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Cash Flow Is King!
Let’s look at the first concept we met at the very start of this chapter in more detail: operational cash flow. You may feel great sending out all those invoices; however, those sheets of paper won’t help pay your expenses. The proof is in the pay ments—and it’s when they actually arrive in your bank account that matters. As we’ll discuss, not all businesses are keen to abide by your terms of payment.
When funds are tight, it’s imperative that you do what you can to balance the income and outgoings so that you’ll always have money available in the bank. It’s a good practice to adopt from the very start, and continue into the future.
You should concentrate your efforts on:
reducing the average collection period
This is the time that lapses between the invoice going out, and the payment being received.
reducing the risk of bad debtors
Nobody likes the idea that some clients may never pay!
budgeting for future expenses
It’s probably not necessary to buy that shiny new gizmo right now. Create a cash flow plan, and determine the best time to make a purchase.
timing your outgoing payments
Ensure that you have a credit period with purchases, and that you use this wisely.
It isn’t just when you’re beginning your freelance career that cash flow is such a crucial element. Ask any business owner, and they’ll agree that controlling cash flow is an ongoing challenge—the failure of which can cripple any organization, whatever the size.
Three Types of Cash Flow
There are three types of cash flow in business. Operational cash flow is cash re ceived or spent for a core business activity. This is the type of cash flow most applicable to freelancers.
Financing cash flow is cash received or expended as a result of financial activities, such as interests or dividends. Investment cash flow is cash received or spent on investments, acquisitions, and capital expenditure. The latter two are typically not so relevant to freelancers.
Encouraging Prompt Payment
One of the biggest issues that many freelancers face is being paid on time. The consequences of waiting months for a large bill to be settled—especially when it’s payment for a job that took up all your resources for a significant period of time and prevented you from taking on smaller fry to keep you going—can be severe. You need to be prepared for such eventualities as best you can, with enough savings and cash flow to tide you over.
It’s often the case that the larger the organization, the quicker their clients pay, due to the fact that larger organizations employ people to chase down their debtors. Unfortunately, these larger organizations are also typically the ones that are slowest at paying their own bills.
You can encourage prompt payment from clients by using a number of strategies. Ensure that you invoice as frequently and as quickly as possible. You can arrange milestone payments at the start, during the project, and at the end. Smaller invoices are normally far more palatable than larger ones, so invoice early and often.
Ensure you cover every detail on your actual invoice, so that you minimize queries. These details should not only cover all of your legal and contact information, but also explain the charges and provide a brief description of the work, as well as the date incurred, if it’s maintenance or support. Most importantly, ensure that your payment terms are clearly stated and are obvious to the recipient. Consider making them big and bold. For a sample freelance invoice, see this book’s web site for a
downloadable example.2
Find out the name of the person in the accounts department, and address the invoice accordingly. This way, there should be no excuses about the paperwork going astray or not being addressed to the person with the right authority. If you don’t have any luck with the accounts people, politely mention it to the person or people you’re dealing with on the project, if it’s ongoing. They may be able to get the wheels in motion to ensure your willing continuation with the project, and to keep the rela tionship sweet.
Communicate frequently, and with consistency. If the invoice was due yesterday, email or call the client today and politely ask when payment will be received. Take a note of their response, and set a reminder to call again close to the date they nominated. Clients will quickly learn that if the account is still outstanding on the due date, they can expect a call from you.
Avoid setting unrealistic payment terms. Many companies will simply ignore pay
ment terms if they are less than 14 days. Similarly, they will sit back and wait for
a statement or follow-up if you give 90-day terms. Find a nice window (I typically use 30 days) which most clients will stick to, and avoid changing your payment terms for difficult clients, without a very good reason (or additional loading!).
2 http://www.sitepoint.com/books/freelancer1/
Discounting to Save Headaches
Some businesses and freelancers offer a small discount if the invoice is paid by a certain date, or is prepaid. I’m not a big fan of this approach, but many other freelancers report considerable success this way. My main concern with offering this carrot is that you could open yourself to arguments when a client pays after the due date, but still insists upon receiving the discount that they now look upon as your expected, standard rate.
Dealing with Debtors
When faced with a debtor who just isn’t paying up, there’s always a temptation to inflame the situation by pulling out that jousting equipment beloved of our freelance forebears. Don’t! Approaching the situation with discourtesy, aggression, or threats simply won’t work; it will only escalate the issue into a personal grudge and bring any negotiations to a standstill.
The best approach is to be firm about your expectations and agreements, and ensure that you present this message in a written form. Inquire about the delay in payment with the person you’ve been dealing with, ask about whether there are any issues, and see what you can do to resolve them.
If absolutely necessary, agree on a payment plan—even though this won’t help your short-term money needs, it’s better to at least have a trickle of the money coming in than no money at all. And you’ll often find that the mere insinuation that a client can’t pay their bills will lead to them paying up in order to save ego.
If there’s still no resolution, consider engaging a debt collection agency—typically, they will take a percentage fee from the overall invoice, if they’re successful in collecting the sum owed to you. In my opinion, it’s better to salvage 80–90% of the total cost than none at all.
When You Need to Get Tough
An important consideration is that debts become harder to recoup the longer they exist, so it’s vital to act quickly with recalcitrant clients. If all negotiations fail, look at options such as locking troublesome clients out of their CMS, delaying any remaining work until they have paid you in full for your work to date, or as an absolute last resort, turning off their web site hosting.
