This post is aimed at those businesses who essentially sell their time (and the time of others) and looks at what assumptions you can make about how much time you can realistically sell per annum.
Q1 – What would you like to earn per annum?
Let’s start with the simple version i.e. a freelancer or sole trader. The more precise question is what taxable income would you like to earn? The answer to this question is different from ‘what turnover are you aiming for?’
If you’d like to have a taxable income of say £50,000. This is after the costs of running the business have been taken into account. And these business costs come to £25,000 (travel, rent etc). Then, in order for your taxable income to be £50k you need to turnover £75k.
Q2 – How many chargeable days are there in the year?
The answer to this question is crucial as it will determine the daily rate you aim to charge. If you’re already in business then look back at a few months and see how many full days in each week are chargeable times … see if you can get to an average.
We reckon that the conservative answer is 2 days per week. We’d rather be conservative than optimistic on this figure because if you go for the optimistic end of the spectrum e.g. 4-5 days/week but never achieve it then you’ll find yourself needing to sell a lot of days of time just to achieve a basic level of income … a headless chicken comes to mind.
So, on two days a week that’s roughly 100 days per year.
Q3 – so what daily rate am I aiming to charge?
Well, divide your goal income (£75k) by the number of chargeable days (100) … to get £750/day.
Another way of looking at the daily rate you charge now e.g. £250 is to say how many days do I need to charge in order to achieve my goal of a taxable income of £50k … in this case 300 days … nearly 6 days per week … not likely!
You could also consider what your turnover will be if you sell 100 days at this lower rate – £25k. Once you’ve taken the cost of running the business into consideration there won’t be much left to pay you with.
Can you now see why there is little virtue in being cheap and a definite need to manage how much free or cheap time you give away? (and by the way there will probably always be a need to give away some time as you invest in new working relationships or do early work on new unpaid ideas/projects/products).
In the next post on this topic we’ll look at how you compare this rate to the market rate (i.e. what customers expect to pay), and how over time you can raise your rates as you get busier.