How many days are you going to be sick this year? How to calculate your billable rate

The most common pitfall when you start out as a freelancer is to just multiply your billable rate with the number of hours per week (say, 40), and say to yourself “wow, I’m going to be rich”.

Alas, you can’t bill that much time, and you have other expenses other than your own salary.

For example:

  • Sick time
  • National holidays
  • Vacation
  • Business development, marketing, contract negotiation
  • Down time
  • Retirement savings
  • Accounting and legal fees
  • Software, hardware, rent, and other costs of doing business

All in all, you have a lot less time and a lot more costs than most of us think.

I’ve been in business for myself as both the owner of a software consulting business and as a sole freelancer for almost seven years now, yet I’ve never sat down and done the math for this until this past weekend. Shame on me, but don’t let that happen to you: I’ve decided to share my simple rate calculator spreadsheet.

I know there’s already an Hourly Rate Calculator by FreelanceSwitch, but I don’t like it much. It’s too granular for me. “How much do you spend annually on travel?” I have no clue. But, I do have a rough guesstimate of how much money I spend on various stuff per month, on average. And if not, after a few months or a year of doing business, you can start to calculate or just sum up this number pretty easily.

Instructions

  1. Click here for the spreadsheet.
  2. Sign in to your Google account, or create one if you don’t have one, then click File and “Copy spreadsheet…” to copy it to your own account, so you can modify it.
  3. Edit the numbers in the boxes with gray background to suit your needs.
  4. Find your required income revealed in the boxes with yellow background

A few notes:

  • The first group is about how many days you’re working and how many hours per day.
  • Be realistic. I find it hard to bill more than 4-5 hours per day, and I need on average at least one day per week for new biz development, conferences, etc.
  • The second group of gray boxes is about your costs – salary, fixed costs, variable costs. Needless to say, it’s good to keep fixed costs down.
  • Fixed costs are in a separate area at the bottom. Add more rows as needed, and make sure to check that the totals for fixed costs count all the rows. If you add rows at the bottom, the total generally doesn’t change to include those rows.

Armed with your new information, you can still have a little flexibility. If for example you have a contract where you can effectively bill 7-8 hours per day, then your rate can be lower – just look at the day rate instead of the hourly rate.

As always, the key to insight lies in being really specific about your reality.

I’m curious to hear what you learn, if you’ve done this calculation before, and what insights you have that I’ve overlooked.

Have at it in the comments.