Most freelancers think — I’ve believed it myself in the past — that because their expenses are so few, any money they make is practically profit. The ‘even if I made Rs. 500 off a project, that’s 500 more than I had’ attitude. *scoff*
Profit = Earnings (minus) Cost. Simple, right? Great! Today, I’m going to show you how we calculate profitability within emdash (from a random month last year).
This is the dashboard that breaks down what profits we’re making for each client. A client who is paying us 64,000 per month is actually at nearly 20% loss! How do we know?
1. Some basic assumptions: We set an hourly rate for each of our employees — calculated based on their cost-to-company. For instance, if someone was drawing 44,000 Rs. per month, their hourly rate would be 44000/22 (days)/8 (hours). Rs. 250.
2. Time spent by each person for each task: In the worksheet above, you’ll see that costs are calculated based on the time spent by each team member on that particular task. We use a time tracker for this, but when we miss tracking, we fill it up by intuition (though not ideal).
One of our contractors (the designer) charges by the piece, so we add that in as it is.
3. Deduct overheads and taxes: We’ve only taken 15% as overheads, because we have little expenses beyond payroll. You figure out what it is for you. emdash is an LLP and so it’s flat 30% corporate tax.
On a project that was worth 112,000, we only made 14,000 Rs. This is still technically profitable, but is it really worth it? For a business like ours, 30% is a reasonable target profit — you’ll see we didn’t meet the target on any of our projects in that month. (I have my reasons, but that’s not the point here.)
These calculations might seem easier as an entrepreneur because the cost-to-company of each employee is clearer. As a freelancer, you might think you don’t have any of these costs. Don’t!
Add up all your personal expenses (house rent, food, lipstick etc.)
Add up all business expenses (subscriptions, laptop depreciation, commute etc.)
Include benefits like insurance etc. — you need this!
Include your goal savings too.
I know that you are probably thinking — ah, 10k for rent, 5k for food and I’m all set. No, you’re not. That notebook you’re writing on is 350 bucks, I’m guessing. Those headphones are a few thousands. The cab ride from the airport with surge pricing is another couple of thousands. Think. And when you feel you’re done. Think twice more.
Calculate what yearly pay you want to make and break that into hourly. Then, go back up and start from step 1. From here, there are a couple of things you can do:
Reduce costs: Bring down the number of people or time spent on the job.
Or increase price: Re-negotiate with the customer.