orig post date OCT 2012
Add up the money you are paying per month to actually produce the work that you are getting paid for. This will be primarily salaries, but more particularly the portion of the salary paying for productive work as opposed to office tasks.
Now add up all the money you are spending per month to run the office, everything, project-related expences included.
Divide the total expense by the project expense. You want the resulting number to be about 3. The lower the number the more profitable you will be. The higher the number the less profitable.
What this is telling you is how much you have to charge for each hour you work on a project to cover all your expenses. The higher the number you got, the more you have to charge. At some point no one will pay what you need to charge.
This is simple math and there is no way around it.
Let's say you want to make $100,000 a year (about $50 an hour). If the number you calculated is 4, then you have to bill out at $200/hr. If you calculated a 2, then you have to bill at $100 an hour.
If market rates in your area are $150/hr, there is a real problem with having calculated a 4. On the other hand if you calculated a 2, you can charge less than your colleagues and get more work. Or you can charge the market rate and put some money away for a rainy day, replacing equipment, or bonuses.
How do you reduce the number you calculated? Here are the things you can do:
- Reduce your overall expenses by eliminating all the things, people and services that aren't necessary.
- Eliminate non-billable stuff you and your office do.
Keep in mind that this discussion about profitability depends upon keeping the pipeline full of work and being effective in the execution of your work. Rework and poor procedures will undermine the economics of any organization.
The Article How Much Are You Worth An Hour? takes this description of finances a little farther.