What is the best process for determining the base break even and profitibility of the business… from which one can determine a fair charge out rate to clients?
There are a few different ways you can approach this. First, it is a good idea to consider what the value is you are delivering. Without knowing what industry you are in it is a hard one. But have a think about what your client gains from being with you – or what potential negative impact is avoided. Who do you want to serve?
It could be worth putting together packages, rather than just working to an hourly rate. You could test it with your market – ‘would you rather pay me by the hour or for a project fee?’
It could also be worth contacting your industry body to check standard hourly rates. Can you do some investigating into competitors and find out how much they charge? Then consider where you want to fit in the market. I wouldn’t recommend competing on low price. That is just a race to the bottom and no one wins.
Finally consider how much you want to earn and how much billable time you can commit to. If it is just you – freelancing – one formula is to spend 1/3 of your time on business development (bringing clients in), 1/3 of your time on admin and 1/3 of your time doing the do…aka…billable hours.
That means – you need to earn enough in that small portion of your week to fund your whole week, while allowing for your costs (accountant, subscriptions, advertising, website, phone, internet etc etc) and putting away (approx) 1/3 for tax and ACC.
If you are just working for a single client and there is no need for business development, then the formula would be adjusted.
If and when you choose to scale by bringing others into your team, your time allocation for business development may go up, and billable ‘hours’ goes down, while your team have more capacity for billable hours and spend less (if any) on business development… and you may outsource some of the admin….so time/cost allocation would be adjusted then too.
Hope this is helpful.
Thanks for reaching out. Can you clarify the nature of your business – is it a product business or a services business?