When you’re hustling and grinding it out, do you push yourself forward imagining a future financial payoff? What are your financial dreams and aspirations for your creative practice? Are you moving closer and closer to those goals? Or are your profit goals slipping further and further into the future?
There are many reasons why creative entrepreneurs fail to meet their financial goals, or in some cases to ever turn a profit at all. But once you’ve fixed all your underlying operational problems, and begin performing at optimal conditions, what’s the ceiling? Is there a cap to what you can earn?
Dream Big, But Don’t Be Delusional
In contrast to product-based companies, creative entrepreneurs operate professional service businesses. Product-based businesses will always be much more scalable than professional services. That’s why you’ll never see a creative service business on Shark Tank. That’s because professional services are generally sold on a time and materials basis. And so, since there’s a cap on the number of hours you have each day, there’s a corresponding limit to what you can earn. But it might be much higher than you think.
Maxing Out the Time and Material Business Model
Let’s do a little rough figuring to sketch out your maximum earning potential as a creative entrepreneur. Let’s start with measuring the maximum earning capacity of a strictly time and materials practice. In such a case you have a certain “inventory” of hours to sell. Since we’re trying to calculate a maximum, let’s assume that you’re able to work a strong fifty hours per week. If we’re going to work so hard, we’ll need to take time off to recharge if we’re going to sustain that level for the long term. So let’s factor in eight weeks off per year, for holidays, vacation, and sick time. All told, a fifty-hour-per-week schedule at 52 weeks per year with eight weeks off and discounting for other non-billable overhead activities will give you about 1,500 billable hours per year. A simple shortcut to these calculations is to just take the total time in a year and apply a 60% utilization metric to it ((52 x 50) x 60%)=1,560.
Applying an hourly rate to that number gives us our maximum revenue. Here’s a quick chart with a few different hourly rates plugged in.
|HOURLY RATE||x 1,500 hours||TOTAL REVENUE|
Total Revenue is Not Maximum Earnings
If you bill strictly by the hour this is your theoretical revenue cap. However, keep in mind that total revenue is not total earnings. All businesses have expenses, so we need to ballpark these, and adjust the total. Depending on your situation, for example working from home instead of renting an office, your operating costs will vary. But let’s assume two main cost centers, general operating costs of 20% and a profit margin of 15%.
Many creative entrepreneurs fail to account for a healthy profit margin in their businesses. They assume that their take-home is their profits. But your compensation is really an expense to your business. Profits are what’s left over after you pay yourself (or anyone else). You should always operate in such a way that you are making strong profits—15% should be a minimum. Retaining profits are what enable you to build cash cushions to hedge against downturns, endure step costs if you decide to grow, or for distributions back to you as additional compensation. But you need to build profits into your revenue model, separate from your compensation. So let’s adjust our table with overhead and profits deducted.
For a strictly time and material model, these ranges, driven by your rate, are your maximum earning potential.
Maximum is Hardly Guaranteed
However, there are other things to consider. This maximum assumes that you are able to sell all your available inventory of hours. But sometimes, even though you have time available, you may not have active projects to fill it. This downtime is not a part of your planned time off. It’s over and above. It essentially means that you were not able to max out your top utilization of 60% because you didn’t have enough volume to hit it.
How to Increase the Cap Without Adding Hours
While these caps are pretty firm, for the purely hourly business model, there are ways to grow your earnings. One obvious way is by adding more inventory through hiring employees or contractors. But another way is to break out of the limited hourly billing model.
If you move toward project fees rather than strict hourly billing, you will have opportunities to increase your maximum earning potential. If you quote a project fee of $10,000 and your target hourly rate is $100 per hour, if you finish the project in less than 100 hours, whatever that differential is becomes added profit. Of course this model cuts both ways. If you spend more than 100 hours, you effectively start working at a discounted rate, lowering your earning potential.
PinPoint Positioning and Profit Margins
Of course, as with most topics on the business of creative entrepreneur, making the fee-based approach work to your profit requires PinPoint Positioning. The more you focus on one area of service for one kind of client or problem, the more skill and efficiency you can build, ensuring that you come in under budget and capture that extra margin. And what’s more, as you become a specialized expert, you can demand higher fees based on the value you deliver, not just on how long it takes to produce your work. While there may still be a cap on what clients are willing to pay you, as an expert over similar fees from generalists, depending on your market, that difference can be quite substantial. This means your absolute cap on earnings can go much higher than you ever imagined, potentially two to three times higher than the caps that are derived from rate x hour calculations.
Creative entrepreneurship is not a path that leads to multi-million dollar exits. But it can generate significant returns, and substantially reward all your efforts. To get there you’ll need to make some adjustments to how you operate, and move toward specialization, but there is a path toward considerably increasing your earnings.
|HOURLY RATE||x 1,500 hours||TOTAL REVENUE||COMPENSATION (LESS 35% OVERHEAD|