I was going to title this post Covering Your Assets, but technically we're not talking about assets today. We're talking about expenses—business expenses. The kind you have to pay to run a small business. I'd like to tell you that I have the secret for covering all of your business expenses if you're a small, service-oriented business. The secret is simple. The secret is almost obvious. But sometimes we find the secret hard to justify.
The secret is: Raise your rates.
Our clients understand that our rates are a good value for the work we provide. Our clients also run businesses and understand that they in turn must make a profit. Raising your prices does not mean scalping. Raising prices ensures stability, excellence-in-work, and profitability for the future.
Firewheel turned five a few months back. We're now fortunate and blessed to have a nice office above a Starbucks. But it wasn't always this way. We started in our spare bedrooms and basements. Heck, Brian still works from his basement, but that's because we chain him to his desk there constrain his relentless creativity. There were, however, some steps that got us from the bedroom to 181 Grand Avenue.
Growing any small business is extremely dependent on managing your cashflow and expenses. If you're just starting out, it's important to spend as little as possible and avoid debt like the plague. However, just because you keep your expenses low doesn't mean your billing rates should be low as well. Selling yourself cheap to get work is not a recipe for long-term success.
If you're starting out on your own, and you need help arriving at a billable rate, here's a good formula: Add up all your expenses (equipment, software, phone, DSL, rent, taxes, etc.). Then add to that what you need (or would like) to get paid over a years time. If your expenses come to $20,000 and you'd like to get paid $80,000, you need to be able to foot the bill for $100,000 in a year's time. On top of that you want a profit. 15 percent is a good place to start. So $115,000 is your magic figure.
Now let's assume you want four weeks of vacation and/or sick time. This leaves you with 48 weeks or working time. While it may sound like a pipe dream (it is), let's say you only want to work 40 hours a week. Of those 40 hours, you can chock up 16 hours (or two days a week) to non-client work. Plan on this. You'll need to market yourself, design your own website, chase down leads, and pay the bills.
This leaves you with 24 "billable" hours in a week, or just over 1150 billable hours in a year. So what do you need to bill per hour to pull your $115,000? Well, dividing your $115,000 by 1150 tells you $100 an hour is your billable rate. It's that simple. That may sound like a lot to you, but if you do quality work, your clients will not see this as an expense. They'll see it as an investment.
About once or twice a year it's good to reevaluate your expenses and see if you need to raise your rates (presenting your new rates to your clients is a topic for another discussion though).
When you're hit with unforeseen expenses or additional overhead, the logic stays the same. A few years ago we were hit with a lawsuit (more on that another time as well, perhaps in a book). The legal bills that came out of the successful defense of that suit ran well into the five-figure range. A figure like that can send a small business into panic mode quite quickly. But here's the deal... Don't treat that as a one time killer expense. Factor it out over a year's time, and it won't seem that bad.
Let's say you're hit with an unexpected $10,000 expense (our lawsuit was worse). While the initial shock might be hard to stomach, take a deep breath and divide that additional expense out over a year's worth of billable time. $10,000 divided by 1150 hours is a little over $8 per hour. Adding $8 per hour to your hourly rate isn't that scary now is it? Not scary to you. Not scary to your clients. It covers the crises, and more importantly, positions you to handle a future crises even better. This also is a good example of why its important to have some cash in reserve so you can float yourself while you adjust your rates.
We receive emails every now and then from folks who'd like us to charge less for our Blinksale invoicing service. They write things like, "If it only cost $3 instead of $6, I'd sign up." Well, the reality is that we cannot cover our expenses at $3 a month. So we charge $6. If you're a small business and want to add Blinksale to your expenses (it's well worth the $6 per month, trust me), there's a simple solution. Raise your rates. The cost of subscribing to Blinksale over a year's time is $0.06 per billable hour using our formulas above. Six cents. Plus Blinksale will save you time on your non-billable hours. It's a win win.
So the next time you're unsure how you're going to grow your small business, remember the secret. Raise your rates.
