This guest post is by FreeAgent, who specialise in accounting software for small businesses and their accountants.
For a lot of freelancers, knowing how much for their work is a struggle, especially when they’re starting out. Pitch it too low and you could damage your business’s profitability, too high and you risk being undercut by a competitor.
Your rate can be dependent on your industry, experience and location, among other factors, so everyone is different. Here’s some handy information around finding suitable prices for both you and your clients, including tips from fellow freelancers.
Figuring out your break-even point
Knowing how much money you need to earn for your business to survive is a great starting point. Andrew McSparran, a graphic and website designer, found this out the hard way when he found himself “charging next to nothing as I just wanted the business. I agreed the fee for the full job with a client, but it worked out to be less than £3 per hour.”
Your break-even point is the minimum amount you need to be earning, per day, in order to cover all your costs.
Here’s how to calculate your personal break-even point:
1. First, add up all the outgoings associated with your business per year: this could be rent/mortgage, insurance, subscriptions, web hosting, postage costs – anything that costs you money.
2. Next, add up the amount of billable days that you think you can work per year: out of the 365 days in a typical year there are 261 working days (Monday to Friday). From that 261, you should deduct the amount of holidays/days off you expect to take in that year. 28 is a normal amount for a freelancer. Remember, everyone needs a break!
It’s not just the billable stuff you need to take into account! Admin such as filling in your tax returns or answering email should be considered, as well as your efforts to go out and find new clients.
3. Finally, divide the sum of your yearly outgoings by the sum of your yearly billable days: this figure is your personal break-even point. Don’t forget, this is the bare minimum you need to earn, and you should always be aiming to charge a healthy amount over this figure to safeguard your business.
Example: how Lucy calculates her break-even point daily rate
Lucy is a photographer. She is looking at her profit and loss account to work out her break-even point.
It shows outgoings for the year of:
|Printing and mounting
|Business use of home
She works out that her billable days are 231 per year.
That means her break-even point is £20,772 ÷ 231 = £89.92.
Lucy must earn at least £89.92 per day in order to break even. Anything above this is profit.
Financial buffers are essential
The plus sides of freelancing are numerous, but unfortunately, you aren’t entitled to the safety net of holiday pay, sick pay and similar benefits. You might also be faced with periods of downtime between jobs, which could cause your earnings to drop. Your rate needs to reflect this uncertainty and include a buffer that can cover you during your business’s quieter times.
As a starting point to work out a day rate that includes a buffer, the Association of Independent Professionals and the Self-Employed (IPSE) recommends that you take the salary that you would earn as an employee in a similar role and add a third, which accounts for the added costs that being a freelancer can entail.
So if you earned £30,000 as an employee in a similar role, then adding on a third of this takes you up to £40,000. You can then divide £40,000 by the number of days you would expect to work in a year (as discussed above under ‘Work out your break-even point’). This should give you an idea of an ideal minimum day rate.
As tempting as it may feel, don’t let clients take advantage of you by asking to work for free or for “exposure”. The Freelancer Club, a group run by IPSE to support the creative community, asks both freelancers and companies to pledge not to apply or post unpaid work, while also providing listings of paid work and resources to help freelancers.
Don’t be afraid to charge different clients different rates
The price you charge can depend on a variety of factors outside of the work you are being asked to do. It might be affected by the size and budget of the client, for example. Martin Bean, a developer and consultant, suggests that you “look into the client…if it’s a limited company, you can find its age and key financial statistics such as turnover and any debt for free online.”
Past experience with clients also matters. If you’ve worked with a client before and know that they’re great to work with and will pay you on time, you might want to give them a preferential rate. Conversely, for a first-time client who is more of an unknown quantity, you might want to quote a higher rate to cover yourself for the possibility of any unexpected problems.
At the end of the day, it’s your business, your rules. Camilla Grey, a strategist, sums it up like this: “If you love your client, charge what seems fair. If you know it’s going to be a nightmare, charge what makes it worth it to you.”
Check out the FreeAgent website for more helpful bookkeeping tips.