The typical revenue model of a professional services firm is hourly billing. Understanding the liability of the time and materials model—that your hours have real time expiration dates—can help you manage your “inventory” more effectively.
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The typical revenue model of a professional services firm is hourly billing. There are other, and better models, which I’ll talk about in future episodes, but hourly billing is the most common for creative startups. Understanding the liability of the time and materials model—that your hours have real time expiration dates—can help you manage your “inventory” more effectively.
Let’s think of your hours as physical “products” using a Lego analogy. Let’s assume that you work 40 hours a week, and eight hours per day. And let’s visualize each of these hours as products—as Lego blocks. Now we’re going to need a few different colors to represent the different uses of time that make up your 40 hour week.
Let’s imagine blue blocks as your billable project work—the ones that actually get sold. But remember, every business has overhead. And overhead costs always factor into the total cost of the goods that get sold. So let’s imagine red blocks as hours you spend on necessary overhead tasks such as marketing, sales, professional development, project analysis, finances, and general administration.
But let’s not forget that in addition, we all have to take time off for rest, vacations, holidays, and sickness. So let’s imagine white blocks as the hours you take off from productivity.
Finally, we have to account for time that simply doesn’t get sold, gaps between projects—unplanned idle time. Let’s imagine those units as gray blocks.
Now if you were to assemble a typical work day out of these blocks you might have four or five blue blocks, a couple red blocks, and maybe a white or gray. Now imagine a whole year of time represented as a mosaic of these colored legos. Now separate them and pile them up into their respective colors. What percentage of the whole do you think would be billable blue blocks? Believe it or not, if 60% of those blocks were blue you’d be doing well above the average of most creative services which typically have 50% or fewer blue blocks.
Let’s finish up this thought experiment considering the wholesale cost of these blocks. Rounding off for easy math, let’s say that you work 2,000 hours a year and that your yearly expenses, including salary, comes out to an even $100,000. In this example every block (including the red, white, and gray ones) have a hard cost of $50 each—those are some expensive Legos!
When you’re working you don’t think of your hours as having hard costs like that, but they do. And just think how you might manage those blocks if you had to go to the wholesale “hours market” and buy your inventory before you could sell them. Suppose you had to shell out $400 for each day’s hours before you began work, in hopes of selling them for $1,200 by the end of the day. Would you be willing to buy a week’s worth in advance? A month’s worth? A year? And if you did have to buy them, how would you feel about those overhead blocks? Particularly the gray ones? Remember, you can’t store them up, they expire by the hour.
Your hours cost money, and you only capture some of them. Thinking about it this way, how might you improve your management of your hours inventory? In the coming weeks we’ll talk about ways to control your valuable inventory and insure that you sell more, and waste less.
So until next week: don’t let the business of creativity overwhelm your creative business.