Recurring Revenue
Regardless of whether you’re charging by the project or by the hour, an income stream that shouldn’t be overlooked is that of recurring revenue, also known as “passive income.”
Let’s consider a quick example. Say we bought hosting accounts for $12 per month, and we could sell them to our clients for $20 per month. But, you might say, that’s a whole $8. It’s not going to change my life!
Well, what about an average of two clients a month signing up for your hosting? This means that after two years, you will have 48 sites hosted on your reseller hosting account. This works out to a rather nice $384 per month—for doing very little.
Now, let’s add domain names, secure certificates, and other add-on items into this equation, and I’m sure you’ll really start to see value in the proposition.
Can you build a web application? An important opportunity for those who create products, such as content management systems or web apps, is to reduce any upfront costs of the installation—which therefore makes it more affordable and attract- ive—and build in an annual, recurring licensing fee. This is an example of the power in numbers—ten clients paying $200 a year for CMS licensing means an extra two thousand dollars per year in passive income.
This principle isn’t just for hosting, domain names, and applications, of course. There’s a multitude of items from which you can create products, and sell over and over again. Consider such items as membership sites, advertisement-funded sites
(a successful blog is a good example), or sales of photographs and illustrations on stock design sites such as iStockPhoto3 and BigStockPhoto.4
Then there’s writing an ebook for sale, designing T-shirts and other designer items and selling them through sites such as RedBubble5 and Spreadshirt,6 developing web-based applications, or even creating web site design templates for sale.
When funds are tight, it’s imperative that you do what you can to balance the income and outgoings so that you’ll always have money available in the bank. It’s a good practice to adopt from the very start, and continue into the future.
You should concentrate your efforts on:
reducing the average collection period
This is the time that lapses between the invoice going out, and the payment being received.
reducing the risk of bad debtors
Nobody likes the idea that some clients may never pay!
budgeting for future expenses
It’s probably not necessary to buy that shiny new gizmo right now. Create a cash flow plan, and determine the best time to make a purchase.
timing your outgoing payments
Ensure that you have a credit period with purchases, and that you use this wisely.
It isn’t just when you’re beginning your freelance career that cash flow is such a crucial element. Ask any business owner, and they’ll agree that controlling cash flow is an ongoing challenge—the failure of which can cripple any organization, whatever the size.
Three Types of Cash Flow
There are three types of cash flow in business. Operational cash flow is cash re ceived or spent for a core business activity. This is the type of cash flow most applicable to freelancers.
Financing cash flow is cash received or expended as a result of financial activities, such as interests or dividends. Investment cash flow is cash received or spent on investments, acquisitions, and capital expenditure. The latter two are typically not so relevant to freelancers.
Encouraging Prompt Payment
One of the biggest issues that many freelancers face is being paid on time. The consequences of waiting months for a large bill to be settled—especially when it’s payment for a job that took up all your resources for a significant period of time and prevented you from taking on smaller fry to keep you going—can be severe. You need to be prepared for such eventualities as best you can, with enough savings and cash flow to tide you over.
It’s often the case that the larger the organization, the quicker their clients pay, due to the fact that larger organizations employ people to chase down their debtors. Unfortunately, these larger organizations are also typically the ones that are slowest at paying their own bills.
You can encourage prompt payment from clients by using a number of strategies. Ensure that you invoice as frequently and as quickly as possible. You can arrange milestone payments at the start, during the project, and at the end. Smaller invoices are normally far more palatable than larger ones, so invoice early and often.
Ensure you cover every detail on your actual invoice, so that you minimize queries. These details should not only cover all of your legal and contact information, but also explain the charges and provide a brief description of the work, as well as the date incurred, if it’s maintenance or support. Most importantly, ensure that your payment terms are clearly stated and are obvious to the recipient. Consider making them big and bold. For a sample freelance invoice, see this book’s web site for a
downloadable example.2
Find out the name of the person in the accounts department, and address the invoice accordingly. This way, there should be no excuses about the paperwork going astray or not being addressed to the person with the right authority. If you don’t have any luck with the accounts people, politely mention it to the person or people you’re dealing with on the project, if it’s ongoing. They may be able to get the wheels in motion to ensure your willing continuation with the project, and to keep the rela tionship sweet.
Communicate frequently, and with consistency. If the invoice was due yesterday, email or call the client today and politely ask when payment will be received. Take a note of their response, and set a reminder to call again close to the date they nominated. Clients will quickly learn that if the account is still outstanding on the due date, they can expect a call from you.
Avoid setting unrealistic payment terms. Many companies will simply ignore pay
ment terms if they are less than 14 days. Similarly, they will sit back and wait for
a statement or follow-up if you give 90-day terms. Find a nice window (I typically use 30 days) which most clients will stick to, and avoid changing your payment terms for difficult clients, without a very good reason (or additional loading!).
2 http://www.sitepoint.com/books/freelancer1/
Discounting to Save Headaches
Some businesses and freelancers offer a small discount if the invoice is paid by a certain date, or is prepaid. I’m not a big fan of this approach, but many other freelancers report considerable success this way. My main concern with offering this carrot is that you could open yourself to arguments when a client pays after the due date, but still insists upon receiving the discount that they now look upon as your expected, standard rate.
Dealing with Debtors
When faced with a debtor who just isn’t paying up, there’s always a temptation to inflame the situation by pulling out that jousting equipment beloved of our freelance forebears. Don’t! Approaching the situation with discourtesy, aggression, or threats simply won’t work; it will only escalate the issue into a personal grudge and bring any negotiations to a standstill.
