A person who starts and operates a business is on their own, literally. There is no umbrella company paying their health insurance, 401(k), or salary. A self-employed person needs to sell or bill enough to cover expenses, costs and, if they’re lucky, have a little bit left over for growth. Using a service business as an example (consultant, photographer, hair stylist, etc.), the business owner needs to calculate what’s called the Cost of Doing Business (CODB). This figure is the cost paid every day for operating that particular business.
The CODB is composed of all expenses and overhead, divided by the expected number of billable jobs performed (or “open for business” days) during the year. Now, a self-employed person can’t reasonably expect to bill 365 days a year. There is a lot of downtime, processing invoices, creating and distributing marketing and advertising materials, making phone calls to prospective clients, etc. This might be 1 or 2 days a week spent on administrative duties. If a person can afford to hire help for these functions, those expenses go into the CODB as well.
For example, there are 365 days in the year, 104 days are weekend days, leaving 261. Take out 14 for vacation and a conservative 7 days for sick time (what sole business owner has time to take a vacation or be sick, though?) and you’re left with 240 billable business days. That’s 48 5-day weeks. If you have 1.5 admin days per week, that’s 72 days. Subtract 72 from 240 and you get 168 days a year a sole business owner can reasonably expect to have available for billable work, work that they get paid for and from which they have to cover costs and expenses. However, the number of billable days ranges from 170 – 250 and the final number will be based on your own business an personal needs.
The total of costs and expenses divided by 168 billable days equals the CODB, the MINIMUM amount the business owner needs to charge for every billable day to just break even for the year.
Here is a selection of information and CODB calculators to assist you:
For people wondering why photographers charge what they do: