Do you know how much work you need to stay afloat? To pay the bills? To be profitable!? It’s a pretty simple equation but man, it took me like 5 years in business until I finally realized how simple it was.
Oh, and then I’ve forgotten it many times.
Here’s the simple equation to work all that out. (This works both for freelancers and for business owners).
First, how much money do you need? You need to know your personal finances, and you’ll want to think about not just how much you need to pay the bills, but also to have some profit margin in your personal life, just as you do in your business.
So – how much do you need? Let’s use $5,000 for our example.
Next – how many projects you can do per month? If you’re a photographer doing on site shoots that require little prep, maybe you can do 20 shoots a month. If you’re a film director, it’s not uncommon to spend 18 months on a movie between prep, production, and post.
Now, say you’re a photographer. You need $5000/month for personal finances, and you’d like to have a healthy profit margin in your business as well so you can grow it. A good equation to get to a healthy margin is to multiply your take home pay by 2.5.
$5000 x 2.5 = $12,500
The cool thing about this is it shows you what you need to charge your clients. At 20 shoots a month you should be charging $625 on average. Maybe you do a mixture of weddings, smaller shoots, and commercial work. This gives you a simple way to determine what to charge.
Now, maybe you’re just starting out. Well, your personal expenses are probably lower, but you also may only average 10 shoots per month. Time to make some adjustments to the budget and your business model.
On the flip side, you can figure out what your monthly potential income is. Take your average income per project, multiply by how many you can do in a month, and that’s your total potential income. If you’re like us where an average project for a client is around $10,000, and you can do 2 per week, then you know what your potential is each month and not to scale beyond that. You don’t want to be hiring employees you can’t afford.
Next – how much work do you need to book!? In our experience, we have to meet with 4-5 potential clients — like, sit down and talk about a project with them, at their office — in order to book one. In the last two months we’ve had meetings where the projects would total around $400k. How much actually came through? About $125-150k. That’s what it’s looking like now, but that amount could be as low as $85k. (Ouch. Hurts a little to type that out.)
Back to our photographer – in order to make $12,500 they need to book 20 shoots, which means they may need to meet between 50-100 potential clients per month. Our business model is looking less feasible at this point, so they’re either going to have to increase their rates, or do a better job at booking a higher percentage of the potential work.
This is a good way to stress test your business model to see if what you’re getting into is going to work on paper. Maybe you have a job but want to start freelancing. Don’t quit that day job with benefits until you know you can charge enough, prospect enough, and boom enough work to sustain your lifestyle.
Have employees or thinking about taking them on? Use the 2.5 x Salary equation to see how much extra you need in order to afford them. Then make sure that by adding them it either allows you to raise your rates or complete more work.
It’s important to stress test your business this way, especially when you’re starting out.
Try it, let me know what you discover in the comments!