The best approach is to be firm about your expectations and agreements, and ensure that you present this message in a written form. Inquire about the delay in payment with the person you’ve been dealing with, ask about whether there are any issues, and see what you can do to resolve them.
If absolutely necessary, agree on a payment plan—even though this won’t help your short-term money needs, it’s better to at least have a trickle of the money coming in than no money at all. And you’ll often find that the mere insinuation that a client can’t pay their bills will lead to them paying up in order to save ego.
If there’s still no resolution, consider engaging a debt collection agency—typically, they will take a percentage fee from the overall invoice, if they’re successful in collecting the sum owed to you. In my opinion, it’s better to salvage 80–90% of the total cost than none at all.
When You Need to Get Tough
An important consideration is that debts become harder to recoup the longer they exist, so it’s vital to act quickly with recalcitrant clients. If all negotiations fail, look at options such as locking troublesome clients out of their CMS, delaying any remaining work until they have paid you in full for your work to date, or as an absolute last resort, turning off their web site hosting.
Recurring Revenue
Regardless of whether you’re charging by the project or by the hour, an income stream that shouldn’t be overlooked is that of recurring revenue, also known as “passive income.”
Let’s consider a quick example. Say we bought hosting accounts for $12 per month, and we could sell them to our clients for $20 per month. But, you might say, that’s a whole $8. It’s not going to change my life!
Well, what about an average of two clients a month signing up for your hosting? This means that after two years, you will have 48 sites hosted on your reseller hosting account. This works out to a rather nice $384 per month—for doing very little.
Now, let’s add domain names, secure certificates, and other add-on items into this equation, and I’m sure you’ll really start to see value in the proposition.
Can you build a web application? An important opportunity for those who create products, such as content management systems or web apps, is to reduce any upfront costs of the installation—which therefore makes it more affordable and attract- ive—and build in an annual, recurring licensing fee. This is an example of the power in numbers—ten clients paying $200 a year for CMS licensing means an extra two thousand dollars per year in passive income.
This principle isn’t just for hosting, domain names, and applications, of course. There’s a multitude of items from which you can create products, and sell over and over again. Consider such items as membership sites, advertisement-funded sites
(a successful blog is a good example), or sales of photographs and illustrations on stock design sites such as iStockPhoto3 and BigStockPhoto.4
Then there’s writing an ebook for sale, designing T-shirts and other designer items and selling them through sites such as RedBubble5 and Spreadshirt,6 developing web-based applications, or even creating web site design templates for sale.
Loans and Savings
At the very least, you should have a bank account created solely for your business use. Don’t blur the line between your money and your business’s money, as it can allow you to fall into the trap of spending everything that you make.
Organize a main business bank account, and then draw on that account for your own wages—a weekly or fortnightly transfer to another personal account does the trick.
Then, ensure that a percentage of the income being deposited into this business account is never touched. This will allow a small amount to grow into something that can be used for larger capital expenses down the track, such as a new laptop or color laser printer.
It’s also wise to consider having yet another account for items that need to be paid regularly but infrequently, such as taxes and superannuation—this way, when tax time comes, you won’t need to struggle to find the money. Work out what income tax rate you’ll most likely need to pay, and consider automatic transferral of that percentage from any income into this account.
Don’t be shy about applying for a loan to help sort out your start-up costs. Many people find it very hard to fund the costs of starting up from the meager income they make in those first few months. It’s a shame for lack of funds to hold you back, if you have to turn down projects because you don’t have the right software or hardware, and it’s probably avoidable if you have a decent credit history. It’s crucial, of course, to make sure that you can meet the repayments.
3 http://www.istockphoto.com/
4 http://www.bigstockphoto.com/
5 http://www.redbubble.com/
6 http://www.spreadshirt.com/
If you do get a loan at any stage, make sure that the loan is serviced from your business account, and treat it as a company expense. Blurring the line between personal and business money will cause headaches at tax time, and adds unnecessary complexity to your bookkeeping.
Organize a main business bank account, and then draw on that account for your own wages—a weekly or fortnightly transfer to another personal account does the trick.
Then, ensure that a percentage of the income being deposited into this business account is never touched. This will allow a small amount to grow into something that can be used for larger capital expenses down the track, such as a new laptop or color laser printer.
It’s also wise to consider having yet another account for items that need to be paid regularly but infrequently, such as taxes and superannuation—this way, when tax time comes, you won’t need to struggle to find the money. Work out what income tax rate you’ll most likely need to pay, and consider automatic transferral of that percentage from any income into this account.
Don’t be shy about applying for a loan to help sort out your start-up costs. Many people find it very hard to fund the costs of starting up from the meager income they make in those first few months. It’s a shame for lack of funds to hold you back, if you have to turn down projects because you don’t have the right software or hardware, and it’s probably avoidable if you have a decent credit history. It’s crucial, of course, to make sure that you can meet the repayments.
3 http://www.istockphoto.com/
4 http://www.bigstockphoto.com/
5 http://www.redbubble.com/
6 http://www.spreadshirt.com/
If you do get a loan at any stage, make sure that the loan is serviced from your business account, and treat it as a company expense. Blurring the line between personal and business money will cause headaches at tax time, and adds unnecessary complexity to your bookkeeping.
Calculating Your Rates
There are basically two ways in which most freelancers charge for projects. The traditional method of a “per project” fee is often referred to as a fixed price contract, while charging by the hour is often referred to as time and materials.
In either scenario, it is very important to work out what your minimum hourly rate should be. This way, you can track your progress against this minimum rate in the case of a project fee, or know what to charge as an hourly rate.
