How to Estimate your work
Out of context: Reply #6
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- gramme0
First: figure out a salary for yourself. Always start a process like this by paying yourself first. This should be a figure you want to make which will cover all living expenses, savings, donations, vacations, and miscellaneous costs.
Second: divide the above number by an estimated hours of billable work per year. An fairly common percentage is 60%, which is 1,142 hours per year.
Third: add 30% to your salary for taxes. So, say if your salary you pay yourself after taxes (this is a business expense, NOT your profit) is $40,000, then you need to add $12,000 for taxes. Your salary would thus be $52k before adding any other expenses which should also be part of your hourly rates.
Fourth: Divide your salary by the estimated number of billable hours. This is your hourly labor rate.
Fifth: tally up all office expenses. Typical items in this list are computer, software, printer, scanner, studio supplies, mileage, business meals, office space (if in your house or apt., figure out sq. foot percentage of costs for that area), shipping, Pantone books, furniture, professional association fees, competitions, self promotion. For a one-person operation, these costs can be anywhere from $10k on up.
Sixth: Divide your overhead costs by your salary. This will be a percentage for your hourly overhead rate. Then, multiply this percentage by your hourly labor rate. The resulting figure is your overhead rate, i.e. the amount per hour you need to charge to simply cover costs of running a business besides your salary.
Seventh: Add your hourly rates for labor and overhead. This is your rock-bottom, break-even rate.
Eighth: Determine a profit margin you'd like to make. This is money that will put you in good stead through hard times, and will help grow the business—especially when the projects aren't exactly rolling in. A common range of profit margin for small businesses is 10–20%.
Ninth: Add your profit percentage to your break-even rate. This should be the hourly rate you charge clients. Stick to it if at all possible, because otherwise you won't be profitable—you'll only get by at best.
Tenth: Don't be like me and wait till the end of your first year in business to crunch all these numbers and then find out your fees—which you thought were quite competitive—are actually much lower than they should be.
Oh and one more thing: don't tell clients your hourly rates, unless you're freelancing for an agency who needs to know. Otherwise, it's not your clients' business. The only need to know net costs and phase breakdowns if applicable. The hourly rate is for your eyes only, and it is how you'll decide what to charge people. Otherwise, you're just pulling numbers from thin air.