What some examples of typical operating expenses in which the cost of can be passed on to the client?
For example, Docusign for signing contracts can be passed on to the client.
What are some other examples?
Huh?
A service like the one you mentioned is part of your overhead. It’s software, like all your other software. As overhead, it’s charged to the client, in a manner of speaking, as part of your fee. But very doubtful you’d line-item it.
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All operating expenses are passed along to clients — that’s how costs are covered. However, as PrintDriver said, overhead items are not passed along as separate line items on an invoice; they’re just part of the cost of running a business and are factored into what you charge for the job. Basically, you figure out your overhead and how much extra you’d need to charge to make the profit before telling a client how much you’ll charge them for the work you’ll be doing.
You might break an invoice into separate lines that list the cost of different phases of the job, but the only things typically added as extra items on a designer’s invoice are expenses specific to that job. For example, if I found halfway through a job that the client unexpectedly wanted me to travel across the country for a meeting. I would expect to be paid for that unanticipated trip. Fonts and photos and various services from illustrators or photographers needed for that job might fit into this too.
Also keep in mind that you can’t just add these sorts of extras to the bill without the client’s approval Ideally, there would be something in the contract anticipating extra expenses that would be billed as extra line items on the invoice. When a totally unexpected expense comes along, you have the choice of just eating the extra expense, figuring out how to get by without it or bringing it up with the client and getting written buy-off on it.
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Change Orders happen all the time. If something is about to happen that will change the contract amount, you discuss it with the client, come to an agreement and then make a written amendment to the contract.
This goes both ways. If a service is added at extra cost, such as B’s trip across the country, or if an element is removed and a refund is warranted. But any change has to be discussed beforehand, not billed after the fact.
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In other words… I should have a general idea of what I will charge each client for the “cost-of-doing-business” items now… before even having a client… and apply that to the overall price from the beginning. I can see how this will work in value-based pricing.
However, I’m not sure how I apply this if I were to charge hourly for a job. If i quote 20 hours to do a job and I charge as such, how do I build in that cost of business without noting as a line item on an invoice? Unless of course I pad the hours. Is the answer that simple?
Understood.
How often have you had to refund or discount a project?
You seem to be exploring all the details, but I think you might have overlooked the biggest piece of the puzzle — a sustained cashflow covering your cost of operations plus the profit you want to make.
In a sole-proprietorship, like a freelance business, most of the hours spent won’t be billable. Instead, they’ll be spent looking for work, answering emails, creating proposals, doing bookkeeping, paying bills, sending out invoices, fixing computer glitches and a million other things. When figuring out how much to charge per hour, you need to take everything into consideration and figure out how much you’ll need to make each week to keep the cash flow going.
If after factoring everything into the equation, you conclude that you’ll need to work X hours of billable time per week and charge X amount per hour to sustain a positive cash flow, well, that’s how much you need to charge per hour. And of course, you’ll also need to decide whether or not your per-hour rate is low enough to get and keep clients but still high enough to keep a positive cash flow going.
If this is a full-time business, you need to figure this out as part of your business plan — otherwise you’ll be heading into it blind without a road map to guide you. If it’s an after hours freelance thing where you’ve got another paid job covering the bills and cushioning your miscalculations, you have a little more freedom to play things by ear.
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Yes. Quite a bit of detail. I feel like I’m getting the weeds.
I have a full time gig. So, I’m not really expecting to draw much of a salary, if any at all, my first couple of years until my investment is paid back. Determining that hourly rate was a little more difficult without that variable in place.
I’ve determined a rate based on yearly operational expenses, personal investment replenishment, company profit margin of 10%, guesstimate on taxes and BILLABLE hours.
But I understand what you are saying. sounds like it might not be a bad idea to go back and rerun the hourly formula based on some new numbers I’ve landed on.
Thanks for the insight.
Depending on where you’re at, taxes will eat up about a third of your income. And don’t forget, the federal taxes need to be paid quarterly, rather than yearly (in the U.S.). It’s the billable hours part that’s difficult to judge at first. You might have more or fewer clients than you expect, so it’s sort of an unknown. But if you figure everything else out that is more under your direct control, you’ll know how many clients you’ll need to make it worth your while.
That full-time gig you have is important. I’ve done it that way for years while freelancing on the side from home. If I were to go full-time freelancing, it would get a lot more difficult, and I’d need to raise my rates to cover the extra costs.
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You need a robust hourly rate. Take the hourly rate you currently earn at your regular design job, and double it, and that’s the starting neighborhood for freelancing.
At your full time job, do you or anyone you work with hire freelance designers? If so, review their contracts for terms and pricing and use that as your guide.
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Since you’re just starting with this, you’re going to be working on estimates to project your overhead. This is one of those more in-depth topics that I’d highly suggest you pick up a book on. You’ll want to be able to set-up a spread sheet so that at the end of it, you’ll know roughly how much you’ll have to charge to even be in business. If you can, access your local library’s website and see if you can checkout some e-books on this.
Since you’re still work another job, do no factor those earnings into your projections. You don’t want your design business to be propped up by your other job, so make sure the calculations you do are strictly for your design business. If/when you leave your other job is when you can calculate fixed costs (e.g. rent) and variable costs (e.g. office supplies and utilities) into overall projections.