By Richard Adin, AAE Founder
Even though you can use EditTools’ Time Tracker to accumulate important data regarding your business, you need to calculate your required Effective Hourly Rate (rEHR) before you begin analyzing that data. If you don’t, your analysis won’t be as meaningful and useful as it could be because the rEHR is the baseline value for determining what you need to charge and what you need to earn each working hour.
Suppose, for example, your data show that your EHR over your five most-recent projects is $25.10. What does that mean? On the surface, the $25.10 EHR looks good, especially compared to what others earn; after all, you won’t earn $25.10 an hour delivering pizza. What is missing, however, is a baseline number — a comparator — that makes that EHR relevant to you. That baseline number is your rEHR, which makes calculating your rEHR your most-important preparatory task.
The rEHR has been discussed in previous AAE essays, beginning with my 2010 essay, “Thinking About Money: What Freelancers Need to Understand” and in many subsequent essays, including my 2017 essay, “Do You Know Your Business’ Health?” Basically, the rEHR is the net (i.e., after tax) amount you need to earn each hour of work to pay all of your bills (including food, shelter, and clothing) at a breakeven point; that is, no loss and no profit — or 100% of after-tax (net) revenue coming in equals 100% net revenue going out.
It is important to note that the rEHR it is calculated based on only the actual number of billable work hours, not the number of work hours. In other words, if you work seven hours a day for five days a week (a 35-hour workweek) but only do work for which you can send a client a bill for 25 of those 35 hours, your rEHR is based on 25 hours, not 35 hours. In addition, if you plan on working only the equivalent of 46 weeks during the calendar year, and not 52 weeks, then the rEHR is calculated on the 46 workweeks, not the 52 calendar-year weeks.
Here is an example of the effect of calculating your rEHR incorrectly. Assume these parameters:
- Living costs (all bills of any kind) equal $725 per week (divide monthly expenses, such as rent or mortgage, by 4.3 to get the weekly amount; be sure to include annual [divide by 52], semiannual [divide by 26], and quarterly [divide by 13] expenses such as insurance or property taxes that are paid once or twice a year in the weekly number);
- Billable hours are 25 hours per week;
- The work year is 48 weeks; and
- Over the last five projects, your EHR has averaged $25.10.
For one year, the expense number equals $37,700 ($725 [weekly living costs] × 52 [weeks in the calendar year; remember that expenses continue even when you are not working, thus 52 instead of 48]). Because $37,700 is net, you need to earn more than $37,700 to be able to pay income and Social Security taxes.
The QuickBooks Resource Center offers a free Self-Employed Tax Calculator. Enter your net self-employment income and it will calculate your self-employment tax (Medicare and Social Security). For $37,700, the self-employment tax is $5,768.10, bringing us to a gross income of $43,468.10. However, that does not include any money to pay income tax or other required federal or state taxes. The additional amount needed is difficult to calculate because of the variations. (The best way for estimation purposes is to use the amount you paid last year.) To work with round numbers, let’s assume that altogether, you need a gross income of $50,000 to meet your net income requirement of $37,700.
To calculate the rEHR, follow these steps:
- Divide $50,000 by 48 (the number of workweeks in your fiscal year) to determine the gross income you are required to earn in each of the 48 workweeks you expect to work: $50,000 ÷ 48 = $1,041.67 (the required gross income per workweek).
- Divide $1,041.67 by 25 (the number of billable hours per workweek) to determine your rEHR: $1,041.67 ÷ 25 = $41.67 (your rEHR).
This illustrates why knowing your rEHR is so important. We said earlier that your EHR over your five most-recent projects was $25.10.
It is important to note that the EHR is an average number. Your EHR on one project may have been $47.80, but $10.08 on another project. The EHR almost always differs project-by-project; what we seek is an average EHR over all projects — the Year-to-Date (YTD) and Lifetime EHRs that EditTools’ Time Tracker calculates and tracks, and that at a minimum equals the rEHR and at best exceeds the rEHR. (For a detailed discussion of Time Tracker, see the recent AAE five-part series “It’s All About the Benjamins! EditTools’ Time Tracker” and the Time Tracker Help file, which is available as a downloadable PDF.) The only time the EHR remains constant is if you use an hourly fee method and never have to work nonbillable hours on a project.
