Summary
Your transition from employee to entrepreneur is loaded with traps. One of the biggest is that you will charge too little for your time and not be able to be profitable. In this article, you will learn some tricks to ensuring you are valuing your billable time correctly.
If you are starting out in the consulting or other practitioner field, one of the things you must do is estimate (aka, budget) your available billable time. And when you budget your billable time, it pays to remember that it will be far less than you think. Not slightly less…far less.
Some back of the envelope arithmetic
We begin with 260 working days in a year.
Subtract out:
- 1.5 days per week marketing and business development
- 0.5 days per week administration (tax compliance, government compliance, financial management, etc.)
- Four weeks per year, vacation and holidays
So far we have removed 127 days from your billable time.
From the remainder:
- 10% for “rework” or “freebies” and other non-billable client activities.
- 10% for shooting the breeze (come on, you know you will, so budget it!)
So what do you really have to work with?
When you do the above math you are left with roughly 110 billable days per year with which to make your business work.
Please don’t think “I’ll work six or seven days a week or 10 hours a day” because you already will without budgeting for them. Simply accept the reality that you have far less of yourself to sell than you believed you did when you were an employee.
Figuring out your rate.
That takes care of time, but when figuring out your rate — that is how much you must generate per billable hour or day — often we forget about little things. Little things like accounting costs, payroll taxes, self-employment taxes, utilities, equipment costs, marketing and advertising costs. If you are in a consulting type practice and you are parsimonious, you might keep it down to 50% of your payroll costs.
So, if your target income is $80,000 per year, and you estimate your operating overhead at 50% of your payroll, that makes for $120,000 per year gross receipts in 110 days or around $1,010/day or $137/hour. I’ll wait until the shock wears off…ok, let’s continue.
The most common mistake.
A common mistake is to forget to budget for the time and the overhead and end up with $80,000/260 = $308/day or around $38/hour and then wonder why you are starving and overworked in a year or so.
When you run your own numbers, be ruthless with that calculator. If the final price looks too big for your market then either figure out how to earn that average rate – or pick another market. Whatever you do, please don’t sell yourself short.
Until next time…