The mistake most freelancers make after having worked full-time is taking their annual salary and breaking that out into an hourly rate.
This is a mistake for so many reasons, one of which is that what you pay in taxes here in the U.S. as a W2 employed person is very different than that of a 1099 self-employed person.
You will need to cover things like healthcare, social security, and a whole plethora of other things that often times your full-time employer have covered for you.
So before you make that leap, or if you have already and wonder why you feel strapped for cash, this episode should shed some light for you.
This is the biggest nut to crack and the harshest reality for a lot of people. Your personal expenses can vary from what your groceries cost, how much the mortgage or rent is to how much do you often spend on a pair of jeans.
Be honest with yourself when exploring this because this is the space where you don’t want to skimp on. In fact, if you over budget here, you’ll be better off.
Things to think about here are food, shelter, family expenses, taxes, travel, hobbies, emergency funds, car payment, toys, and so on.
You can extrapolate these numbers just from looking at your credit card and/or bank statements. In fact, I encourage you to do so because you don’t want to be short.
Be honest with yourself here. Then take your monthly number and multiply it by 12 to get your yearly personal expenses.
Next you’ll need to figure out the cost of running your business. This could be things like your laptop, hosting for your website, supplies, contractors that you hire, organizational filing expense, professional fees for your accountant and lawyer, other business equipment.
If you are just starting out, you may not know these, so ask around to get ballpark figure on these if you have to.
Don’t let people, namely your friends and family, who aren’t accountants tell you that “it’s a write off, who cares what it costs.”
A write-off doesn’t mean that you get everything back, it’s often percentage based and you want to keep your expenses low especially when starting out so that your profits, what goes into your pocket, is as much as possible.
Get your estimated business expenses per month here and multiple it by 12.
What is your yearly target
After those 2 areas are figured out, think about what you would like to make for the business. If this number is short of your expenses added together, time to up your revenue goal.
Here’s the tricky part, just because the business brings in $100,000 doesn’t mean that’s what you make. What you make is a percentage of that total revenue minus expenses.
When thinking about the total revenue, it’s best to think about your taxes first. You’ll want to set aside 30% to cover your taxes.
If you want the total revenue of the business to be $100,000, that number should be more like $130,000. This way you know you’ve got your taxes covered before anything else.
I don’t want to dive too deep into the accounting here, but if you want to check out a fantastic book on this, read Profit First by Michael Michalowicz.
In that book, it tells you how to think about your business and numbers by taking your profit first, before divvying out the expenses. This is great, because it automatically gives money in your pocket and then puts a restriction around how much you can spend on your expenses.
How will you make money
Once you have your total yearly revenue number, you’ll want to figure out what that looks like on a monthly, even weekly basis.
This way you can figure out what you need to do today so that you can reach your revenue goals by the end of the year.
This is a process known as Activity Based Selling. Where you know the leading indicators that can have a positive affect on reaching your goals, rather than paying attention to lagging indicators like getting a payment that you don’t have control over.
In tomorrow’s episode I’ll expand upon this a bit more.
For now, figure out what you are charging per project, and how long a project will take. For the sake of this example, let’s assume it takes 1-month.
Divide your total revenue by 12.
Then take that number and divide by the average revenue per project.
This will give you the number of projects you need per month.
Hopefully that number is realistic for you, because if not, you’ll either have to raise your rates, or cut back on expenses.
Here are some further resources that you'll want to check out that directly relate to the show.
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