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How Much Should I Charge?

How to Plan for All the Costs, So You Don't Bankrupt Yourself!

A Guest Article by John Carpenter

Your choice to work as a freelance writer is a decision to start a business.  It may be small, but it's your business, with all the freedom, opportunities, obligations, and tax deductions that come with a business.  When just starting out, it's hard to estimate what costs you will encounter, and how to plan for them.  The attached spreadsheet (which should download automatically) represents one "business model" and one set of answers to that mystery. 

 A little time experimenting with various costs, budgets, and revenue goals in the spreadsheet, can safe a lot of time and money later in the real world.  There are other approaches, but in business feasibility and cost analysis simpler is not necessarily better.  As an entrepreneur, any expense that you neglect to build into your "cost structure," you will pay later out of your own pocket.

Three categories of cost 

This business model uses three categories of cost:
 
  1. Overhead: the costs directly associated with delivering a product to a customer.  This category includes not only the wages (even to yourself) and benefits (holidays, sick time, insurance, coffee), but also the office resources and services required to perform the work. These costs are not negotiable, and you can show a potential customer how you must pay these expenses (or allocate the costs, in the case of holidays and sick leave for example) in order to deliver the hours of services and products required.
 
  2.  General and Accounting (G&A):  the costs to run the office, keep the accounts, and pay the bills - this is separate because these costs are spread across your entire business.  Billable materials (printing the customer's books, travel to the customer's site, etc.) get G&A applied because you have incurred costs to select the vendors and write the checks.  G&A is non-negotiable because the administrative tasks are a fixed cost.
 
  3.  Fee: Some people dismiss this as "profit" and go into anti-capitalist rhetoric mode, but that's not what Fee is.  Fee pays for anything discretionary (a new office chair, a company party, training for new skills, reference books), developing new business (advertising, Web site development and hosting, those coffee cups from CafePress, bids and proposals), building your capabilities (recruiting & hiring expenses for new personnel, subscriptions, memberships, seminars), and contingency (money in the bank for a rainy day). 

And if the amount that goes to the bank isn't better than if you had bought a CD with your investment money, then buy the CD and find another business idea.  If you need to negotiate a discount, for subcontracted work or for repeat business for example, the amount you can afford to discount is the estimated cost of obtaining equivalent business - the advertising and marketing budget for that amount of revenue.  All other dollars are committed.   

Wrap rate 

One term you will hear in the consulting business is "wrap rate."  That is the total multiplier (overhead, G&A and fee) that is applied to the individual's hourly rate, to get the "loaded" rate that appears on the invoice.  (When you have learned to say that sentence fast, and understand what you're saying, you are ready to talk to the veteran consultants!) 

Protect how you calculate your loaded rate, because if a customer finds out the details (beyond the fact that you are accounting for your overhead costs), they will micromanage you into bankruptcy.  That's proprietary information, and you should protect it as such.  But an independent auditor should be able to understand how you got to your cost structure (if you write for a public agency, they may send an auditor - that's OK, as long as you can show why you are charging the rates you are).  That's why I like fixed-price deliverables - if they are specified adequately, you make out, and because it's for a product and not services, they can't audit your cost structure.  But that's not always possible.

 
This spreadsheet as-submitted assumes 1500 hours of billable time per year.  There are about 2080 work hours in a year, but after holidays, vacation, and sick time, most companies use a figure more like 1840 or even 1800 for actual productive work hours. Where did the other 340+ hours go?  As a freelancer, that and more you must have the discipline to use for marketing and customer service (about 28 hours a month, minimum) - if you get so absorbed in today's project, you'll neglect to continue to market for the next project.  You need to keep the phone ringing and the email inquiries coming, and that takes time from your work day. 

Of course, any additional hours you put into smart marketing will bring in even more business, and that's when you'll have the best decision an entrepreneur can have - whether to turn some projects away, refer them to trusted colleagues, or to hire help to expand the business.

 
The spreadsheet can be used as a what-if planning tool.  Only change the numbers in the spreadsheet's orange-colored cells.  All the other cells are linked to these by formula.  When you change the revenue number (the orange cell with $100,000 in it originally), you will see all the budget numbers change.  You can give yourself $10,000 worth of business consulting, just by spending an hour with this spreadsheet.  You can either pick a desired income level (top chart, right-hand side) and find the billing rates that will get you there, or you can start with what you think is a "competitive" billing rate and see what that works out to, in gross and net income.   Then, take a look at the charts lower on the page.  They represent a pretty crude and general chart of accounts for each of the three cost categories, but they cover the major cost areas for a consulting business such as freelance writing.

Experiment 

Experiment with the revenue and budget numbers in the spreadsheet (remember to change only the orange-colored cells!), to see where your plans fit in.  First, save a copy of the chart (call it my-test.xls or something), and experiment with the budget percentages. 

If you think you need a new computer every three years or must buy new office furniture, see what that does to the other budget items.  (I worked for a guy who tried to support his airplane with a small business, and the business crashed even though the airplane didn't.) You can't really reduce the tax or insurance line items (be sure to check with your tax, accounting, and insurance experts for the percentages that apply to you specifically). 

If you have fixed expenses already (office rent or allocation of home office expenses, for example), change the orange revenue number until the budget shows the amount you need for specific requirements. 

Then go back to the top of the sheet and figure out what you have to charge and how many hours you will have to bill to obtain that revenue.  It's a pretty good reality check.  Now you'll understand where sales goals come from. If you're not "making your numbers" sufficiently to meet all expenses, you'll be running a nonprofit organization (unintentionally), where you are supporting the business instead of the business supporting you.

 
I have used a joke for years (probably wore it out), that the spreadsheet has saved me more money than any other piece of software I have used.  Why?  When I run a cost analysis of a business idea, it usually turns out that to meet expenses I would have to produce far more widgets per week or billable hours per month than is humanly possible.  So, by understanding all the costs at the outset, I have avoided investment in what would have been losing propositions.  Paper is cheap.  Electrons are cheap.  Bad business investments are expensive and time-consuming.  Keep it in the spreadsheet until you know your business model will work.  Of course, I haven't found that one lucrative proposition yet either, which is why I still have a day job.  :-)
 
This spreadsheet will have accomplished its purpose if it helps a few people to make some better-informed business decisions, especially regarding the implications of quoting low hourly rates.  This is a conservative business approach, but it suggests disciplined business decisions that will keep you out of trouble.  Please suggest improvements on the AboutFreelanceWriting Forum.  

   jc

Copyright (c) 2005, John E. Carpenter

John Carpenter writes primarily on the topic of reform and improvement of public education.  His business experience has come from working (primarily as a publications and training manager) in information technology startups and writing proposals for technology integration companies.

 

 

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