What you are worth and your bottom line are two very different things. The main difference is that the former relates to your value while the latter is a calculation to determine what you need to charge in order to sustain your current standard of living or 'break-even' point. The beauty of this little bottom line formula is that you can adjust it to find out what your freelance hourly rate should be to achieve the life you'd like to live. Remember, know what you are worth, then ask for it!
Note: this is a simple, crass equation to help freelancers get a starting point and not an exact figure.
By the end of this short article, you'll know how to calculate the hourly amount you should never go below and the figure you need to charge to achieve the life you'd like. To calculate your bottom line, use this simple equation:
EXPENSES / HOURS WORKED + TAX
A couple of points to note before adding in your numbers to work our your freelance hourly rate. When we talk about expenses we are referring to all expenses, not just business. Tally up your essential bills such as your mortgage or rent, electricity, gas and food. Add them up and make a note. As an example, we'll say these add up to £10,000 per year.
Next add in your business expenses including office rent, internet, online fees (bank charges, web tools), insurance etc... and make a note of the total. We'll call this Bottom Line Expenses. Let's imagine it's £5,000 per year.
Lastly include any extra expenses that you're currently paying for such as nights out, holidays etc... note it. eg: £3,000 per year.
Finally, write down the cost of any other items that you would like such as a new car or an extra couple of holidays each year. Let's call them Dream Expenses. Say £10,000.
Now to figure out how many chargeable hours you work each year. A rough average is fine. Let's say you work 40 hours per week and take 2 weeks off per year, your annual hourly total is 40 hours x 50 weeks = 2000 hours per year. However, you're not going to be working for a client every hour of those 2000. There are times when you need to do your admin, accounts, development or look for new business so let's knock off 50%. That's 1000 hours of chargeable time per year.
Note: Most freelancers in their first year generate around 25% of chargeable hours which should increase year on year.
Again, recalculate with your Dream Expenses in place. Perhaps extra holidays take up 2 weeks of work time so the total number of hours would be around 900 per year.
Lastly, tax in the UK for most freelancers comes out at around 20% comprising of income tax and national insurance minus expenses (so long as you're not VAT registered ie: generating less than £85,000 turnover).
Let's put the numbers in for the Bottom Line figure:
Expenses of £10,000 + £5,000 + £3000 = £18,000 / 1000 hours = £18 + 20% tax (£3.60) = £21.60 p/h
Remember that this amount is the bottom line hourly figure that you must charge a new client to sustain your current lifestyle. To calculate what you need to charge to pay for your dream life, redo the formula with the Dream Expenses added and the adjusted hours you're going to work each year.
Expenses of £10,000 + £5,000 + £3000 + dream expenses £10,000 = £28,000 / 900 hours = £31.11 + 20% tax (£6.22) = £37.33 p/h
Remember these figures are all estimates so it's not an exact science but it's a cute way to figure out the hourly rate that you should aim to charge a new client and the hourly rate you need to reach to achieve your dream life. Now ask yourself the following 3 questions:
'Am I worth this amount per hour?'
'Are clients willing to pay it'?'
'Can I generate that amount of new business per year?'
