A Guide for Consultants and Freelancers on the Cost of Running their Business
The challenge for any professional transitioning from employee to self-employed is understanding how a business works, including the costs involved.
I have introduced the series on the Five-line Business Framework so we can focus on the activities that make up a business.
The framework will help you focus on what is essential and can also be a model to make a range of decisions on how to spend your time and money.
I use the term framework to mean a structured plan or set of interlinked guidelines that provide an overview or outline for addressing complex issues. Looking closely at the framework, you can see how each activity relates to the other lines in the model. All are essential aspects of a business.
When we talk numbers such as time or money, the framework can shift into a tangible model, which we'll explore more in future articles.
The previous articles in this series are here:
- Five Business Basics Every Entrepreneur Must Master
- Make or Buy Decisions
- Effective Marketing and Selling Strategies
This article will focus on the fourth line - the business's cost.
It includes all expenses not directly tied to producing or marketing your product or service. To reiterate:
- Revenue from product/service sales (which must exceed costs)
- Cost to make or buy the product/service (your time, including materials and contractors)
- Cost of selling (marketing, advertising and selling costs)
- Cost of running the business rent, insurance, utilities, subscriptions and administration
- Profit (revenue less costs)
Understanding Administrative Costs
These are like the backstage crew in a theatre production. You might not see them in the limelight, but the show can't continue without them.
They include office rent or home office costs, utilities, insurance, accounting services, legal fees, software subscriptions, and other operational expenses that keep your business running smoothly.
These costs might not directly contribute to the creation or delivery of your service, but they are essential for maintaining an environment where work can take place. They are the backbone of your business operations, providing the necessary support for your value-creating activities.
Major Cost Categories
While the exact categories can vary depending on your specific business, most administrative costs fall into the following areas:
Whether you rent an office space or work from your home, there are associated costs such as rent, utilities, office supplies, furniture, computers, etc. Regulatory Costs: In Australia, this relates to business registration, such as company ASIC fees, licencing fees, etc.
Include premiums for any business insurance you may need, such as professional liability/indemnity or property insurance.
Legal, accountants, bookkeepers and other professionals provide essential services that help keep your business compliant and financially healthy.
Software and Technology:
Most businesses today rely on various software for tasks like email, project
management, accounting, etc. These subscriptions can add up.
Techniques for Reducing Administrative Costs
Knowing your administrative costs is the first step towards managing them effectively. Here are some strategies to help you reduce these costs:
Consider working from home or a coworking space to reduce office rent and utilities.
Use technology to automate routine tasks to free up your time to focus on your core business activities.
If tasks are outside your expertise, consider outsourcing them to a freelancer or a service provider, which can often be cheaper than hiring a full-time employee.
Monitoring and Managing Expenses
Once you've identified your administrative costs, monitor them to help stay within budget and enable you to spot trends and make adjustments as necessary. For example, find out when regulatory fees are due and pay them on time, unlike me, for the second year in a row.
You cannot eliminate administrative costs but must monitor them to ensure they are proportionate to your business size and revenue.
Linking Administrative Costs to Revenue
In our Five-line Business Framework, administrative costs appear just before the final line—profit. The cost to make or buy the cost of selling and running the business impacts your bottom line.
If administrative costs are too high, they can eat into your profit and cause your business to run at a loss.
A good rule of thumb is to keep administrative costs under a certain percentage of your revenue, around 10%.
By understanding your costs, implementing strategies to manage them, and regularly monitoring them, you can ensure that your business remains financially healthy and set up for long-term success.
Every dollar you save on administrative costs is another dollar that flows through to your profit, the fifth line of the framework and the subject of our next article.