As an established freelancer, you likely have a daily routine and client list that works for you…for the most part. You only have so many hours in a week and you’re already using them all to the best of your ability: admin work, like maintaining your website and paying those (painful) self-employment taxes; pitching new client business; and, of course, working on projects you’ve already landed.
You’re doing the best you can, and yet…
It just seems that there’s never quite as much money at the end of the month as you’d like there to be in order to take a well-deserved vacation (okay, staycation these days), or tuck a little bit away for a rainy day.
It IS possible to thrive as a freelancer financially, as well as in all those personal well-being categories. But sometimes it’s hard to see the forest for the trees.
When you’re already spending all your available time and energy just keeping the plates spinning, lest something crash to the ground, it’s time to take a deep breath, step back, and really look at where your time is going.
This article will walk you through how to evaluate your current business and five steps you can take to improve profitability.
Where is your money coming from right now?
As soon as you read the question, I’m sure your mind jumped to all your current clients: “Well, Client A is on the second installment payment of that $10k job, and I just picked up a quick-turn project that should only take a couple of days—gosh, I hope they pay on time…”
No, no, no. That’s not what I mean.
Month over month, year over year, when you look at the (dreaded) spreadsheet, which types of jobs and which specific clients keep you in business?
If you’re like the vast majority of businesses out there, of any size, then it’s likely that 20% of your clients are responsible for 80% of your total business; or, that 20% of your service offering is responsible for 80% of your billable hours. Crazy, right?
Known as the Pareto Principle, examples of this phenomenon surface everywhere, from traffic accidents (20% of drivers cause 80% of accidents) to responding to emails (20% of your incoming emails represent 80% of the total value you will get out of reading through your inbox).
Taking a hard look at your business’s financial history is an important first step in prioritizing your most profitable work. Maybe you’ve been freelancing for five years and your income has shifted during that time from one-off jobs to ongoing, project-level engagements. Maybe you find that you’re able to charge higher rates for similar types of work with software companies vs. content companies. Maybe you get more repeat business from a client that originated from a personal referral.
While you probably have a general sense of these things floating around in your head, nothing beats sitting down and running the numbers. Try doing it just like a full-fledged business would—look at all your work and its associated revenue for each month, each quarter, and each year that you’ve been in business for yourself. You’ll find trends you may not have noticed otherwise, and just possibly a few “Aha!” moments.
Where is your time going?
As a freelancer, time is your most precious asset. No matter how hard you try, you just can’t squeeze more than 24 hours into a day.
Because your time is limited, it’s important to make the most of it. But ramping up the level of personal anxiety and trying to frantically cross more things off your to-do list isn’t the answer.
And just guessing where your time is going won’t cut it either. To have good, data-based information to work with, you have to track your time. If you haven’t tracked your time before, then this is a great opportunity to start, because you can set up your time tracking in a way that will give you the specific information you need to answer questions about how your time translates into profitability.
Questions like:
- How much of your time is billable client work vs non-billable admin work?
- Which types of projects can you do faster and which drag on…and on and on?
- Are there certain times of day or days of the week when you’re more productive per unit of time?
Quick Sidenote: This article is written by Caitlyn, partnerships manager with Toggl—a time-tracking tool so simple, you’ll actually use it. Millo readers can track their time Free for 30 days.
You may find that “urgent” things keep popping up and interrupting your flow. So, maybe you dedicate one hour at the beginning or end of each day to deal with those instead of letting them break your focus. Or you may find that you can accomplish the same quantity and quality of work in an evening between 7-10pm that would take you ALL DAY if you started at 8am (you’re just not a morning person—no judgement here).
The point is, productivity is personal. There is no one-size-fits-all solution. But as a freelancer, you’re in the absolutely brilliant position of being able to set your own schedule, so do it in a way that is going to align with your own personal, daily rhythm.
