Puakma: Under the hood

I'm Brendon Upson, jack-of-all-trades, master of one or two. I'm talking about life running a small ISV tackling business issues and leaping technology hurdles in a single bound.

webWise Network Consultants is based in Sydney, Australia and develops the groundbreaking Puakma server technology.

Business

So you want to run your own consulting business?

Filed under: by Brendon Upson on 11:01

I have been asked a few times by various people on how to be a freelance IT specialist, so thought it was time to write about it.

The first question you need to ask yourself is: Why do I want to do it? If you answer is "for the money", beware. Consulting is a services based business which means you have two natural constraints, time and the amount people will pay for your service. There is a limit to what you can earn and it's actually not that high. If your answer is "for the money" look at selling some kind of product, or turn your service into a product if possible. This is all beyond the scope of what I'm going to talk about here.

The biggest mistake freelance consultants make is not charging enough. We've been conditioned to think in terms of cheap. "If XYZ Co charge $2000 a day, then I'll charge $1000 a day and I'll be flooded with work". Wrong. First, the amount you charge creates a perception of quality. Second, XYZ charge this amount for a reason. They have calculated training, annual leave, sick leave, down time, overheads (office rent, phone, payroll admin, ...), basically, in order to run a sustainable business this is the amount you NEED to charge.

How do you work out how much to charge?

It's actually quite easy. First is your salary. If you're leaving a $60,000 a year job to start a consulting company I assume you want to earn at least as much. The formula is basically: Your salary (or rate) + Overheads + Profit margin = your rate to a customer. Overheads are those bills that roll in every month whether you are working or not (sometimes called fixed costs). These include office rent, computer equipment, phone costs etc. The profit margin is the premium you add for being in business. Businesses are about making a profit. This can be whatever you want, youcould use around 10% as a base line.

In the previous example, we'll assume monthly overheads of $2,000, your gross monthly salary is $5,000 and you want to make a 10% profit. The formula is:

(5,000 + 2,000) * 1.1 =  $7,700 per month.

Now that we have the monthly figure it's easy to work out an hourly rate. There are about 160 working hours in a month, so 7,700 / 160 = $48.12 per hour.

Sloooow down skippy, we're not done yet. 

It is pretty unlikely you will bill the full 160 hours every month so we need to load in a contingency factor. Let's assume you'll be paid for 70% of the time. Those 160 hours now fall to 120 hours but of course your overheads and gross salary remain the same, so 7,700 / 120 = $64.16 per hour. 

At this point STOP. Compare that rate to what you can get as a contractor or permanent employee. They get paid for the full 160 hours every month! If the numbers don't add and you really want to run your own consulting business, look at which overheads you can cut, then re-run the figures.

Now you know what you need to make as a minimum just to stay in business. Now compare that figure to your competitors. Are you high or low. If you're too high, abort, the numbers don't stack up ;-) If you're too low (great!) increase your rate to that of your competitors to maintain your level of perceived quality.

Next time we'll talk about fixed price work. That's a whole different can of worms!

 

Comments

  1. How true. Let's also not forget the large amounts of tax that you'll have to pay. The tax system will not particularly favour you as basically you still need to do all the stuff a large corporate has do (quarterly BAS statements, end of year returns etc). It's very important to find a good accountant!

    Comment posted by Chris Bekas on 2008-08-04 13:02:34.0 | mail

  2. Indeed. I purposely ignored the subject of tax, although in the above examples you'll only need to pay tax on your gross salary ($5,000 per month) and any profit the business makes. You might say paying a hefty chunk of tax is actually a good thing! A good accountant will minimise that...

    Comment posted by Brendon Upson on 2008-08-04 13:16:57.0 | mail

Your comment

Protected from spambots!



HTML is allowed
Formatting: Basic formatting can be included like so:
[b]bold[/b] and [i]italic[/i]