Understanding Your Effective Hourly Rate (EHR)

Knowledge Base Article

Category: Profitability Metrics

Difficulty: Beginner

Reading Time: 4 minutes

What is Effective Hourly Rate?

Your Effective Hourly Rate (EHR) is the most important metric for sole traders. It answers one critical question:

"What am I really earning per hour after all costs?"

Unlike your base hourly rate, EHR accounts for:

• Travel time (non-billable hours)
• Your overhead share (rent, insurance, software, etc.)
• All job-related costs
• Actual revenue collected

Why EHR Matters More Than Profit Margin

Many sole traders focus on profit margin percentages, but EHR tells you more:

Example:

Job A: 40% profit margin, $45/hour EHR
Job B: 30% profit margin, $80/hour EHR

Which job is better? Job B, even though it has a lower margin, because you earn $80/hour instead of $45/hour. Your time is your most valuable resource.

How EHR is Calculated

EHR = Annual Net Profit ÷ Annual Hours (including travel)

Step by step:

1. Take your job's annual revenue (GST-exclusive)
2. Subtract direct costs (your labor + travel)
3. Subtract allocated overhead (your fair share)
4. Divide by total annual hours (work time + travel time)

Example Calculation:

Weekly cleaning job:
- Revenue: $150/visit × 48 weeks = $7,200/year
- Your labour: 3 hours × $40/hr × 48 = $5,760
- Travel: 0.5 hours × $40/hr × 48 = $960
- Overhead share: $450/year
- Net Profit: $7,200 - $5,760 - $960 - $450 = $30/year
- Total hours: (3 + 0.5) × 48 = 168 hours
- EHR: $30 ÷ 168 = $0.18/hour

This job is LOSING you money!

Setting Your Target EHR

Step 1: Calculate Your Minimum EHR

Desired Annual Income ÷ Productive Hours = Minimum EHR

Example:
$70,000 ÷ 1,760 hours = $39.77/hour minimum

Step 2: Add a Buffer (Recommended)

You won't bill every hour, so aim higher:

• Good Target: 1.5× minimum = $60/hour
• Excellent Target: 2× minimum = $80/hour

Step 3: Set Thresholds in Settings

Go to Settings > Business Settings > Profitability Ranges:

• High Value: ≥ $80/hour (your excellent target)
• Good Value: ≥ $60/hour (your good target)

Now your dashboard will color-code jobs:

• 🟢 Green = High Value (prioritize these!)
• 🔵 Blue = Good Value (solid work)
• 🟡 Yellow = Low Value (review pricing)
• 🔴 Red = Loss Making (urgent action needed)

Using EHR to Make Decisions

Which Jobs to Accept

• Accept: Jobs above your Good Value threshold
• Negotiate: Jobs between Good and High (try to raise price)
• Decline: Jobs below Good Value (unless strategic reasons)

When to Raise Prices

Look for jobs with EHR below your target:

1. Sort your jobs by EHR (lowest first)
2. Identify jobs under $60/hour
3. Use Quick Price Adjuster to test increases
4. Apply new pricing when appropriate

Geographic Clustering

Jobs with high travel time hurt your EHR:

Job A: $150, 3 hours work, 0.5 hours travel = EHR $60/hr
Job B: $150, 3 hours work, 1.5 hours travel = EHR $45/hr

Same revenue, but Job B earns 25% less per hour!

Solution: Cluster jobs geographically to reduce travel impact.

Common EHR Questions

Q: What's a good EHR for my industry?

Industry benchmarks (Australian sole traders):

• Cleaning: $50-$80/hour
• Gardening: $60-$90/hour
• Trades: $80-$120/hour
• Professional services: $100-$200/hour

But YOUR target depends on YOUR income goals and costs.

Q: Should I focus on EHR or profit margin?

For sole traders, prioritize EHR. Your time is finite—you can't scale it. Earning $80/hour at 25% margin beats earning $45/hour at 40% margin.

Q: My EHR is low. What should I do?

Three options:

1. Increase prices (easiest)
2. Reduce costs (lower overhead)
3. Improve efficiency (less time per job)

Start with option 1—test a 10-15% price increase on low EHR jobs.

Action Steps

1. Review your dashboard - Look at your average EHR
2. Set your targets - Configure High/Good thresholds in Settings
3. Sort by EHR - Run Job Summary Report, sort by EHR column
4. Identify problems - Focus on red and yellow jobs
5. Test price increases - Use Quick Price Adjuster on low EHR jobs
6. Track improvements - Monitor your average EHR monthly

Related Articles

• Configuring Your Profitability Thresholds
• Using the Quick Price Adjuster
• Understanding Overhead Allocation
• Reading Your Job Summary Report

Need Help?

Email: support@profitcalculator.com.au

Documentation: Review Getting Started guide for Pro Solo

Updated on: 22/11/2025