This is something that I wish I would’ve learned earlier on in my career. Lacking this knowledge has cost me thousands of dollars over the past few years.
After studying business and learning about profits, I’ve been able to sustain a better freelance business and personal lifestyle
Successful businesses are ones that are able to make profits from their services or products. A perfect example is Apple. It takes them $200 to make an iPhone, but they sale it for $650, which earns them a 69% profit on each phone that they sell. Most freelancers don’t take profits into account when they are proposing budgets to clients. If you only bill for your time, and don’t add any margin in for actual profits, you won’t have much to show for your efforts.
Expenses are an amount of money that must be spent especially regularly to earn a revenue. Expenses include office furniture, equipment, software, travel etc. Another expense that people don’t account for is labor. Labor is require to earn revenue and isn’t counted as profit.
Revenue is money that is made by or paid to a business or an organization before taxes and expenses are documented.
Profits are money that is made in a business after all the costs and expenses are paid,
If you’re only charging for the hours it takes you to do the work, you’re only breaking even and not running a profitable business.
Let’s look at the numbers.
Let’s say an artist was approached to work on a 30 second animated video. He or she figures out the design process and how long it will take them to complete the project. Now it’s time to submit a budget proposal. Lets say the artist thinks it will take 60 hours to complete, and his or her hourly rate is $100. Doing the math, the project would be $6000.
Most freelancers will stop there and not add a profit margin. Not everyone is Apple, so adding a 69% margin is not ideal. Margins tend to vary depending on the situation, but most companies add an extra 30%-40% profit to the labor cost. Using the sample above, lets us a profit margin of 30%. That will take the price from $6000 to $7800, a $1800 profit.
So the next time your coming up with a price for your next freelance project, make sure to include a profit margin and not just charge for labor. Don’t forget, we have to pay taxes, pay for our own healthcare, buy equipment and pay accountants or financial advisors. Not to mention sustain a healthy personal lifestyle.