December 21, 2014

Do You Know Your Time-is-Money Rate?

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Divide your salary by 1,000. While recommending business books on a blog post last week I said a business book pays for itself in less than an hour. A reader asked me how I measured that. If you want quick and dirty, then divide the annual salary by 1,000 and that’s the hourly cost to the company. That’s your time-is-money rate. It’s valid for you, for your team members, for your company.

When I say it’s valid, I mean as a guideline for understanding costs and making decisions. It’s just a rough estimate. And I think it’s probably a useful exercise, so here it is, as you would work it out in your favorite spreadsheet:

spreadsheet

  1. Write the label, set the format, and type the estimated annual gross salary into the first cell, B2 in my example. I typed 35000 for that and the formatting made it $35,000.
  2. Divide that number by 52. I’ve got that in cell B3 here. The formula for that cell is =B2/52 and the result is showing, $673.08. This gives you the gross earnings per week.
  3. Divide that earnings by week estimate by 40 to get the estimated earnings per hour. I’ve got that as $16.83 per hour in cell B4. Its formula is =B3/40.
  4. Double the hourly earnings to calculate the cost to the business. That’s in B5, with the formula =B4*2. This one isn’t always intuitive, but when you think about what it costs the business you have to include payroll taxes, insurance, telephone, Internet, office space, office furniture, electric power, copy paper, water cooler, coffee, snacks, etc. Double is not scientific but it’s a pretty good estimate.

spreadsheetSo there you have it: the $35K per year person costs the business $33.65 per hour. Obviously that really means somewhere between $25 and $45, roughly or approximately $35, because so much depends on the overhead estimate. It’s not scientific, but it’s still useful.

So why the even simpler divide by 1,000 suggestion? Take a look at the spreadsheet to the left. Find the pattern. That’s why I say divide by 1,000.

I think this time-is-money analysis is important because sometimes we get too cheap with business expenses. I can give you lots of  examples:

  • Are you spending extra hours on cheap rental cars? Does the money saved equal time saved?
  • Compare the cost of the taxi to the cost of the shuttle bus, then the difference in time, and the value of the time.
  • Is it worth the money to have lunch brought in for a meeting? To buy lunch at a restaurant when two or more of you are talking about business?
  • How much time does a business book or magazine have to save you before it’s worth it?
  • How much time does a business software product have to save you to be worth the money?
  • How much money is saved by having a webinar instead of a live business workshop?

And of course there’s also the other side of this coin. Like how much does it cost the business to start a meeting late? What does it cost when a plane is delayed an hour or more?

You already know this. I’m just suggesting putting some numbers to it.

15 Comments ▼

Tim Berry


Tim Berry Tim Berry is Founder and Chairman of Palo Alto Software, Founder of Bplans, Co-Founder of Borland International, Stanford MBA, and co-founder of Have Presence. He is the author of several books and thousands of articles on business planning, small business, social media and startup business.

15 Reactions

  1. You mean if you divide a number by 52, then divide by 40, then multiply by 2, it’s roughly the same operation as dividing by 1000?

    52 x 40 / 2 = 1040.

    No kidding.

    Teasing aside, it’s an interesting article on the cost-benefit of various activities. But I think efforts to price employee time is a downward spiral of efforts to monetize human beings. Shuttlebus versus taxi? You should pay for the taxi, even if it’s less efficient, because a member of your team deserves the extra expense for the comfort and convenience. How much aggravation and discontent does a new piece of software have to alleviate before it becomes worth the cost?

    How do you price employee dissatisfaction? How do you monetize team morale? When you have a dollar value assigned to employee time, you invite foolish decisions in an effort to shave pennies.

  2. Tim,
    Nice to see your musings..It’s been awhile since you’ve written one of your stellar posts here.

    I love the math on this one.

    I always overestimate my expenses.

    The Franchise King

  3. A Managerial Accounting prof once gave us 2,000 hrs per year as a productivity rule (40hr/wk * 50wks/yr) – taking vacation out. Same handy principle without including overhead.

  4. Oh so glad I saw this in SmartBriefs today! I hope you don’t mind but I’m going to link to it in an upcoming blog post of my own!

    As a Virtual Assistant too often people focus on the “per hour” cost without factoring in what the cost would be for a similar skilled employee (that overhead is what people often leave out).

  5. I just read a related quote on Duct Tape Marketing: “Time is not money. Time is worth more than money.” I think more and more small business owners should think about what they can effectively delegate — to someone outside their business — if the price is fair. Sandra Chesnutt, AdvancedAR

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