In the highly competitive print and mail industry, knowledge is the foundation of success. Specifically, it’s important to know exactly what it costs to provide services so that you can set prices and discounts appropriately. This information, known as budgeted hourly rates (BHR), delivers project by project net profit numbers so you always know where you stand.
Budgeted Hourly Rates
Knowing the budgeted hourly rates allows you to ground your business in reality rather than operating by “gut feel” or setting prices in response to the competition. Budgeted hourly rates are calculated:
- On a per-machine basis. Every machine in the shop has its own value, depreciation rate, and typical hours of usage. For example, a digital printer may cost $200,000 and have a 5 year life span. $200,000 divided by 5 years is $40,000 per year of cost. This number is then divided by 2000 hours of use per year, which means that this machine’s budgeted rate is $20/hour, but the calculations don’t stop here.
- Including all overhead costs. Rent, taxes, payroll, insurance, paid days off, and more are calculated. These overhead costs are then allocated to each machine.
- Allocating overhead costs to each machine. Continuing the digital printer example, if it is used to produce 30% of the work of your shop, then 30% of the overhead costs are assigned to this machine. These costs are again divided by 2000 hours and an hourly rate is established. For the purposes of this example, we will set that number at $1/hour.
- Combining the per-machine and overhead costs. Under this scenario, the budgeted hourly rate of the digital printer is $21.
Ultimately, a BHR calculates the accurate and complete cost of operating a specific machine within the unique operational structure of your shop. Using this data, you can set competitive pricing knowing that every operation is a profit center.
It is important to note that this BHR does not include consumables, such as paper and ink, which may vary from project to project and are added separately to the total cost. Also, rates are adjusted to address the realities of productivity. While a machine could be used 2000 hours a year, employees are not machines and the rates are adjusted to reflect productivity levels of between 70% and 80% to reflect employee usage.
Benefits of Knowing Budgeted Hourly Rates
BHR present a clear and accurate picture of the cost of using each machine in your shop, which translates into the cost of producing products for customers. Knowing your budgeted hourly rates allows you to:
- Accurately price your deliverables. Price projects based on the use of the various machines needed to complete it and manage your profit margins and cash flow.
- Identify areas where your pricing is below operating costs. Without realizing it, you may have some processes that are priced below costs. Once you identify these areas, pricing can be adjusted accordingly. This profit, no matter how small, goes directly to your bottom line.
- Discount with confidence. When you know the exact cost of a project in relation to standard pricing, you know how to offer discounts to high-volume customers while retaining a profit margin. Just as important, projects can be rejected that you know will be run at a loss. Being competitive doesn’t mean accepting everything that comes into your shop. It means taking those projects that can be delivered at a price that allows you to keep the doors open.
- Always know the profitability of your shop. Many businesses run a profit and loss report every six months or once a year, which means that problems are identified after it’s too late to make adjustments. When using budgeted hourly rates, you always know the exact cost and profit on every project, day in and day out, and can modify pricing or operations as needed.
- Integrate the information into your MIS. Some print and mail MIS, including Printer’s Plan and Midnight by Print Reach, allows you to input budgeted hourly rates, so you can run reports, price projects, develop estimates and more based on accurate operating costs. You can also set standard discounts with permissions in place to discount further, but only after administrative approval.
- Achieve a great ROI. Calculating the budgeted hourly rates of your machines is time consuming and requires a certain level of expertise that some shop owners may not have. Utilizing a budgeted hourly rate expert, such as David Ashkenaz (firstname.lastname@example.org), provides the accurate information that you need with a ROI of 3 to 6 months.
Establishing your budgeted hourly rate will require an investment of time and/or money, but it is worth the effort. Identifying areas where you are losing money as well as having more control of profit margins will help grow your business. Contact Print Reach to learn more about Printer’s Plan, Midnight, and other products that support the profitable operations of your shop.