This content was originally published at: https://medium.com/@freeagentapp/how-to-make-sure-your-freelance-rates-arent-losing-you-money-27bd8bdc1ce5
The first thing you need to know about pricing your work
We all love the freedom that being freelance gives us. But at the end of the day we also all need to make money. Being the best designer or developer in the world sadly won’t help you if you can’t make enough money to survive, which is why the figure called the “break-even point” is so important for freelancers.
Your break-even point is the point at which your business is making enough revenue to cover all your costs (without net loss or gain) and anything you make on top of this is lovely, lovely profit. You’ll be able to send out quotes confident that you’re ensuring your own financial security and building up your business — the key to future success! To get the ball rolling, you need to work out the costs associated with your business over a year.
Step 1: Add up all your costs
These might be fixed costs (a cost that stays the same regardless of how many sales your business makes, or how active it is), for example:
•Rent/mortgage
• Subscriptions
• Web hosting for your own site
• Insurance
or they might be variable costs (changes with how many sales your business makes, or how active it is), for example:
• Postage costs
• Taxi fares
• Web hosting for customer sites
• Electricity
Also look at your personal outgoings — how much do you need to take in each month to pay all your bills? Don’t forget to include anything that will change as a result of being freelance such as childcare costs, travel and any extra equipment like your own computer and software.
Step 2: Plan your capacity for billable days
How many days do you think you’ll be working every year? Your true capacity is probably lower than you think. Out of 365 days in a typical year there are 261 working days (Monday to Friday) — but of course you’re not going to be spending 261 days working solidly.
Take into account public and religious holidays, and the number of days you want to take as holidays. As a freelancer you can have a lot of flexibility around taking time off, but not working means not earning money, so you need to consider all of this when figuring out your rate.
Also think about the days you need to set aside for maintaining and developing your business. Invoicing, preparing accounts and tax all take time, as do finding and chasing leads for new work, project management and correspondence. Tools like FreeAgent can massively help with this, but don’t forget that in larger businesses this is a role in itself, so when you work for yourself you need to factor in (and schedule) enough time towards this.
You can also allocate time towards your own learning and personal development. This includes conference attendance, and time spent reading and studying. If you don’t invest time in improving yourself then it will be much harder to stand out from — or even keep up with — the competition.
So, let’s say we subtract the following from your potential 261 working days per year:
Maintaining and developing business: 10% (26 days) Learning and personal development: 5% (13 days) Holidays and time o : 10% (26 days) Sickness and unforeseen circumstances: 5% (13 days)
= 183 available days to work per year
That means that, in this example, you are not able to charge for nearly half of the 365 days ‘available’ in the year.
Step 3: Calculate your break-even point
To calculate the break-even point on what you charge, divide the sum of your yearly outgoings by your yearly billable days.
Example: How Jenny works out her break-even point daily rate
Jenny is a freelance web designer who wants to know the amount of money she would need to charge per day to cover her costs.
Total of her outgoings per year (including household expenses): £25,000
Total of her projected billable days per year (taking into weekends/holidays/ possible sick days, etc): 183
So Jenny divides her outgoings by her billable days: £25,000/183 = £137 per day break-even point
Jenny now knows that she’ll need to be charging her clients at least £137 a day to cover her costs.
Remember, your break-even point really is your bare minimum. Charging this amount doesn’t leave any room to build up a cash buffer or to expand as a business, and doesn’t take into account external factors like market conditions. It’s crucial you bear this number in mind when you quote for work as you want to ensure that you’re being paid a healthy amount over this so that your business is profitable and resilient.
Making a profit is key to a healthy business and knowing your break-even point will really help you to eliminate guesswork when it comes to quoting for work — make sure you know what you’re worth!
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