Your Effective Hourly Rate (EHR)

by | F2B Podcast

Here’s how to use the EHR to transform your business profitability:

  • Divide
  • Filter
  • Increase

Full Transcript:

So last week I mentioned that we were going to begin discussing some simple systems that I have used in my life and in my business to help shape things and even to grow things, to take things to the next level.  One of those, the very first one I would like to talk about, has been arguably the most transformational for me, not in terms of necessarily what it has done in the past because I uncovered it pretty recently, but because of what it seems to be doing for me now and will be doing for me in the future.  That is the EHR or Effective Hourly Rate.

I’ve always had a background knowledge of what an effective hourly rate is, but I never thought about applying it to my business or what it would look like to apply it to my business.  I first heard about it in that context from James Schramko in his book Work Less, Make More.  I think it’s a fantastic book and one worthy of you checking out.  He basically uses the effective hourly rate as an objective measurement for many different thing.  It will help you to not only determine when it makes sense for somebody else to do a task versus you, when it makes sense to take a project on versus not take a project on, when you need to make changes in your business based on your effective hourly rate and it’s really super simple.  The formula is basically just to take the amount of money that you made in a given month and divide that by the amount of hours that you worked and there’s your effective hourly rate.  Now, I’m terrible at math, and even I can do that.

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Right now there are, I think, 3 simple steps that you can take with the effective hourly rate to start using it in your business as a measurement, as an effective tool, for being able to gauge things like growth, expenses and bringing in employees, etc.  As you’re using it to filter out these different things, it will tell you if you’re making enough money.  The good news is, this is also a metric that you can use to work backwards.  This is what’s cool, you can just declare this.  If you want to make $150 an hour as your effective hourly rate, that one decision gives you so much information about what you can do in your business.  It tells you that if you want to make an effective hourly rate of $150, it tells you that you need to be charging a certain amount for your product and/or your service.  It also tells you that if that’s going to be your effective hourly rate, then you could pay someone else $20 an hour to do something that you should not be doing at $150 an hour.  You have to be able to work backwards and price appropriately for all of that to work.  I’m guilty here.  Arguably, I don’t charge enough for some of the services that I offer and the effective hourly rate has helped me to understand that and hopefully I will be fixing some things soon based on that.

I associate these 3 simple steps with EHR, that is divide, filter and increase.

The first is divide.  By divide I mean go ahead and run the formula.  Figure out what you make right now, what you get to take home for you, versus the amount of hours you work and there is your effective hourly rate.

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The second thing is filter.  We divide, we do the math, so we know.  Then we use it to filter.  We filter opportunities, we filter the hiring of employees, whatever it is.  We can filter all sorts of things based on our EHR and we can raise that and you have to filter down what it looks like to raise that.  How does it affect your product prices, how does it affect your hiring, how does it affect your services, etc.?

The third is increase.  So, divide, do the math, filter, start making decisions based on that, and then thirdly, increase.  Start moving that needle up, start making decisions about where you want that to be.  Design the life you want and use that to kind’ve measure it, and then you can go from there.  You could just say, okay, I don’t want to have an effective hourly rate less than $300 per hour.  If that’s what you desire, then you can make that happen.  You just have to make some decisions about pricing, hiring, etc. and these are all decisions made possible by the EHR or effective hourly rate.  So I highly recommend that you start thinking in terms of this and implementing this in your business.  I think it will be a great help to you.

Thank you for listening to the Faith-Full Business podcast and we’ll see you in the next episode.

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