Many freelancers use the argument that their low overhead makes them a more competitive option to the firms and agencies that charge higher rates. And while it’s true that freelancers don’t carry some of the costs of a larger firm such as rent and administrative staff, in other respects freelancers actually carry higher overhead.
Uncalculated Overhead of Creative Solopreneurship
While freelancers avoid some of the fixed costs of running a multi-employee practice, there are other categories of overhead which put even more downward pressure on their profit margins than it does for larger firms. These are the overhead costs of the time you must spend on the non-production roles of running your practice: administrative time, client service time, and new business development time.
Each of these three areas is absolutely necessary to running a business. And for every hour you spend in these roles, you lose the opportunity for productive billable work. Hopefully you are charging for all your client service time, so perhaps those hours are still productive—but many creatives fail to measure and bill non-project related client communications time.
Overhead Includes Your Cost of Goods Sold
If you think of your hours as billable units, then every hour you spend in support related activities should be considered a part of your cost of goods sold. Just like in the restaurant business, food costs, as well as staff, rent, and utilities, need to be factored into the prices on the menu. I enjoy watching Restaurant Impossible, and The Profit—and when Robert Irvine or Marcus Lemonis go into a business to clean house, they often expose the fact that owners often don’t know what their costs of goods are.
If I asked you to break down your cost of goods, to show me what the real profit margin is for your billable units, could you give me an accurate breakdown? Do you even have the records available to do that? At least in a restaurant business they have sales receipts and vendor invoices, and with enough bookkeeping they can provide a concrete answer. But creative entrepreneurs don’t usually have this data.
Record All Your Time!
That’s why one of my big three recommendations, for every creative entrepreneur, is to record all the time they spend running their businesses. Not just the time they spend on billable work. You need to have a timekeeping system, and you need to add internal categories to that system. You should list yourself as one of your companies, and add tasks for administration, new business, time off, and planning. These are direct overhead costs.
And when you measure these costs, you’ll find that they will account for at least 40% of your total time. That’s a lot of overhead! And while an agency does carry additional categories of overhead that you don’t, they have the potential to in increase their overall utilization because they can hire administrative and new business specialists, and then add a greater number of producers that can maintain 80-90% productivity. And with enough producers, when you average all time across the whole agency, they might actually have lower overhead per billable unit than a freelancer does.
Narrow Profit Margins Kill Businesses
Low profit margins are the reason why businesses fail. When Robert Irvine shows a restaurant owner that his food costs are cutting profits to the bone, the overworked and stressed out business owner suddenly understands why they’ve been failing. And while it’s a painful exposure, it’s also hopeful, because now they know what to fix to make things better.
If you start to record all your time, and then evaluate it, you will probably be in for that same kind of uncomfortable exposure. But then, at least, you’ll have some data to think through how to fit it. If you’ve been burning the candle at both ends, and still facing cash flow problems, look no further than your uncalculated overhead. That’s what’s eating up your profit margins.