Cover Yourself with Ad Hoc Loading
Project rates should be based on a minimum of your hourly rate multiplied by an estimation of hours involved, plus a loading to cover any ad hoc issues (which, depending on your previous experience with the client, you could anticipate to be large or small). This additional loading means that you will stay within budget more frequently, allows you to be more flexible with the occasional micro task or small scope creep, and helps avoid any issues at project completion.
Now, there are five steps to determine your hourly rate. You do this by looking at what it actually costs you to work per hour. There’s a bit more to it than you might think …
Step One: Determine Your Overheads
Using the spreadsheet you have created, you can now determine the annual costs per year, which we’ll use in this calculation. It’s prudent to add a further ten percent to this total, just to cover any unforeseen costs.
Step Two: Allocate Your Salary
There are a number of ways to calculate this figure, and you need to take into account your own particular expectations and lifestyle. However, a good yardstick is to look at what you could expect to be paid for doing the same work for an employer.
Perhaps you’re already under employment, or have only recently left your job; if so, consider what your salary expectation would be in twelve months’ time, including all taxes and employer contributions.
If you don’t have this point of reference, look around a few employment-listing web sites and resources, or ask your peers in the business what they would consider to be a desirable salary for the work that you do.
Weigh up whether you wish to add a little more, to acknowledge that you’re taking a risk in opting to work for yourself. This way, you really can create a desirable figure.
Raise Your Rates!
As you would receive salary rises from time to time, you need to assess your bil lable rates in the same way—don’t overlook the fact that as the years go by, your expertise grows, and therefore is worth more to the client.
Step Three: Decide on a Profit Margin
In all businesses, large and small, the aim of the game is profit. Being a freelancer should really be no exception. You’ll want this margin for those times when cash flow is tight; moreover, by allowing for this profit now, you’ll have some money saved for hiring staff or expanding the office when your business grows.
Step Four: Work Out Your Realistic Hours
Let’s imagine for a moment that you could work 40 hours per week, just as a starting point. Theoretically, this means you have 52 weeks multiplied by 40, which comes to 2,080 hours per year.
Now, if you were an employee, you’d likely have a number of federal or public holidays (roughly 11 in United States, 10 in Australia, and 9 in the United Kingdom). Let’s make this 10 days per year for the sake of the exercise.
Now, none of us likes the idea of being ill, but it’s an inescapable fact of life; we’ll allow a week off for sickness per year as well. And of course you realize and respect the importance of achieving work–life balance when freelancing, so you’ll want to allow at least three weeks of vacation leave on top of it all.
So we have 52 weeks, minus two weeks for public holidays, one week for sick leave, and three weeks for holidays. This calculates to 46 weeks of actual work, or 1,840 hours if we work 40 hours per week.
It is unrealistic to imagine that you are able to charge out all 40 hours in a week, if that’s the sum total of the time you spend working. There are a number of un chargeable tasks, such as administration, sales, meetings, travel, lunches, and other duties that will crop up in the best-run business.
A conservative estimate for these duties might reduce your billable hours by a further
25%, leaving you with 1,380 hours of billable work per year.
Step Five: Calculate Your Hourly Rate
Armed with the information from the four points before, we can now apply the following formula to create your hourly rate:
Pre-tax hourly rate =
(Annual Overheads + Expected Salary + Profit) / Billable Hours
For example, let’s say we calculated $20,000 in overheads plus $40,000 salary, and we’d like a 10% profit margin; we divide $66,000 by 1,380 hours, which equates to $47.83 per hour.
Now that isn’t the end of the equation. We may have a (fairly) scientifically calculated figure, but what we need to do now is to compare this against the range of rates in your local industry, and determine whether it is competitive.
For some people, keeping an hourly rate within a so-called industry standard may not be a concern—perhaps you’re very specialized, or serve a niche market—but for most freelancers, it can make all the difference to landing those prospects who are shopping around. We all know that that deciding on hourly rate alone is a false economy on the part of the prospect, given that the amount of hours one person takes to complete a task could be five times greater than someone else, but we also know that most clients don’t see it that way, especially if they’re unfamiliar with using services such as yours.
Selling Ahead
Consider selling prepaid maintenance (perhaps in five-hour blocks), which is a nice means of immediate payment, and is a great way to cover incidental support requests.
Do some research into similar freelancers in your area in order to nail down a range of rates. Find out from colleagues what they charge, ask people who have used freelancers before, or ask a friend to obtain quotes from your competitors. Where does your rate fit in?
Is it cheap?
This is a good situation to be in. You now have an opportunity to raise your hourly rate, and earn more income. You don’t want your hourly rate to be signi ficantly less than others, as it may make prospective clients start to wonder why you are so cheap, and doubt your abilities.
Don’t Be Cheap
Don’t, whatever you do, try to win work by being the cheapest. This devalues your work, does your wider industry no favors, and means you’ll have a tougher time convincing clients of your value when you start raising your rates.
Many freelancers undercharge when they start, due to a lack of confidence or because they haven’t considered all of their outgoings. You are taking this leap because you’re worth it, so don’t cave into that inner demon of self-doubt!
Is it middle of the range?
Well done! This is the sweet spot—there are freelancers who charge more than you, yet you aren’t in the bargain basement, either. This is the price area that most freelancers should really aim for in their first few years.
Is it higher than average?
If your rate is higher than most, you need to look at what the factors are. You don’t want to be the cheapest; however, being the most expensive may make life a little tougher, if you’re finding clients resistant to the idea.
