In an early post on this blog, I established a 5-year plan for taking my computer consulting business from a wistful idea to a part-time side-business and finally into a full time career. After those 5 years, I could leave the workforce with enough experience and financial cushion to be confident with a successful transition to small business ownership. I admit this was a leisurely time frame, but there was no rush. I had a stable, well-paying job that I could leverage to make my dreams a reality.
Fast forward to today, and things aren’t so certain. With the economy in recovery mode, most companies are still laying off, and my employer has recently tossed around the idea of outsourcing a good majority of the in-house IT staff. With the possibility of unemployment looming, I decided to buckle down and realistically figure out what kind of business traffic I would need if I do happen to get kicked to the curb before I’m ready. How many billable hours will I need to log in order continue the lifestyle I currently enjoy, and pay my bills? How does that translate into actual customers?
Not All Hours Are Created Equal
The first thing I needed to grasp was the concept of “billable hours”. In a small consulting business, you’re only making money when you’re actually doing work for a customer. This doesn’t include time spent planning, advertising, networking, doing finances, and any number of other administrative tasks. I will also need to account for traveling from site to site.
In some of the books and articles I’ve read, this traditionally can be a 50/50 split. That is, 50% of the time you spend working is billable and 50% is other stuff. Realistically, especially in the beginning, the percentages will most likely skew much more toward non-billable hours.
With that concept in mind, I turned to my personal finance and business accountant (I recommend everyone get one unless you like spending time crunching numbers). She and I ran through the following exercise to determine how many customers I would likely need, per week, in order to make a living at fixing computers. I recommend this exercise for anyone who is thinking about starting a business. It’s a fairly simple equation, but one that you should carefully step through in order to get the most realistic figures.
Step 1 – How much do you want to earn?
Simply put, what is the amount of money you need in your pocket in order to live comfortably? For me, I decided to use the take home pay for my current job. Since right now I’m accustomed to living with this amount of money, I decided it would be a good starting point. Could I survive on less? Yes. Do I want to earn more? Of course! But for the purposes of this exercise, and as a starting point, how things are now is perfectly fine.
For others, you may want to sit down and do a realistic spending analysis to determine exactly how much money you would need to pay your bills and sustain your lifestyle.
Since I’m trying to figure out how many customers I need per week, I simply take my monthly salary and divide by 4.
Step 2 – What are your estimated business expenses?
The beauty of computer consulting is that it doesn’t require much overhead and little, if any, inventory. Some tools here and there, helpful diagnostic and administrative software, regular advertising, ink in your printer, and reliable transportation are the basics. Overhead will be more at first when you are establishing your business.
Since I’m slowly growing my business part-time, I have the luxury of spreading out my initial purchases over time so I wont incur a big up front cost. It’s hard to estimate this number without actually having ran your business for a while, so this is one of my biggest unknowns. Talk to others in your field to get a good idea of what they spend money on. From what I have seen, advertising will be the biggest expenditure, so figure out what forms of advertising you’d like to try and include that in your budget.
I determined the amount of money I’d spend on a monthly basis and then divided that by 4 to use in my weekly calculation.
Step 3 – What do you take for granted at your workplace?
If you’re currently employed, like me, you’ll need to account for the benefits your work provides you that you’ll still need once you strike out on your own: things like life, health, dental, and vision insurance. Hopefully some kind of health care reform will get worked out here in the US and small business owners will have some more affordable health insurance options out there, but until then, be prepared to pay out the wazoo for good health coverage. Also make sure to account for any commuting help your work may provide like a company car or mass transit supplements. Finally, if there are any bonuses or commission that you count on from your job, make sure you roll that into step one so that you’re still making that money with your business.
Step 4 – How much are you going to charge?
At first, pick an amount that you THINK you want to charge. This may need to be adjusted later if you find that it doesn’t meet your expectations for income. I’ve written previously about my thoughts on this subject, so I wont go into too much detail here. This part is easier if you charge hourly, or the same flat rate per customer. It can get a little tricky if you charge different rates to different customers or mix hourly and flat rates. Your accountant can help you find the best number to put in here.
Step 5 – What will be your average time on-site?
Finally, in order to convert the hourly numbers you’ll get from the equation into actual customers, you’ll need to determine the average time you’ll spend on site per-customer. From the experience I’ve had, the average service call takes a little over an hour. To skew things conservatively, I put 2 hours here. Some technicians take longer than others, so this is up to you to decide.
How Many Customers Will You Need?
Here’s the equation after gathering numbers from all the above steps. Make sure you’re using the same time span for each step (in my case, I’m using weekly numbers). The $300 is estimated taxes. Talk to your accountant to get this number.
((Step 1 + Step 2 + Step 3 + 300)/ Step 4 ) / Step 5
As a practical example, lets say you need to make $600 a week to pay your bills and continue your current lifestyle (step 1). You estimate your weekly business expenses to be $200 (step2) and your benefits will cost an additional $100 a week (step 3). You find out your estimated taxes to be $200 based on your income. You expect to charge $40 and hour (Step 4) and spend an average of 1.5 hours per customer (Step 5). Your equation will look like this:
This means you should work towards servicing about 18 customers per week in order to meet your income goal. Take it one step further and you would shoot to service 3 to 4 customers per day during a 5 day work week. Once you have the equation, you can play around with the numbers, see what happens if you lower your business expenses or increase your rates.
This was a fun exercise for me and it really helped provide a high level perspective as to the hidden costs associated with making a living at computer consulting.