Need X income, therefore business must by Y profitable?
February 10, 2008 2:42 PM   Subscribe

Simple set of calculations/spreadsheet formulas for thinking about the true cost of starting a business or going freelance?

I'd like to do a spreadsheet that "reverse calculates" what I would need to charge per-widget in order to make a living wage. Something like input-current-cost-of-living, then see how many widgets you can make in a day, and see how productive you'd have to be. (Asking because I noted a colleague of mine had "gone independent" and was charging $17 per digital image to clients...thought this was rediculously expensive, then figured taxes/health insurance, etc, might even make this way unprofitable?).

I've seen cortex's question which covers some of the considerations on starting/not-starting a business. One of these is "if you have to pay self-employment tax then reduce your profit calculations by 40%." Got it. So I'm thinking the equation should show loss to taxes, loss to health insurance, loss to business registration fees, loss to capital expenditures, etc? What else do I need to add to this equation?

(Oh, and I'm in the US).
posted by garfy3 to Work & Money (3 answers total) 4 users marked this as a favorite
As I am not qualified to instruct you on U.S. details of your propositiong, let me recommend you the following:

1. there is no such thing as a "true cost". Your extimations will be more or less rational and probably take few or many factors in consideration, but you are likely to often find that you have under estimated some cost. The easier to mis-estimate are , in my experience, the ones that are hard to measure with money. IN a small business you will not have to worry much about best methods to calculate cost distribution, but you will have to think about cost-opportunity a lot. For instance, if running your business implies that you will renounce an employed position, you should ALWAYS factor that cost in. If you give, for instance, a $100 job that your would reasonably expect to hold for the next 5 years, than you have to consider that you are sustaining a "virtual cost" (cost opporunity) of at least $500 (100*5).

2. Most business are interested in limitation of liability, which is both a very big problem in todays economies and a good instrument that allows some real enterpreneus to reduce their risks. Consider that unless you have a very detailed understanding on how, how much, in what times and why you could be liable for doing/not doing something well (not necessarily for doing something intentionally in a cheating way) you should be often if not always looking for limitation of liability, which could imply incorporation in US law ( I dunno really).
posted by elpapacito at 2:59 PM on February 10, 2008

You might try looking at a cash-flow forecast and working out your profitability that way - it gives you a good way to see much your overheads will increase as you (hopefully) scale up. It's not a formula - it relies on you to consider how your business might grow and research the costs. The best example i can find so far is unfortunately in PDF and not a spreadsheet, but it's a good one for listing all the possible expenses you may incur along the way. If you keep digging around you'll find countless other great examples.
posted by ukdanae at 4:21 PM on February 10, 2008

Freelance Switch Rates Calculator

It might not be as detailed as you specified, but I think it could serve as a decent start. Of course, you should replace 'hours billable' with 'widgets produced' or something similar.
posted by mebibyte at 11:52 PM on February 10, 2008

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