More Than Math: Part 1

Wild Goose Creative, April 2016

Wild Goose Creative, April 2016

Quick – What is your hourly rate?

 

If you had to think about it too much, or if the answer is too complicated, or if you aren’t entirely sure, it might be time to revisit your pricing model.

 

Earlier this month, I visited Wild Goose Creative in Columbus to do just that. I led a pricing workshop that started with the “math” answer to the question, “What is your hourly rate?” Then—spoiler alert—we broke down all the reasons why the math answer is incomplete.

 

Here’s Part 1 of our three-part series on the “math” approach to calculating billable hours…

 

Part 1: The Equation

At its simplest, the math answer tells us how much you have to earn each hour to cover your costs for a period of time. The equation reads:

 

Costs / Billable Hours = Hourly Rate

 

 

Time Period

First figure out what period of time you’re trying to cover. One year is common, but it involves some assumptions that extend several months into the future. It also assumes that work will flow fairly consistently through the year. If your work is cyclical in nature (for example, a wedding photographer may be busier in June than in January), consider breaking down the hourly rate by quarter instead of by year, or building in some sort of surplus charge during peak seasons.

 

If you don’t have a lot of historical data for your business, either because your records are, ahem, incomplete or because you are in the early stages of your business, plan for a year and build in an additional contingency. Having an extra 10-20% of wiggle room in your cost assumptions can be very helpful as you discover what the true costs of running your business may be.

 

Costs

Your “costs” should include both direct and indirect costs, and both personal and professional costs. If you aim to support yourself entirely from your creativity, then the costs your creativity must cover include the costs of running your creative practice, plus your costs to exist as a human, plus some savings, plus some taxes, plus a bit of extra savings for an emergency reserve. (Hint: Your budgets can be super helpful here.) Think of “costs” as “costs you need to cover with your creativity” if that verbiage helps.

 

If you have additional sources of income, reduce the costs you need to cover by the additional income, assuming it will continue throughout the time period. Be careful though. You may find you become dependent on these additional sources of income because your hourly rate is too low. If your ultimate goal is to eliminate these additional sources of income, calculate your hourly rate without them.

 

And remember, building in additional contingencies here (for example, an “uncertainty contingency” of 10-20% if your figures are less reliable than you’d like) can give you some much needed wiggle room.

 

Example

Throughout this series, we’ll be looking at Joaquin’s professional practice as an example to illustrate the points. Joaquin calculates his costs for each month as follows:

2016-04-25_MoreThanMathBudgetPic

 

Next Up: Billable Hours

Next week, we’ll break down “billable hours” in the context of the equation.

 

 

Spring Tax Update

2016-03-21_SpringPic

Spring Has Sprung! March 2016

It’s no secret that I love doing our taxes. I love the excuse to sit quietly, without interruption for a prolonged period of time. I love the excuse to look back on 2015. I love seeing how the business has grown; I love seeing the results of decisions we made and experiments we ran. I love remembering the causes we supported… And why we chose to support them.

 

So with that in mind, I wanted to share some of what I observed. I suspect you’ll observe some interesting things in looking back at your own creative business as well…

 

2015 Income

2016-03-21_IncomeChartNope, I’m not going to tell you how much I made. (That’s why you’re here, right? For the juicy data?) Here’s what I will share: I was surprised by how I earned what I earned. My perception was that most of my work and income is derived from presentations and workshops, whether live or online. That was certainly true during 2013 and 2014, but in 2015 that made up about 40% of my income. (Who knew? Apparently not me. At least not in real time.)

 

The rest of the income came from a split (more or less) between one-on-one coaching with artists and writing work. I had pretty substantial growth in both categories during 2015, and the data reflects that.

 

(By the way, learning something new about my 2015 earnings helped me tweak my 2016 budget. It’s an iterative, imperfect process.)

 

2015 Expenses

2016-03-21_ExpenseChartIn looking back at my expenses, I found a few high-level categories emerged. The biggest one is “Running the Business.” This counts everything from web development to legal support to advertising to postage. The next biggest category is Travel (no surprise), followed by Taxes and Insurance. I had my own Professional Development (maintaining my licenses, my own education) plus a bit devoted to Teaching Expenses (think: Pipe cleaners and play doh).

 

To be fair, these aren’t the categories I use in my system on a day-to-day basis. They don’t have nearly enough detail. I have 28 expense categories and I made use of 27 of them during 2015. (The one I didn’t use is “Other Client Services.” I have no idea what that is supposed to mean, and I didn’t use it during 2014 either. So I deleted it from my 2016 budget.)

 

These also aren’t the categories from Schedule C. Those categories mirror my own 27 categories more or less, but in some cases, I need more information that will fit within the IRS description. So I add it.

 

That’s the beauty of keeping your own system. You get to organize it in the way that makes the most sense for the type of work you do and the information you need from your numbers.

 

Charitable Giving

By far, my favorite part of the tax return is reviewing what we chose to support during 2015. There is something powerful about choosing to support organizations we value. And there is something refreshing about planning our 2016 giving with the same deliberate intention.

 

In general, we supported education. Whether our support went to colleges or universities for scholarships (Mizzou, OSU, and CCAD), to public institutions that support broad education (NPR, the library system), or other educational initiatives (financial literacy for elementary and secondary children), education was a common theme. It’s also a lifelong pursuit for us, and we believe in making it accessible to anyone who wants it, in whatever form that takes.

 

We also supported the arts, both via CCAD, the art museum, performing arts groups, and theater companies. Art changes lives. And if our support can make it accessible to someone who otherwise couldn’t or wouldn’t afford a show, that’s a pretty good use of our support.

 

We supported our community, primarily through health-related giving (OSU’s hospital, Nationwide Children’s Hospital) and repurposing organizations (Habitat for Humanity, Goodwill).

 

Finally, we supported organizations run by those who matter to us. We gave when friends asked; we said yes when someone shared news of an exciting initiative, we remember times when we’ve been helped. It is this group—which looks like the most delightfully uncategorizable hodgepodge of love—that makes me smile. Each contribution comes with a story, and I am so grateful for every one.