4 Freelance Formulas To Calculate Your Business Success
As a freelancer, your success in business depends on doing the right things.
You can spin your wheels doing the wrong things, or focus your energy on doing the right things — and an easy way to figure out the difference between the “right” stuff and the “wrong” stuff is to apply some simple formulas.
Most freelancers know their hourly rate, because that number is easy to calculate. Look at your invoices over the past year, divide it by the hours you have worked, and BAM! You know what your average hourly rate has been. So far.
The problem with this calculation is that is an average; an average of your greatest clients, your worst clients, and all your middle-of-the-road average clients, all mushed together.
Would you like you know how to weed out your problem clients, and identify your best clients? Track your client data, and enter it into a Client Analysis Spreadsheet.
To create this invaluable spreadsheet, here’s what you need to track:
- Hours worked per client
- Expenses per client
- Proposals out
- Revenue in
Once upon a time, I was focusing a lot on social media. I wanted to try getting clients on retainer for social media posting and ghost blogging.
After I had worked with a few of these clients, I calculated my Hourly Rate Per Client. For these new retainer clients, it was a much lower rate than I was getting for full website redesigns.
So after that, I focused more on building websites, and I made more money in less time. Smart move, right?
This is what applying these formulas can give you: the intelligence you need to make intelligent decisions.
If you have a wide sandbox and provide lots of different services, some services may be more profitable than others, and it’s only by crunching the data that you can tell which is which.
I can show you how to calculate the same numbers for your own business. If you want to make better strategic decisions, you will need some specific data about your clients and your business.
Enter a few numbers into the spreadsheet at the bottom of this blog post every week, and you will be armed with the knowledge of how to pursue the most profitable clients, and turn down the dogs.
Note: These formulas are specifically useful for agencies and businesses that have multiple service offerings. If you are trying to find out what services are the most profitable, and what kind of ideal client you should be pursuing, then this is for you.
- Expense Ratio = Expenses / Revenue
- Time to Completion = Average(Completion date - Starting date)
- Closing Ratio = Net cost to client / Proposals sent out
- Hourly Rate Per Client = (net cost to client - expenses) / hours worked per client
Keep reading, and I’ll tell you how each of these formulas can make your business run better, and I’ll give you a spreadsheet template for using them in your own business.
Formula 1: Expense Ratio
Hiring contractors, purchasing supplies and licenses, and spending money are the costs of doing business. If you know your average expense ratio, then you know how much to earmark for expenses when you start a new project.
If you outsource through Upwork to provide services you don’t (currently) have in your own toolbox, you can create a budget by applying your Expense Ratio to your project bid.
Expense Ratio = Expenses / Revenue
Don’t track this on an annual basis, though — track it per client, and average it out. It is useful to see if certain kinds of projects have a higher expense ratio than others.
Formula 2: Average time to completion
How long does it take you to finish a project? Track your starting and ending dates with every client, and you will be able to calculate how long an average customer contract takes you, from start to finish.
When someone asks me for a time estimate on a project, it sounds really professional to say ‘I average 65 days from start to finish, right now, so let’s say 90 days to give us some breathing room.” Just record the date of your first invoice and your last invoice in the spreadsheet linked below, and you can do the same.
Time to Completion = Average(Completion date - Starting date)
If your business focuses on recurring retainer work instead of project work, this is still a useful formula for you, because you can average out how long clients will stay with you.
Formula 3: Closing Ratio
This is the likelihood that a proposal will be accepted. If you have a 50% closing ratio, and you want to make $5,000 this month, put out $10,000 worth of proposals, and the law of averages says you should be fine.
Closing Ratio = Net cost to client / Proposals sent out
There is an alternate way to perform this formula, as well:
Closing Ratio = # of Clients / # of Proposals
This gives you the percentage likelihood that your proposal will be accepted, without any weight for the size of the proposal.
Closing a $5000 proposal could be much more important to you than closing a $500 proposal. If so, use the weighted formula; if it’s all the same to you, use the unweighted formula instead.
Formula 4: Hourly Rate per Client
If you had a choice between two clients, and one of them paid twice the hourly rate of the other, which would you choose?
Charging top dollar is more efficient, more profitable, and oftentimes more fun than scraping by with pennies. By examining your Hourly Rate Per Client, you can identify the clients you should (and should not) be taking. Many entrepreneurs rely on their gut instinct to make this distinction; but you don’t have to rely on your gut, if you track your client data.
Hourly rate = (net cost to client - expenses) / hours worked per client
If you find yourself making above your average hourly rate for a certain type of project, you should try and get more of those projects. If you find yourself making $12 an hour for projects you don’t like doing, then it’s a good business move to decline those types of projects when they come along.
To do this, you have to diligently track your time. Thankfully, there are some good tools out there.
Freshbooks has an add-on to put a timer on your desktop, so you can start and stop the timer as you go into and out of work mode. This is really fun to use because you can generate an invoice with a couple of clicks if you use this method.
Although I love Freshbooks for invoicing, for time tracking I use iCal. Color coding my projects helps me to see at a glance what I’m planning to do this week.
As I go throughout my day, if I need to switch projects and change my plan, I record my actual time spent on each project on my calendar. Every week, I look back at last week’s calendar and record the hours per project into my Client Analysis spreadsheet.
One of the neatest features of iCal is that you can use checkboxes to turn your different calendars on and off. I’ve got one client in red, another in blue, and a third in green. If I want to add up my hours from last week for the red client, I can uncheck the other boxes to see only one client at a time.
The disadvantage to iCal is that you can only track time in 15 minute increments, but I’ve never found this to be a difficult limitation. If you want to-the-minute time tracking, go with Freshbooks instead.
Calculate Your Formulas
This Google Spreadsheet Template can be copied to your own Google Drive. It has cell formulas pre-written to calculate the 4 Formulas for Business Success we’ve gone over above.
This video screencast will walk you through how to use this spreadsheet, step by step:
Have you made a savvy business decision because of tracking specific data about your business? Leave a comment below and share it with us!
Originally published at julestaggart.com on October 6, 2013.