Based on the given parameters, your calculated rEHR is $41.67, but your EHR is $25.10, which means that you are losing $16.57 every hour you work.
Without knowing your rEHR, the $25.10 EHR looks pretty good. After all, if you check the rate surveys published by various editorial organizations (for a discussion of rate surveys, see “The Quest for Rate Charts”), somewhere between $20 and $30 an hour appears to be the “going rate” (for a discussion of “going rate,” see “A Continuing Frustration — The “Going Rate”) for the services you provide and a $25.10 EHR is in the middle. But the reality is different. An EHR of $25.10 is not good for you unless you make some significant lifestyle changes that will reduce your living costs. Perhaps giving up health insurance, even though you are 55 years old and have a preexisting condition, will be enough. Maybe if you stop saving for retirement and hope to work until you are 80.
As you can see, knowing your baseline (rEHR) is fundamental. Of course, knowing the rEHR is insufficient in the overall scheme of things. You also have to know your YTD and Lifetime EHRs (data that EditTools’ Time Tracker can provide) because it may well be that those five most-recent projects do not really reflect the overall health of your business — the EHR for those five projects may be lower or higher than the YTD and Lifetime EHRs. In other words, it is possible that overall you are doing worse or better than the selected data for the last five projects show.
Knowing your rEHR and YTD and Lifetime EHRs can help you devise a plan to improve your efficiency and productivity. One of the features of EditTools’ Time Tracker is that it tracks the EHR and APH (Average Pages per Hour) data for individual projects as well as YTD and Lifetime. When I found that my EHR was not where I wanted it to be, I was able to manipulate the data to determine what I needed to do to get the EHR where I wanted it.
A good example of how to manipulate the data and the effect of doing so is covered in the essay “It’s All About the Benjamins! EditTools’ Time Tracker” at the end of the discussion about updating information. By way of demonstration, I changed the page count by one page and showed how that small a change affected the EHR numbers. Perhaps all I need to do is slightly increase my APH.
- Caution: Before modifying any data for the purpose of finding a way to improve your EHR, make a note of the correct data so you can, when done, reset the manipulated data to the original numbers. Keeping correct data is critical.
Another option is to change how you charge for a project. For example, if you charge an hourly rate of $25, there is nothing you can do to increase your EHR from $25. Something to note, however, is this: Just because you charge $25 an hour does not mean your EHR is $25 an hour; what it does mean is that the EHR cannot be more than $25. It can, however, be less than $25 an hour. Charging by the hour is the worst method for multiple reasons, all of which boil down to this: If you charge $25 an hour, the most you can ever earn is $25 an hour — but it is not the least you can earn per hour.
A third option is to redefine what constitutes a page. For all methods of charging, the page is the common item, unless you do not need to provide a client with an estimate of hours when charging by the hour. But even then, you would want to know for your own scheduling approximately how long a project will take, making the page count important even when the fee method is hourly.
Many people will tell you that a page equals 250 words, but that is a holdover from the typewriter days when a manuscript page had to have one-inch margins and the text had to be typed in 12-point Courier, double-spaced, with two spaces following sentence-ending punctuation, and when it was expected that the average word would have five characters. In other words, that was the standard in prehistoric (editorially speaking) times.
Today, because of computers and word-processing and desktop publishing software, the standard is nonexistent. I don’t use 250 words and many of my clients do not use 250 words as the equivalent of a page. Some of my clients use 275 words, some 300 words, some 350 words, and one tried to use 500 words. Others use characters counts such as 1,500 characters excluding spaces; 1,600 characters with spaces; or 1,750 characters. The point is that a page is not always a page — a page is whatever it is defined as (for additional discussion, see “A Page Is a Page — Or Is It?”).
Once you have calculated your rEHR and have collected data using EditTools’ Time Tracker (see the recent AAE five-part series “It’s All About the Benjamins! EditTools’ Time Tracker” and the Time Tracker Help file, which is available as a downloadable PDF), you can explore the best way to make your business profitable for you. Data are the key to all successful businesses, and your rEHR is founded on the data. Without knowing your rEHR, you cannot know what to charge, what to bid/quote, or whether you are making or losing money.
Richard (Rich) Adin is the founder of the An American Editor blog, author of The Business of Editing, owner of wordsnSync, and creator/owner of EditTools.
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