And don’t feel guilty about it. When you have a whole list, written down and sitting right there by your elbow, of things that you should be doing, it can be hard to give yourself permission to focus. By tracking your time, you gain the confidence of knowing that you are making an informed decision and using your time in the best way possible to move your business forward each day.
So let go of the guilt, and embrace the data.
Are you profitable?
As a small business, revenue is your total business income, and profit is what’s left over after you pay all your business costs.
And guess what? Your time isn’t free. It’s a business cost too, right alongside web hosting, and that Adobe subscription, and the coworking space membership you never use.
When you are both the worker and the business owner, for purposes of finances, it’s important to ensure that you’re paying yourself fairly for your time, and that you account for that cost when thinking about the profitability of your business.
Here’s a thought experiment that will take you back to high school math class:
- Your fixed business costs each month are $1,000
- You work 120 hours in the month on billable client work that generates $15,000 in revenue
- You also spend 40 hours on non-billable work, like admin and self-promotion
- Your target rate for your time is $100 per hour
- Was your business profitable this month?
To find out, you need to calculate the cost of your time and include it alongside your fixed business costs. If you were paying someone else to do the work you would see that as a cost, so don’t hesitate to pay yourself first:
- 120 hours of billable work + 40 hours of non-billable work = 160 hours
- 160 hours x $100/hour = $16,000 in labor costs
- $16,000 + $1,000 in monthly fixed costs = $17,000 in costs
Clearly, your revenue was actually negative this month, once you accurately account for all your costs ($15,000 – $17,000 = -$2,000).
What makes this a bit of a trick question is that, at first glance, if you only considered the time you spent doing billable work, then it would seem like you were profitable. However, even if you’re only a business of one, you still need to account for all those pesky overhead expenses that are necessary to keep the business operating, and which you spend all that otherwise unpaid time on.
On top of which, you should be aiming for a 20-30% profit margin.
Let’s see what that would look like:
- $17,000 in costs x 125% = $21,250
If you billed $21,250 in a month instead of $15,000, that would give you a very healthy 25% profit margin. Which means generating more revenue, but without spending any more time doing so.
Tricky, tricky.
Let’s take a look at some tried and true tactics to make that happen.
Lean into what’s already working
Once you know where your money is coming from, and where your time is going, you can optimize! Or, essentially, do more of what is working and less of what isn’t.
Because you’re trying to generate more revenue without spending more time doing so, it’s absolutely critical to create efficiencies in your processes. That way, the things that need to happen in order for you to make more money do so without you having to stop and think about it.
The goal here, therefore, is to structure your workflows in a way that will help you spend your limited time on higher value activities, such as…
Retain good clients
Good clients = profitable clients. Not all are. But according to HubSpot, acquiring a new customer can be anywhere from 5x to 25x more expensive than retaining an existing customer.
Understanding your client profitability will help you know who to get cozy with and who to cut loose.
You know those 40 hours of administrative work in our high school math example? Those are a point of leverage. Every hour that you don’t have to spend courting new clients is an hour you can spend being paid well by an existing client, if you’ve done the work up-front to ensure that, you know, they like you and are happy with your work.
If a client was great to work with, ask to work with them again, and ask to meet their friends! Asking for referrals can often be tricky, but if you build it into your process—so that it’s not an ego-busting effort every time—a word of mouth recommendation can be the secret key to higher quality clients, and higher value projects.
When you come to the end of a project, one way to make this ask easy is to build it into a feedback survey. If you’ve been working closely with your client, then they likely won’t mind taking 10 minutes to let you know how things went, from their perspective.
Don’t build a survey from scratch every time (this is where technology tools can be very helpful), but do tweak it here and there so that it’s relevant to the work you did. Get information that will actually be valuable to you as you think about your client interactions and service offerings, then ask if there’s an upcoming project you may be able to help them with.
Go ahead, ask for repeat business. The worst they can say is no. And that’s what you would have gotten if you hadn’t asked, so you’re no worse off.
