People often use the phrase “time is money”. That, of course, means that your time has value and should not be wasted. But do you know what your time is worth? Do you know what your employees’ time is worth?
That’s an important metric to know. It should be a dollar figure you can quickly calculate and pull off the top of your head.
What Your Time is Worth
So if the question is: What is your time worth?
The quick answer is: divide your annual 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 your 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.
But it’s helpful to be able to mentally calculate a number when you need to make decisions fast. And so the “divide by 1,000” formula is that fast calculation.
Illustrating the Value of a Person’s Time
I think it’s probably a useful exercise to see how I got to my time-is-money formula. Bear with me as I explain the steps. Let’s work it out in your favorite spreadsheet (refer to the example image above):
- Write the label, set the format, and type the estimated annual gross salary into the first cell, B2. I typed 35000 for that and the formatting made it $35,000.
- Divide that number by 52. The result is in cell B3 in the example image. The formula for that cell is =B2/52 and the result is showing, $673.08. This gives you the gross earnings per week.
- Divide that weekly earnings 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.
- Double the hourly earnings to calculate the cost to the business. That’s in cell B5, with the formula =B4*2. This step 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.
So there you have it: the $35,000 per year person costs the business $33.65 per hour.
Roughly or approximately that works out to $35 per hour. Obviously, that really means somewhere between $25 and $45 per hour. Why the range? Because so much depends on how much your overhead actually costs. It’s not scientific, but it’s still useful.
Now, why the even simpler “divide by 1,000” suggestion? Take a look at the spreadsheet image immediately below. Find the pattern.
Do you see the pattern? It’s close enough when you round the numbers.
This explains why I say it’s faster and easier to take annual salary, and divide by 1,000.
Again, it’s a quick and dirty formula you can do fast in your head. That’s how you figure out the value of your time, or an employee’s time. Or the combined company time.
You won’t actually need a spreadsheet. I merely used a spreadsheet help you see how I got to that formula. And why my simple mental calculation is close enough for many decisions you make as the business owner.
Using “Time is Money” Analysis for Business Expenses
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?
- Can you save money by having a webinar instead of a live business workshop? How much can you save?
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 meeting gets off track? What does it cost when a plane is delayed an hour or more?
Think about how much time is wasted in business — time that could be better spent on driving more revenue, for instance. Are you taking into account the value of your time?
You already know this. I’m just suggesting putting some numbers to it.
Time is money / value of your time images: The author
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.
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.
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
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.
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).
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