Review all of your figures from above. Did you exaggerate any overheads too far? Have you added a very large profit percentage? If so, perhaps you need to consider tuning down slightly, to make your rate more realistic and attractive.
Many freelancers complain that people new to freelancing attempt to attract clients by offering considerably cheaper rates. This practice ends up representing a danger to these newbies rather than the freelancers whom they undercut, as they’ve very likely failed to consider their overheads sufficiently. The bright side for seasoned and reasonably priced freelancers is that their fresh-faced competitors may not be freelancing for very long! The unfortunate aspect, however, is that this situation can cause other freelancers to panic and reduce their pricing, thereby creating a spiral towards low costs and a resultant reduction in quality.
Don’t get caught up in the same game—it’s far better to stick to your guns and maintain that you need to be reasonable in your charges, so that you can assure clients you’ll still be freelancing in a year to come.
Also remember that not all new clients shop around. In some situations, it may be common to find that a prospect has had no other quotes than your own, before they make a decision in your favor. This will often become evident during the sales
process.
Bartering Your Skills
To increase your billable hours, consider outsourcing your low-paying, repetitive tasks to allow you to focus more time on the more specialized work you excel at. Smarter still, find a freelancer with better skills in server administration, and ar range to swap services, such as your legendary proficiency in graphics preparation. They’ll be quicker at their area of expertise, and vice versa, so both parties win!
In either scenario, it is very important to work out what your minimum hourly rate should be. This way, you can track your progress against this minimum rate in the case of a project fee, or know what to charge as an hourly rate.
Cover Yourself with Ad Hoc Loading
Project rates should be based on a minimum of your hourly rate multiplied by an estimation of hours involved, plus a loading to cover any ad hoc issues (which, depending on your previous experience with the client, you could anticipate to be large or small). This additional loading means that you will stay within budget more frequently, allows you to be more flexible with the occasional micro task or small scope creep, and helps avoid any issues at project completion.
Now, there are five steps to determine your hourly rate. You do this by looking at what it actually costs you to work per hour. There’s a bit more to it than you might think …
Step One: Determine Your Overheads
Using the spreadsheet you have created, you can now determine the annual costs per year, which we’ll use in this calculation. It’s prudent to add a further ten percent to this total, just to cover any unforeseen costs.
Step Two: Allocate Your Salary
There are a number of ways to calculate this figure, and you need to take into account your own particular expectations and lifestyle. However, a good yardstick is to look at what you could expect to be paid for doing the same work for an employer.
Perhaps you’re already under employment, or have only recently left your job; if so, consider what your salary expectation would be in twelve months’ time, including all taxes and employer contributions.
If you don’t have this point of reference, look around a few employment-listing web sites and resources, or ask your peers in the business what they would consider to be a desirable salary for the work that you do.
Weigh up whether you wish to add a little more, to acknowledge that you’re taking a risk in opting to work for yourself. This way, you really can create a desirable figure.
Raise Your Rates!
As you would receive salary rises from time to time, you need to assess your bil lable rates in the same way—don’t overlook the fact that as the years go by, your expertise grows, and therefore is worth more to the client.
Step Three: Decide on a Profit Margin
In all businesses, large and small, the aim of the game is profit. Being a freelancer should really be no exception. You’ll want this margin for those times when cash flow is tight; moreover, by allowing for this profit now, you’ll have some money saved for hiring staff or expanding the office when your business grows.
Step Four: Work Out Your Realistic Hours
Let’s imagine for a moment that you could work 40 hours per week, just as a starting point. Theoretically, this means you have 52 weeks multiplied by 40, which comes to 2,080 hours per year.
Now, if you were an employee, you’d likely have a number of federal or public holidays (roughly 11 in United States, 10 in Australia, and 9 in the United Kingdom). Let’s make this 10 days per year for the sake of the exercise.
Now, none of us likes the idea of being ill, but it’s an inescapable fact of life; we’ll allow a week off for sickness per year as well. And of course you realize and respect the importance of achieving work–life balance when freelancing, so you’ll want to allow at least three weeks of vacation leave on top of it all.
So we have 52 weeks, minus two weeks for public holidays, one week for sick leave, and three weeks for holidays. This calculates to 46 weeks of actual work, or 1,840 hours if we work 40 hours per week.
It is unrealistic to imagine that you are able to charge out all 40 hours in a week, if that’s the sum total of the time you spend working. There are a number of un chargeable tasks, such as administration, sales, meetings, travel, lunches, and other duties that will crop up in the best-run business.
A conservative estimate for these duties might reduce your billable hours by a further
25%, leaving you with 1,380 hours of billable work per year.
Step Five: Calculate Your Hourly Rate
Armed with the information from the four points before, we can now apply the following formula to create your hourly rate:
Pre-tax hourly rate =
(Annual Overheads + Expected Salary + Profit) / Billable Hours
For example, let’s say we calculated $20,000 in overheads plus $40,000 salary, and we’d like a 10% profit margin; we divide $66,000 by 1,380 hours, which equates to $47.83 per hour.
Now that isn’t the end of the equation. We may have a (fairly) scientifically calculated figure, but what we need to do now is to compare this against the range of rates in your local industry, and determine whether it is competitive.
For some people, keeping an hourly rate within a so-called industry standard may not be a concern—perhaps you’re very specialized, or serve a niche market—but for most freelancers, it can make all the difference to landing those prospects who are shopping around. We all know that that deciding on hourly rate alone is a false economy on the part of the prospect, given that the amount of hours one person takes to complete a task could be five times greater than someone else, but we also know that most clients don’t see it that way, especially if they’re unfamiliar with using services such as yours.
