or your business will be left behind.

Another issue is that self-employed need to understand what their actual bottom line/hour figure is.  We can work with you to get a detailed answer to this, but a  quick high-level exercise you can do now is: Roughly work out the number of hours you worked throughout the year and divide it into the Net Profit figure from your most recent Profit & Loss statement. 

For example : Nick is self-employed, offering services to the public, and he charges himself out at $70/hour. 
That can seem quite an appealing hourly rate.  However, the most recent 12 month Profit & Loss statement showed a Net Profit of $75,000
(Income less expenses, interest and depreciation). 

Nick worked 5 days a week, doing 8 chargeable hours a day, for 49 weeks (after he took 3 weeks off over summer). He did not work an additional 8 stat days and had 4 days off where he couldn’t work due to sickness.  Total hours available to work =1,582.

The actual relative hourly rate (before tax) is more like $40.23. 

Nick needs to reflect on how appealing that number is now as compensation for all the work he has put in. Because business owners will know too that on top of chargeable hours is time spent working on the business doing things like invoicing, lining up work, and meeting all the compliance requirements.

From 1^st April 2024, the Minimum wage will increase to $23.15.  If your number is around that, or less than what you expect on PAYE wages, then it’s critical to meet with our team for a deeper dive into meaningful things you can do to get back on track. Your time and risks all need to be compensated for all those skills and extra efforts that go into being self-employed.

Increasing your hourly rate can be a scary thing, especially if you haven’t reviewed it for a while, because of the competition for work and clients.  A solution is to incrementally increase your price by a small manageable % and set yourself a reminder to review every 6 months there on. There’s every chance if you’re reviewing the charge-out rate, your competitors in the industry are making a move too – so are you ready to make yours? 

Your time, financial and mind freedom depend on it.

See our team today for more business planning ideas, and tools, to know your numbers.

Written by Rachel Robb.

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[i] www.stats.govt.nz/indicators/consumers-price-index-cpi/   updated 24 January 2024

[ii] www.stats.govt.nz/news/annual-inflation-remains-at-7-2-percent/  updated 25 January 20- it