The cost of doing business is everything a business must spend in a year to exist and to deliver work, including the owner's own pay, divided by the hours that can actually be sold. It is the single most useful number a small operator can know, and the most commonly missing one. Businesses do not usually fail because their rate was slightly too low; they fail because nobody ever worked out what the floor was.
Arb Digital built this page as a cost model with every figure as an input. It publishes no rates, no salaries, no overhead benchmarks and no suggested pricing, because all of those depend on the country, the trade, the year and the individual. Where our freelance hourly rate calculator prices one person's time against what they want to earn, this page builds the whole business's cost base — premises, equipment provision, non-billable time and employment taxes — and derives the rate that recovers it.
What This Cost of Doing Business Calculator Does
It totals six categories of annual overhead, adds the salary you intend to take and the employment taxes or set-aside on it, and divides that cost base by the hours you can genuinely bill. The result is a break-even rate: the point at which the business covers its costs and pays you, with nothing left over.
It then applies a target profit margin to give a second rate. Profit is deliberately separate from salary here, because they do different jobs. Salary pays you for the work. Profit is what funds growth, absorbs a bad quarter, and eventually gives the business a value independent of your labour. A business that pays its owner well and makes no profit is a job with extra paperwork.
The same cost base is also expressed per job, which is the more natural unit in trades that quote by project rather than by hour, and the bars show which categories dominate the total.
How to Use It
- Work through last year's bank statements rather than estimating from memory. The categories exist to prompt recall, and the “everything else” field usually needs to be larger than your first instinct.
- Enter an equipment replacement provision, not last year's equipment spend. In a year you buy nothing the true cost is not zero; it is the wear on what you already own.
- Set your salary as a decision, not a residual. Deciding what you should earn and then finding the rate that delivers it is the entire point of the exercise.
- Be brutal about the billable share. Count a week honestly: quoting, invoicing, chasing payment, marketing, admin, training and travel are all unpaid.
- Read the break-even rate first, then the target rate. If your current pricing sits below the break-even figure, the arithmetic is telling you something the profit-and-loss account will confirm later.
The Formula
Three steps:
Cost base = total overhead + salary + (salary × employment tax rate)
Billable hours = weeks × hours per week × billable share
Break-even rate = cost base ÷ billable hours
A worked example on the defaults. Overheads of 9,600 + 3,300 + 2,400 + 3,000 + 4,200 + 1,500 total 24,000. A salary of 60,000 with a 15 per cent set-aside adds 60,000 + 9,000, giving a cost base of 93,000. Forty-six weeks at forty hours is 1,840 available hours, of which 55 per cent is 1,012 billable hours. The break-even rate is 93,000 ÷ 1,012 = 91.90.
The target rate uses margin on price rather than markup on cost: rate = break-even ÷ (1 − margin). At a 20 per cent margin that is 91.90 ÷ 0.80 = 114.87. The equivalent markup on cost is 25 per cent, not 20, and confusing the two is the most common pricing error there is. Our markup calculator and profit margin calculator cover that conversion directly.
The Billable Share Is the Number That Decides Everything
Halve the billable share and the required rate doubles. No other input on the form has that leverage, and no other input is estimated so casually. People start from a 40-hour week, assume most of it is productive, and land on a figure that has never once been true in practice.
The honest way to find it is to track a fortnight. Log everything in fifteen-minute blocks and mark each one billable or not. Quoting, invoicing, chasing late payment, bookkeeping, software administration, marketing, portfolio work, training, travel between jobs, and the conversations that do not turn into work are all unbillable, and together they consume far more of a week than most people believe.
The consequence is that raising the billable share is often more valuable than raising the rate. Recovering four unbillable hours a week is over 180 hours a year, which on the default figures is worth more than a ten per cent price increase, and it costs the client nothing. Our billable hours calculator is the tool for tracking that side.
Equipment: a Provision, Not a Purchase
Treating equipment as an expense only in the year you buy it produces wildly wrong rates. A camera, a van, a laptop or a machine that lasts five years costs a fifth of its replacement price every year, and the year you replace it is not more expensive than the four before it — it is simply the year the accumulated cost becomes visible.
Set the provision at replacement cost divided by realistic life, not at purchase cost divided by a tax depreciation schedule. Those two numbers answer different questions: the tax figure determines your deduction, and the replacement figure determines whether you will be able to afford a replacement. The IRS keeps its expense categories and the publications that govern each in its guide to business expense resources, which is the right place to check the tax treatment separately.
Why Salary and Profit Are Separate Lines
Many small businesses collapse the two, taking whatever is in the account at the end of the month. That has three costs. It hides whether the business is viable, because there is no benchmark to fail against. It makes pricing arbitrary, because there is no floor. And it leaves nothing to absorb a slow quarter, so the business runs on the owner's tolerance for going unpaid.