Selling Ahead
Consider selling prepaid maintenance (perhaps in five-hour blocks), which is a nice means of immediate payment, and is a great way to cover incidental support requests.
Do some research into similar freelancers in your area in order to nail down a range of rates. Find out from colleagues what they charge, ask people who have used freelancers before, or ask a friend to obtain quotes from your competitors. Where does your rate fit in?
Is it cheap?
This is a good situation to be in. You now have an opportunity to raise your hourly rate, and earn more income. You don’t want your hourly rate to be signi ficantly less than others, as it may make prospective clients start to wonder why you are so cheap, and doubt your abilities.
Don’t Be Cheap
Don’t, whatever you do, try to win work by being the cheapest. This devalues your work, does your wider industry no favors, and means you’ll have a tougher time convincing clients of your value when you start raising your rates.
Many freelancers undercharge when they start, due to a lack of confidence or because they haven’t considered all of their outgoings. You are taking this leap because you’re worth it, so don’t cave into that inner demon of self-doubt!
Is it middle of the range?
Well done! This is the sweet spot—there are freelancers who charge more than you, yet you aren’t in the bargain basement, either. This is the price area that most freelancers should really aim for in their first few years.
Is it higher than average?
If your rate is higher than most, you need to look at what the factors are. You don’t want to be the cheapest; however, being the most expensive may make life a little tougher, if you’re finding clients resistant to the idea.
Review all of your figures from above. Did you exaggerate any overheads too far? Have you added a very large profit percentage? If so, perhaps you need to consider tuning down slightly, to make your rate more realistic and attractive.
Many freelancers complain that people new to freelancing attempt to attract clients by offering considerably cheaper rates. This practice ends up representing a danger to these newbies rather than the freelancers whom they undercut, as they’ve very likely failed to consider their overheads sufficiently. The bright side for seasoned and reasonably priced freelancers is that their fresh-faced competitors may not be freelancing for very long! The unfortunate aspect, however, is that this situation can cause other freelancers to panic and reduce their pricing, thereby creating a spiral towards low costs and a resultant reduction in quality.
Don’t get caught up in the same game—it’s far better to stick to your guns and maintain that you need to be reasonable in your charges, so that you can assure clients you’ll still be freelancing in a year to come.
Also remember that not all new clients shop around. In some situations, it may be common to find that a prospect has had no other quotes than your own, before they make a decision in your favor. This will often become evident during the sales
process.
Bartering Your Skills
To increase your billable hours, consider outsourcing your low-paying, repetitive tasks to allow you to focus more time on the more specialized work you excel at. Smarter still, find a freelancer with better skills in server administration, and ar range to swap services, such as your legendary proficiency in graphics preparation. They’ll be quicker at their area of expertise, and vice versa, so both parties win!
Determining Your Costs
You’ll no doubt have heard the old phrase “it costs money to make money,” and as cliched as this may sound, it is overwhelmingly accurate when applied to freelan cing. No matter how tight a rein you keep on your expenses, you’ll find unexpected bills are a fact of business life. By providing your budgeted amounts with generous margins, you’ll be better prepared to cope with an unexpected cost.
Perhaps you’ve already considered obvious items such as hardware or software, but have you thought about their cost of replacement, or their upgrade or replacement cycle? Say you have a $2,500 computer, which you plan to replace every three years. That’s $834 per year to put aside, and don’t forget to record the depreciation!
Then let’s say you have an operating system, a creative design software suite, an accounting package, and an office application package. Maybe you’ll upgrade to the latest version for just the design and office suite every year—you’ll be putting aside around $1,100 per year just to do that!
Then you have a printer, with those expensive ink replacements, a scanner, a broadband router, and a few wireless network parts.
And it goes without saying that you should attempt to calculate costs that you may not need right now, but may crop up in the near future. For example, it’s far better to allow for your tax return costs as you go, rather than scrambling for funds when tax time comes around.
Costs Checklist
First, create a spreadsheet with three columns: Cost Category, Monthly Cost, and Annual Cost. Then enter the applicable headings from the following example list to the Cost Category, and estimate your costs, being either monthly or annual. You can also download an example spreadsheet from this book’s web site.1 Feel free to add any other expenses that don’t appear on this list , if you consider them relevant to your business.
1 http://www.sitepoint.com/books/freelancer1/
Office Costs
■ rent (if you work from home, determine your percentage of home use and—with advice from your accountant—make this a percentage of rent or mortgage)
■ furniture (desk, chair, bookshelves, and the like)
■ signage (if any)
■ electricity
■ water
■ cleaning
Equipment Costs
■ hardware: desktop computer
■ hardware: laptop computer
■ hardware: printer
■ hardware: phone handsets, answering machine, fax machine
■ hardware: other (wireless routers, thumb drives, and so on)
■ software: office package
■ software: design and development suites
■ software: accounting package
■ software: other
Communication Costs
■ mobile phone costs
■ fixed telephone costs
■ Internet access
Travel Costs
■ vehicle maintenance
■ fuel (speak to your accountant about keeping a log book)
■ taxis
■ airfares
■ accommodation
■ conference fees
■ meals and entertaining
Consumable Costs
■ printer ink
■ stationery
■ postage and couriers
■ paper
■ pens, pencils, staples …
Marketing and Advertising Costs
■ your own web site hosting
■ press advertising
■ phone book advertising
■ other advertising: trade magazines, business cards and stationery, conference flyers
Miscellaneous Costs
■ legal fees (these are normally incurred at the start, so spread them over two or three years)
■ accounting fees (spread any start-up fees over two or three years, and then
add ongoing fees)
■ professional memberships
■ subscriptions (magazines, online publications)
Insurance Costs
■ health insurance
■ professional insurance
■ income insurance
■ business insurance
■ office insurance
Then, multiply the monthly costs by 12 to calculate your annual cost. We’ll use these annual cost figures later in this chapter.
