So you’ve decided it’s time to give up that permanent job and freelance instead. You’re sick and tired of working long hours and being paid badly. You want freedom and you want more money.
Well, you will be joining a big club. Freelancing seems to be the thing to do these days. It comes with several challenges though. And one of the first things you will need to do is work out how much you should be charging for your services.
Obviously your skill level and the amount of experience you have will impact what you can charge, but a starting point is to work out how much you need to charge to make a living. You need to know this amount so that you don’t charge below that and get yourself into financial trouble a few months down the line.
As a freelancer / consultant you are basically selling your time. You will probably charge by the hour or per project, which will be based on how long you estimate the project will take you.
So the basic calculation is how much you need to earn in a month divided by the number of working hours in a month. That seems like a simple calculation at first glance but both sides of that equation need to be carefully considered.
Let’s look at the number of working hours in the month first. You would probably take 20 days in a month x 8 hours per day, making 160 working hours in a month. But what about holidays? Everybody needs a break and didn’t you switch to freelancing so you could take time off when you wanted to?
So let’s say you take 4 weeks of holiday over the course of the year. That’s 20 days, which means nearly 2 days a month gone. Don’t forget public holidays. South Africa has 13 holidays in a year so that means another day gone per month. What about sick days? Are you never sick? I don’t think so. Let’s take 6 days over the year or 1 every second month.
Then it gets a bit more tricky because not all of the work you do is billable. Proposals, quotes, meetings, admin, driving, etc. That all takes time out of your day and you generally won’t be able to charge someone for that time. How much time out of your month you will lose to unbillable hours? For this example I’m going to say 2 days per month.
So after taking off holidays, public holidays, sick days and unbillable time, we are left with only 15 days per month that are billable out of the original 20 we started with. 15 days x 8 hours = 96 hours.
Now to work out how much we need to earn. Notice I said NEED to earn, not want to earn. We would all love to charge R1,000 an hour, but few of us can. This is about understanding what you must earn to live.
So the basic calculation is rent + car + expenses (personal + business) each month. Expenses are no longer just your living expenses because there are now business expenses like office rental, increased cell phone bills, increased petrol expenses, etc. And there is more to consider. You’ll have to pay your own retirement savings. And when you are self-employed you need to reduce your risk exposure, which means building up a cash buffer and taking out income insurance. (Income insurance will pay you if you can’t work because of an accident or serious illness.)
So let’s put some fictional numbers into the calculation…
Rent – R5,000
Car – R3,000
Car insurance – R700
Health insurance – R1,000
Income insurance – R400
Retirement savings – R1,000 (should be more but let’s start there)
Personal expenses – R5,000 (food, toiletries, etc)
Business expenses – R3,000 (cell phone, petrol, etc)
Disposable income – R5,000 (you need to enjoy your life!)
Total income required = R24,100 (let’s round that up to R25,000 per month)
We haven’t accounted for tax (at these numbers you won’t need to pay much tax, but the more you earn the more tax you’ll need to work into the equation).
If we divide our 96 billable hours into that we get an hourly rate of R260 per hour. I like to round up to cover unforeseen expenses so I’d make it R300 per hour.
Now have a look at what others in your industry are charging. If everyone else doing similar work is charging R400 and above per hour, you could make your rate R350 and you’ll still be very competitive. If a client is giving you regular work, you might consider giving them a discount on the hourly rate. Regular income and retainers are gold for people who are self-employed.
The first few months may be slow as you develop your client base, so try to keep your expenses as low as possible to compensate. When you I have good months, I try to save some money for the tough months. It’s tempting to pay yourself a bonus just because there is money in the bank, but it’s more prudent to pay yourself a regular salary every month, and save some of that money like you would if you had a 9 to 5 job.