Your billable rate needs to meet two criteria. First, clients have to be willing to pay your billable rate. Second, your creative agency needs to be able to generate a profit at that rate. This is the 2nd article on setting your billable rate(s). In the first article, we discussed methods for setting a billable rate that will maximize demand and revenue. Now, we will analyze what it takes for your creative agency to generate a profit at that billable rate.
The majority of expenses at a creative agency are fixed expenses, such as salaries, rent, and software subscriptions. The goal of this article is to figure out how many billable hours it takes to cover these fixed expenses. Once these fixed expenses are covered, the majority of additional revenue is profit.
To start, you need to find your cost for being open for business. You need three numbers: salary costs, overhead costs, and expected profits.
Don’t include any project specific costs. Examples are freelancers, and project materials. These costs are variable. They are only incurred when you do project work. They are required to do work, but not to stay in business.
It can be useful to create a 12-month forecast. This allows you to see how expenses change from month-to-month producing a range of low, average, and high costs. This allows you to “stress test” how much it costs to stay in business. For example, this allows you to take into consideration annual fees, and quarterly expenses.
Next, we need to calculate the minimum billable hours required stay in business.
Minimum Billable Hours = (Salaries + Overhead Costs) + ((Salaires + Overhead Costs)*Profit%) / Billable Rate
This gives you the minimum billable hours you and your team have to work. I recommend calculating this for each month of the year — on your month-by-month budget.
Finally, you need to calculate your minimum billable utilization rate. Billable utilization rate is the percent of total available time that employees spend working on billable projects. Finding your billable utilization rate provides two benefits:
According to AIGA the average billable utilization rate for creative agencies in the United States is 42%, and their recommended billable utilization rate is 65%. I recommend that your billable rate should be high enough that you are able to meet your fixed costs at 42% billable utilization. Make sure you can generate a profit by being average, then you will be able reap the rewards of being extraordinary — instead of have to be extraordinary just to pay your bills.
You can reduce your minimum billable utilization, by adjusting your billable rate up, or your costs down. Likely you will have the most control over your costs. It is uncomfortable to cut costs, but it is better than risking and losing revenue.
In conclusion, most creative agencies are started by people that want to focus on doing work they love. Likely you don’t want to spend all of your time just trying to breakeven. The goal of this article is to help you manage your billable rate and costs so that you can generate a profit without having to worry about running the business.