This spreadsheet can be updated throughout the year, to reflect the real costs. You can compare budget versus actual to see how close these figures came at the end of
the first year of freelancing.
The Cost of Software
Software licensing is an often-overlooked expense when freelancers first set up. Consider all the different packages you may need, and allow for these costs from the start. Don’t forget to look at open source, freeware, and shareware software as another option where you can, as many of these are just as functional as their commercial counterparts.
Considering Insurance
Nobody ever plans to fall ill, or expects a client to take legal action, but these unfor tunate situations do occur. Insurance is the only way to ensure that you minimize the impact of such unexpected trials.
Ask an insurance broker what types of insurance you may need to allow for, and ensure that you shop around. Some premiums can be as much as double the price of competing products that offer exactly the same cover.
Make sure that you understand what can and cannot be claimed, and that you have a complete understanding of your chosen insurance policy before you hand over your hard-earned cash. There’s nothing worse than enduring an extended illness, only to find that your insurance provider won’t cover your loss of income because of some small issue detailed in the fine print.
You will find that most insurance is 100% tax deductible as well, which makes this solution even more attractive to freelancers.
Obtaining Accounting Software
We’ll discuss giving your accounting and bookkeeping to a professional in a moment, but you will want to be familiar with your own finances to some degree. We’ll discuss the basic options of controlling your own finances here before deciding how much you should control and how much you hand over.
There are seemingly as many accounting software choices available as there are freelancers. You should speak to colleagues to find what they use, and search out reviews and tutorials for these packages online before making a commitment.
The feature sets and costs vary widely between all of the options on the market, and there’s no easy decision in this area. Any basic accounting package should allow you to track items such as:
■ Accounts Receivable
■ Accounts Payable
■ General Ledger
■ Billing
■ Stock or Inventory
■ Purchase Orders
■ Sales Orders
Most systems allow you to send an invoice or receipt as a PDF by email, as well as the old fashioned “print out and mail” method. Some of the newer versions also feature handy functions, such as time sheets (so you can input your hours directly into the system), mail merge (so you can use as a basic mailing list), and automated debt collections or reminders.
Here’s just a handful of the different options available to you:
System Software
Quicken (http://www.quicken.com/)
Quicken has at least five versions of its product, ranging from the ultra-light starter edition to the premier edition, which integrates with banks, tracks investments, and more.
M.Y.O.B (http://www.myob.com/)
Within its four products, FirstEdge through to Premier, M.Y.O.B software includes payroll, time billing, inventory, and even a simple contact database.
Quickbooks (http://www.quickbooks.com/)
With 15 different suites, Quickbooks has everything from home finance tracking through to Retail, Accountant, and Payroll editions.
Web-based Software
Saasu (http://www.saasu.com/)
The most mature of the web-based finance offerings, Saasu rolls out new features regularly, and has tight integration with social networks, search engines, and CRM systems, as well as including all the regular software features.
Less Accounting (http://lessaccounting.com/)
The folks at Less Accounting make a point of saying they aren’t some bloated accounting package provider; they tout themselves as “simple small business accounting software.”
Freshbooks (http://www.freshbooks.com/)
The Freshbooks system is both an invoicing and time tracking system, with widgets available for desktop integration, sophisticated reports and integra tion with the big-name payment gateways.
Irrespective of which accounting package you choose, it’s very important that you ask your accountant or bookkeeper for advice prior to purchasing software, and for support in setting up your initial accounts. This can avoid more complex and ex pensive situations from occurring later on, when these professionals need to export files for lodgment, or work on the accounts themselves.
Most packages allow fairly easy exporting of data, so you can email your files to your accountant for review or lodgment. Don’t think that choosing the most feature- packed software is best either; this can easily bewilder you and cause more issues than simpler software.
Most up-to-date accounting packages can also reconcile directly to your bank ac
count. Such features can save you countless hours and many headaches.
Perhaps you’ve already considered obvious items such as hardware or software, but have you thought about their cost of replacement, or their upgrade or replacement cycle? Say you have a $2,500 computer, which you plan to replace every three years. That’s $834 per year to put aside, and don’t forget to record the depreciation!
Then let’s say you have an operating system, a creative design software suite, an accounting package, and an office application package. Maybe you’ll upgrade to the latest version for just the design and office suite every year—you’ll be putting aside around $1,100 per year just to do that!
Then you have a printer, with those expensive ink replacements, a scanner, a broadband router, and a few wireless network parts.
And it goes without saying that you should attempt to calculate costs that you may not need right now, but may crop up in the near future. For example, it’s far better to allow for your tax return costs as you go, rather than scrambling for funds when tax time comes around.
Costs Checklist
First, create a spreadsheet with three columns: Cost Category, Monthly Cost, and Annual Cost. Then enter the applicable headings from the following example list to the Cost Category, and estimate your costs, being either monthly or annual. You can also download an example spreadsheet from this book’s web site.1 Feel free to add any other expenses that don’t appear on this list , if you consider them relevant to your business.
