It’s early days in your business and you’ve got income coming in, you’re paying expenses and the big question is “Are you making a profit?”.
Take Cathy for example. She’s in this exact situation. She’s a sole trader with income from consulting and as she works from home or at her client’s premises, she has minimal expenses. When Cathy looks at her numbers, her income is greater than her expenses and she’s making a profit. But is she really?
You see as a sole trader, there is one major expense that Cathy isn’t accounting for. Her time. There’s no cost included in her expenses for the time she’s spending delivering the services and doing all the admin, finance, sales and marketing for the business.
Let’s have a look at Cathy’s numbers:
Income $45,000
Expenses $8,000
Net Profit $37,000
Now let’s have a look at what Cathy’s doing. Cathy is a mum with two kids at school, so she’s working 9.30 to 2.30, five days a week plus two hours in the evening most days and she only works during school term. That’s 35 hours a week for 38 weeks of the year. This means that she’s making $ 37,000 for 1330 hours of work giving her an hourly rate of $27.82.
On the one hand, that’s not too bad given the minimum wages are currently $18.29 per hour. But Cathy thought she was making $100 per hour as that is how she’s charging her clients. What Cathy hasn’t really realized is that she’s only doing chargeable work for 450 hours or 33% of her time. The other 67% is spent travelling to and from meetings, admin, finance, sales and marketing time and dealing with the myriad other small matters that every business owner needs to deal with.
On the other hand, Cathy could easily command $40 per hour as an employee if she could find a job that allowed her to work school hours. In fact if she did, she would earn roughly the same as she is now (25 hours per week times $40 per hour times 38 weeks = $38,000) and she’d recover two hours each evening to do as she wished and not have to worry about where the next consulting job was coming from.
For Cathy to improve her results, she needs to do more hours of consulting work and build up her income which in turn will increase her hourly rate.
Have a look at your numbers if you’re like Cathy and work out what your hourly rate is for the hours you are putting into your business. Then, work out how you can increase your income and reduce the non-chargeable work so that you can increase your overall return on your time.