Putting salary in as a fixed cost changes the question from “what did we have left” to “did we cover what we needed to”. Adding a target margin on top gives the business a buffer and a reason to exist beyond employing you. The US Small Business Administration's material on planning your business takes the same approach to costing before pricing.
What the Rate Cannot Tell You
A cost floor is not a price. Prices are set by what clients will pay, what competitors charge, how urgent the work is and how much value it creates. A rate derived here might be far below what the market pays, in which case you have been leaving money on the table, or far above it, in which case the answer is not to accept less — it is to change the cost base, the utilisation, or the kind of work you take.
The model also assumes a single blended rate, and most businesses do not have one. Different services carry different overheads and different amounts of unbillable support work. If one line of work is materially different, run the calculator separately for it with only the costs that line actually causes.
Finally, it is annual and average. Seasonality, a slow start after a price rise, and the gap between invoicing and payment are all invisible here, and any of them can create a cash problem in a business whose annual arithmetic is sound. Test the volume side with our break-even calculator and keep the collection side under control with the accounts receivable turnover calculator.
Rates for Staff, Not Just for You
If you employ people, the same logic applies with the employee in place of the owner. The cost of an employee is their salary plus employer contributions plus their share of overhead, divided by their own billable hours — and their billable share is usually lower than the owner's, not higher, because they need supervision and are less likely to work unpaid evenings.
Build that figure from the fully loaded cost using our employee cost calculator and the statutory element from the payroll tax calculator, then charge above it. A team that is billed out below its loaded cost loses money faster the busier it gets, which is a genuinely counter-intuitive failure mode and a common one.
Arb Digital builds free tools like this one because useful pages earn attention. If you want tools, calculators or content built for your own audience, we can help.
Browse All Free Tools Talk to Arb DigitalCommon Mistakes to Avoid
- Overstating the billable share — it has more leverage on the rate than any other input, and almost everyone guesses it too high on the first attempt.
- Leaving your own salary out — a cost base that excludes the owner's pay produces a rate that guarantees you work for whatever is left, which is often nothing.
- Expensing equipment only when you buy it — the cost is the annual wear, and a provision is what lets you replace the thing when it fails.
- Confusing margin with markup — a 20 per cent margin needs a 25 per cent markup on cost, and using the wrong one quietly removes the profit you thought you had priced in.
- Treating the result as a price — it is the floor. What the market pays is a separate question, and the gap between them is the actual business decision.
Related Free Tools From Arb Digital
Price one person's time with the freelance hourly rate calculator, track utilisation with the billable hours calculator, and test volumes with the break-even calculator. Convert cost to price with the markup calculator and the profit margin calculator, cost your team with the employee cost calculator and the payroll tax calculator, watch collections with the accounts receivable turnover calculator, and browse the full free online tools hub.
Frequently Asked Questions
Total a full year of overhead, add the salary you intend to take plus the employment taxes or set-aside on it, and divide by the hours you can genuinely bill in a year. Billable hours are working weeks times hours per week times the billable share, and that share is far lower than most people assume.
No. It is the rate below which the business loses money once your salary is counted as a cost. What you can charge is set by the market and by the value of the work. The gap between the two is the decision; the floor is only the arithmetic.
This page suggests no figure, because it varies enormously by trade, business model and how much of the sales and admin load you carry yourself. Track a fortnight in fifteen-minute blocks and measure it. Almost everyone who does this for the first time finds a lower number than they expected.
Yes. Treating owner pay as a residual makes it impossible to tell whether the business is viable, removes the floor from your pricing and leaves nothing to absorb a slow quarter. Decide what you need to earn, then find the rate that delivers it.
As an annual provision rather than as the year's purchases. Divide realistic replacement cost by realistic working life. That is a different number from tax depreciation, which answers a tax question rather than telling you whether you can afford to replace the item.
Because they do different jobs. Salary pays you for doing the work. Profit funds growth, absorbs bad periods and gives the business a value that does not depend on your continuing to work in it. A business that pays its owner and makes no profit is a job with more admin.
Then the model has told you something useful. The options are reducing overhead, raising the billable share, changing the mix of work, or accepting a lower salary as a deliberate decision. Quietly working below the floor is the one option that does not resolve anything.
Yes. Enter the number of jobs you complete in a year and the tool reports the cost base divided across them. Compare that with what you actually charge per job, remembering that a job which overruns consumes billable hours you cannot then sell to anyone else.
This tool is provided for informational and educational use only. It is not financial, accounting or tax advice, and it publishes no rates, salaries or prices — every figure is one you supply. Tax treatment of business expenses, equipment and owner remuneration differs by jurisdiction and by business structure. Consult a qualified accountant before setting pricing or making tax decisions.
