Mar 01, 2022

When forecasting the financials for almost any business, there is a need to estimate the cost of people’s time.

How much does half an hour of one-on-one customer service per month cost us? What about five days’ worth of creative work? The two minutes it takes for someone to pack our giftbox?

If you don’t know these things about your main products or services, then you don’t know your gross margin. And if you don’t know your gross margin, you’re in trouble, because you may be losing money without realising it (or becoming less and less profitable over time without realising it – also bad).

The calculation is usually straightforward: take an employee’s gross salary, including the National Insurance and pension contributions you pay for, plus any other employee-related costs, and divide it by the number of units this person makes/delivers in a year.

Other times, it’s not so straightforward. Invariably, the founder asks, “but what about the cost of my time”?

The rabbit hole this opens up is deep and confusing. “Well, I am currently only paying myself £20K, but I made £70K in my last job, so maybe that’s my real market value, but really, as a CEO, I would want to be making at least £100K, but maybe that’s too much, so how do I know what the cost of one hour of my time is?”

Let me make two assumptions. Number one, you want to sell profitable products or services (rather than losing money on each sale). Number two, you want to grow the business – which implies that, eventually, you won’t be able to do all the work by yourself.

If these are both true, then the answer to the cost of your time question is simple. Take yourself out of the equation – and instead, think of the approximate salary of someone else doing that particular job. If the task in question is packing orders, an hour of that will probably cost between £10 and £20. If it’s one-on-one legal advice, it will be quite a bit more, let’s say £100.

But here’s the thing – it doesn’t matter that it’s you that’s currently doing both – that’s a stage, not a business model. Forecast for the future when you’re no longer doing the £10 tasks (asap), and then even further in the future, for when you’re increasingly not doing £100 tasks either (because your job is to be the CEO, not to deliver everything yourself).

Take yourself out of the equation, and it becomes crystal clear.

Love and cash flow,

Jana

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