Friday, June 22, 2012

Freelancers: Doing the Math

To start, thanks to Phil Wade for his recent post on life as a freelancer and the challenges it entails.  Based on his insights, it may then be the right time to discuss how to manage your freelance business.

Working in Thirds

Based on management consulting, law firms, and other professional trainers we have a nice model to shoot for.  They tend to work in thirds.
  1. 33% billable hours
  2. 33% developing the product
  3. 33% developing the company
Billable Hours

In nearly all cases, this means class time.  The goal here is to charge a high enough rate that it covers the other two thirds of your time.  There are two considerations then when setting pricing targets.  First, we need to determine how much we want to earn and fit it with what the market will handle.  Second we need to look at it from the client's perspective in regards to how many total training hours they will receive.

For example, let's assume we want to earn €36,000 per year net.  This means we will need to send out about €60,000 in invoices (not including sales tax) to cover income taxes, health insurance, retirement, etc.  Assuming there are 1760 working hours in a year (44 weeks x 40 hours), we will have to set our prices at €102/hour to reach this goal.  This is because we are assuming that only 1/3 of our time will be billable.

But it also depends on the training.  If we have 6 participants in a course for 1 hour, that is 6 training hours.  This translates to roughly €17 for each participant.  Yes, these numbers seem a bit high for some markets, but we'll look at how we can make up for that.

Developing the Product

This third includes several tasks.
  • Training prep
  • Materials writing
  • Identifying and adapting materials
  • Travel
  • Post-lesson correspondance, feedback, and notes
  • Professional research with direct training impact (e.g. reading a CUP teacher's handbook or english onestop)
Most freelancers I have worked with tend to underestimate how much time this takes or bill accordingly for it.  But the answer is rather simple... charge for what you do.

If a client is receiving fully customized training, the time spent to develop and produce that training is billable.  After all, a consulting firm doesn't only charge for the time they are in meetings, rather also for the research and preparation.  If you walk into a company and say, "I add 30 min of billable time for each hour of your training so that I can provide you with a fully customized package," most will easily accept the proposal.

There are other ways to make this time add to the bottom line.  If you are running a course website or online portal, this is also billable and is training.  If you are offering assistance per email or telephone for participants, this is billable.  If you are sending the participants follow up exercizes and links to websites post-lesson or part of your flipped classroom concept, this time is billable.  If the client does not want to pay for it... don't do it.  This will then leave you room for upselling in the future.

My recommendation is that the basic classroom training is the door opener.  Then once trust is built and they are satisfied with the training, additional outside the conference room support can be added to the project.

Developing the Company

This is perhaps the most important but also most neglected areas for longer term business success.  These activities include:
  • Billing and admin tasks, including handling taxes and expenses
  • Marketing and branding
    • Industry profile (social networking in ELT, blogging, article writing, professional organizations, conferences, etc.)
    • External profile (social networking with target market, website & advertising, identifying and acquiring new/prospective clients, retaining and upselling current clients)
  • Professional development not related to a specific client (conferences, training courses, online/print research, etc.)
These tasks will never be paid directly by a client, but are the ticket to stability and business growth.  Also, they almost never result in an immediate return on investment, but when they do pay off it happens suddenly and big.

The Work Week

So, by allocating and dividing our time in thirds (and supporting it financially) freelancers can achieve business growth, stability, and obtain a more suitable work life balance without burning the midnight oil.

To close, let's make this a little more tangible by showing how this would look for a normal 40 hour work week.

14 hours in class

13 hours developing the product
  • 5 hours preparation - some billable
  • 2 hours out-of-class contact (email feedback, course website, etc.) - all billable
  • 2 hours travel
  • 2 hours professional research for specific clients
  • 2 hours writing materials
13 hours developing the business
  • 4 hours industry profile
  • 4 hours external profile
  • 3 hours professional development
  • 2 admin work (the key here is to make this as efficient as possible)
Of course this is only averaged.  In fact, the times will shift depending on priority.  But the concept remains the same.  We need to manage our time and maintain flexible prices to accurately reflect the value we are providing our clients.  But perhaps more importantly, we need to balance our well-being with our clients' expectations while still meeting our financial goals.

2 comments:

  1. Great post Charles and chrs for the mention.

    Wow. 36,000 net. You must work in Germany. I dream of that kind of money, even in the UK with a FT ELT job you probably won't get that I think.

    There is also the question of 'survival skills' ie you that you can only work so much without killing yourself. I know that I put in a lot more than some friends who just say "I get paid from the second the door closes". Well, you can understand as if they spend 2 hours planning, 1 hour travelling and only get 20E an hour then for a 3 hour class it comes to 10E an hour. I know some who even travel for a 1 hour class. No thanks!

    I've met loads of people who set up stuff with their partner who is normally a local. I couldn't do this, we'd drive each other bonkers. I also know people who become their own brand or the face of their company. As a freelancer I am sort of that but if I set up as a company and used my name then it would feel a bit too exposed for my liking. More money? Maybe but maybe not.

    Would you set up your own business or do you prefer just doing it alone?

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  2. Thanks for the comment Phil, and yes €36,000 is probably outside the reach of most English trainers (these numbers are only used as an example). But the strategy should be the same. Work backwards from what your goal is and see how you can get to that rate.

    This generally means two things: change markets or change products. Changing markets means finding clients whose needs are not being met by competitors. This could be location, business type, etc. Changing products often means specializing. If you become an expert in training technicians, for example, a freelancer can market that and charge higher rates.

    The problem that I see most often is when freelancers feel that they must take on as many courses as possible to meet their financial goals. In fact, taking some time to develop the product and business will typically result in more sustainable growth.

    Would I start my own business? Great question... that is a long answer and I'll address it in a post soon. Thanks for reading.

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