In my last article, I recommended that you should know your hourly rate when the opportunity to pitch a client presents itself. The idea of coming up with a rate can be both exciting and nerve-racking.
When I went through the process of calculating my hourly rate I didn’t have access to a freelance calculator and was fresh out of college. You could imagine how low my rate was when all I really wanted to do is make some money. I quickly realized that my initial rate couldn’t even pay for fuel when I needed to drive to meet a potential client to close a deal. Nonetheless, it was still exciting to pull out the pen and paper to consider a new hourly rate.
Today I can say that your hourly rate is one of the most important things you should have set when you’re in business. So here are three things you have to consider when developing an hourly rate.
Calculating your current income may seem easy but multiplying your monthly take home pay by twelve will guarantee you won’t bring in enough. When working a full-time job, your monthly take home pay is always lower due to various deductions. Usually, these deductions include taxes, benefits, and retirement. Deductions need to be accounted for when calculating an accurate current income.
After coming up with your current income, I would suggest estimating your lean and fat years. Your lean years represent the year your business didn’t perform as expected while your fat years represent the year your business surpassed expectations. An adjustment of 20% in either direction is a great starting point but remember you must figure out how your business will survive when its performance takes a dip or skyrockets.
The discussion of what is personal overhead is a tricky one to have. I may view a triple play package (home phone, cable, and the Internet) from Spectrum as a business expense but the government may not be so generous. Then there is the matter of your personal expenses. If you have any trouble deciding what is a personal expense remember this general guideline:
“If you’re not using the item or service exclusively for your business then consider it a personal expense.” ~ my Accountant
I know some of you are thinking, what does this have to do with the general topic of Personal Overhead? Well, it’s simple, we all have to live and need a personal life. When deciding on an hourly rate you must include the cost of that personal life because if you don’t, you will stress yourself out.
The concept of business overhead should be straightforward. Anything you use exclusively for your business is considered a business expense. Everything from product development to marketing falls into this category and should be taken into consideration when you’re gauging your hourly rate.
As important as an hourly rate is, be sure not to get so hung up on the topic that you miss out on opportunities that are right in front of you. I get that you want to be paid what you’re worth but you also want to get paid. So get the work and then get paid what you’re worth for the work.