Key Takeaways
- A simple formula for figuring out how much you need to earn to make a living as a freelancer
- How to factor in taxes, health insurance and retirement into your retainers
- By the end of the exercise, you’ll know how much you need to make to earn a living as a full-time freelancer
How much do you need to earn to sleep well at night? While everybody has their own financial responsibilities and goals, below is a simple formula to figure out the right balance for you. Keep in mind that there’s more to it than just the numbers.
A Simple Formula
- Take the average hourly billing rate
- Multiply the hourly billing rate times 40 hours per week to determine revenue
- From the total revenue, subtract estimated taxes based on IRS income tax tables
- Subtract health insurance costs
- Subtract retirement savings costs
- You will have a new estimated revenue based on total billings minus expenses
- Map your revenue against your total personal expenses (housing, car, etc.)
- Divide your total expenses by your hourly rate to determine how many hours you need to work per week/month
3 Factors Impacting a Freelancer's Profitability
Now that you have a good idea of how much work you need to run your business, let’s go beyond the numbers. Here are three factors that can impact your profitability.
Over-servicing the client
This can happen when you’re in the middle of a busy event or launch season, or you have a demanding client. With a retainer business model, you can expect there will be times when you over-service the client to make deadlines and goals. Once the big project is complete, business usually returns to normal. However, if over-servicing becomes the norm, you’re cutting into your profitability and limiting your ability to grow your freelance business.
To avoid this, keep track of every activity and how long each takes. If you’re over-servicing a client for more than six weeks and it’s not due to a special project, you need to look at how you spend your time and if there are areas where you can make up the difference.
Start with the admin and see where you can trim time. For example, are you attending too many meetings? Are you and your client punctual for each meeting? Do meetings get sidetracked or go off in tangents? Do you have a meeting agenda that you send in advance and stick to it?
Next, look at the projects that are taking the most time. Are there processes that could be streamlined? For example, lengthy approval cycles or spending too much time reporting on your work versus actually getting the work done.
If you’ve streamlined admin and processes, have a conversation with the client. Together, you need to figure out if you need to scale back some of your billable activities or expand the scope.
Learning curves and ramping up new clients
When you start working with a new client, it takes some time to get things up and running. This includes learning about competitors and getting up to speed on the company and its offerings, etc. Once the account is up and running, you’ll be able to get things done faster, making it a profitable piece of business. Until then, you’ll likely be breaking even.
Too Much Availability
When you’re not fully booked, it’s easy to pour more time into your existing clients, but that doesn’t help your bottom line or enable you to grow your business.
This also sets you up for work overload. When you do bring in a new client, your existing clients expect the same level of over-service. Be mindful of how you spend your time and when there’s a lull, either fill it with new business development or take some time for yourself.
Starting and growing a successful freelance communications business takes time. But you can shorten the path to profitability by cutting and/or streamlining the activities that don’t help you, or the client, achieve business goals