Then, ask for a referral. Do they know of any other businesses that may be able to make use of your expertise? Not only does a company know of other businesses in their space, or other businesses that they do business with, but each person you interact with has an entire network of their own. And who knows? Maybe the project manager’s spouse’s marketing team has a project coming up next month that would be a great fit.
Intervene with at-risk customers
We’ve already established that you want all of your customers to be profitable. So, what do you do when one is at risk of (gasp!) costing you money in the form of lost time?
You know what client behaviors indicate that something might be going off the rails: failure to return things by agreed deadlines; multiple, last-minute changes in scope; misremembering discussions or expecting you to deliver on something that wasn’t on your radar.
Once you bring this particular project to a graceful close, it is absolutely up to you if you never want to work with this client again. In the meantime, do what you can to salvage your profitability:
- Set up a meeting and try to identify what’s going on. A phone call will do, a video meeting is better, in-person is the best. Don’t do this over email.
- Get clarity around goals, blockers, and mutually identify the steps between now and the end of the project that will ensure everyone gets what they need in the end.
- Get it on the record. Whether you ask to record the meeting and transcribe notes later, or just take very thorough written notes, make sure to share them with your client promptly after the meeting and require them to review and confirm that the notes reflect what was agreed upon. You could use a verified e-signature service to do this, or even set it up as an amendment to your contract.
If you can’t find a path forward that allows you to meet the financial obligations of your business, then be kind but cut your losses. Spending more time on a project that isn’t profitable isn’t something you would ask someone else to do, so don’t make yourself do it either.
Then, think about how you can still get something out of the experience. Is there work you’ve already done that can be added to your portfolio? Did you have the opportunity to work with a new technology tool that you can add to your resume?
Sometimes there isn’t a shiny consolation prize, but it doesn’t hurt to try and find one.
Automate admin
Think about all the things that you do over and over again every time you start a new contract:
- Proposals
- Scope of Work documents
- Contracts
- Invoices
I have two words for you: templatize and automate. Okay, maybe that first one isn’t a word, but you see where I’m going.
The point is, if you’re spending time doing something that doesn’t add value, then find a way to reduce the amount of time you spend doing it—preferably to zero. That gives you more time for high-value work.
Passive income beats active income
Speaking of automating things, anything that requires a one-time effort but produces long-term financial rewards is a great use of some of those slower periods that are inevitable in the life of a freelancer.
Passive income, as this is known, can skyrocket your profitability. After you’ve earned enough to cover your initial costs, there are no ongoing costs—just profits!
These great articles will get you started. And no matter your field, someone, somewhere, has figured out how to monetize content creation. From online courses, to a blog sharing your super hot insider tips, to ebooks that give step-by-step advice on how to start as a freelancer in your field, the options are endless.
Do take the time to create quality content when building a passive income stream. Quality plus a slight edge of timelessness will translate into dollars for weeks, months, and even years to come.
Position yourself as a specialist
In all those spreadsheets you were looking at earlier, did you notice whether you tend to make more money for less time in any particular categories? If so, you might have what we call a competitive edge.
By building up your expertise, and your portfolio, in one or two business verticals rather than many, you become a more respected authority and, as a consequence, clients are willing to pay more for your work.
There is a much debated opportunity cost here—if you narrow your focus, you could be missing out on a lot of potential paying customers!
Think of it like a carpentry shop: they could make doors, and cabinets, and countertops. But they would need specialized tools for each of those projects, and maybe they only get an order for doors once a month, so they don’t use those tools that often. Maybe it takes the carpenter longer to make a door than it does a cabinet, because she doesn’t do it that often and has to pull out the user manual for the whats-a-majigger every time. Maybe it takes her so long that she actually doesn’t make a profit on that door after accounting for her time.
See the resemblance?
By specializing, you can use the right tools as effectively as possible. You can cater your portfolio, your outreach materials, your web presence (including SEO), and social media profiles to position you as the go-to person in your area.
And then charge for your expertise, because you’re worth it.
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