1 http://www.sitepoint.com/books/freelancer1/
Office Costs
■ rent (if you work from home, determine your percentage of home use and—with advice from your accountant—make this a percentage of rent or mortgage)
■ furniture (desk, chair, bookshelves, and the like)
■ signage (if any)
■ electricity
■ water
■ cleaning
Equipment Costs
■ hardware: desktop computer
■ hardware: laptop computer
■ hardware: printer
■ hardware: phone handsets, answering machine, fax machine
■ hardware: other (wireless routers, thumb drives, and so on)
■ software: office package
■ software: design and development suites
■ software: accounting package
■ software: other
Communication Costs
■ mobile phone costs
■ fixed telephone costs
■ Internet access
Travel Costs
■ vehicle maintenance
■ fuel (speak to your accountant about keeping a log book)
■ taxis
■ airfares
■ accommodation
■ conference fees
■ meals and entertaining
Consumable Costs
■ printer ink
■ stationery
■ postage and couriers
■ paper
■ pens, pencils, staples …
Marketing and Advertising Costs
■ your own web site hosting
■ press advertising
■ phone book advertising
■ other advertising: trade magazines, business cards and stationery, conference flyers
Miscellaneous Costs
■ legal fees (these are normally incurred at the start, so spread them over two or three years)
■ accounting fees (spread any start-up fees over two or three years, and then
add ongoing fees)
■ professional memberships
■ subscriptions (magazines, online publications)
Insurance Costs
■ health insurance
■ professional insurance
■ income insurance
■ business insurance
■ office insurance
Then, multiply the monthly costs by 12 to calculate your annual cost. We’ll use these annual cost figures later in this chapter.
This spreadsheet can be updated throughout the year, to reflect the real costs. You can compare budget versus actual to see how close these figures came at the end of
the first year of freelancing.
The Cost of Software
Software licensing is an often-overlooked expense when freelancers first set up. Consider all the different packages you may need, and allow for these costs from the start. Don’t forget to look at open source, freeware, and shareware software as another option where you can, as many of these are just as functional as their commercial counterparts.
Considering Insurance
Nobody ever plans to fall ill, or expects a client to take legal action, but these unfor tunate situations do occur. Insurance is the only way to ensure that you minimize the impact of such unexpected trials.
Ask an insurance broker what types of insurance you may need to allow for, and ensure that you shop around. Some premiums can be as much as double the price of competing products that offer exactly the same cover.
Make sure that you understand what can and cannot be claimed, and that you have a complete understanding of your chosen insurance policy before you hand over your hard-earned cash. There’s nothing worse than enduring an extended illness, only to find that your insurance provider won’t cover your loss of income because of some small issue detailed in the fine print.
You will find that most insurance is 100% tax deductible as well, which makes this solution even more attractive to freelancers.
Obtaining Accounting Software
We’ll discuss giving your accounting and bookkeeping to a professional in a moment, but you will want to be familiar with your own finances to some degree. We’ll discuss the basic options of controlling your own finances here before deciding how much you should control and how much you hand over.
There are seemingly as many accounting software choices available as there are freelancers. You should speak to colleagues to find what they use, and search out reviews and tutorials for these packages online before making a commitment.
The feature sets and costs vary widely between all of the options on the market, and there’s no easy decision in this area. Any basic accounting package should allow you to track items such as:
■ Accounts Receivable
■ Accounts Payable
■ General Ledger
■ Billing
■ Stock or Inventory
■ Purchase Orders
■ Sales Orders
Most systems allow you to send an invoice or receipt as a PDF by email, as well as the old fashioned “print out and mail” method. Some of the newer versions also feature handy functions, such as time sheets (so you can input your hours directly into the system), mail merge (so you can use as a basic mailing list), and automated debt collections or reminders.
Here’s just a handful of the different options available to you:
System Software
Quicken (http://www.quicken.com/)
Quicken has at least five versions of its product, ranging from the ultra-light starter edition to the premier edition, which integrates with banks, tracks investments, and more.
M.Y.O.B (http://www.myob.com/)
Within its four products, FirstEdge through to Premier, M.Y.O.B software includes payroll, time billing, inventory, and even a simple contact database.
Quickbooks (http://www.quickbooks.com/)
With 15 different suites, Quickbooks has everything from home finance tracking through to Retail, Accountant, and Payroll editions.
Web-based Software
Saasu (http://www.saasu.com/)
The most mature of the web-based finance offerings, Saasu rolls out new features regularly, and has tight integration with social networks, search engines, and CRM systems, as well as including all the regular software features.
Less Accounting (http://lessaccounting.com/)
The folks at Less Accounting make a point of saying they aren’t some bloated accounting package provider; they tout themselves as “simple small business accounting software.”
Freshbooks (http://www.freshbooks.com/)
The Freshbooks system is both an invoicing and time tracking system, with widgets available for desktop integration, sophisticated reports and integra tion with the big-name payment gateways.
Irrespective of which accounting package you choose, it’s very important that you ask your accountant or bookkeeper for advice prior to purchasing software, and for support in setting up your initial accounts. This can avoid more complex and ex pensive situations from occurring later on, when these professionals need to export files for lodgment, or work on the accounts themselves.
Most packages allow fairly easy exporting of data, so you can email your files to your accountant for review or lodgment. Don’t think that choosing the most feature- packed software is best either; this can easily bewilder you and cause more issues than simpler software.
Most up-to-date accounting packages can also reconcile directly to your bank ac
count. Such features can save you countless hours and many headaches.
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