Running a Profitable Web Design Company
Here's the problem. Many of us who run small businesses aren't great at being profitable. We want to do a great job for our clients, charge a fair price, and focus as much as we can on our craft. Those are all great things, but barely making it brings a whole host of problems. Stress? Check. Not having enough money to pay your bills? Check. Being totally screwed when tax time comes around? Double check. At that point I guarantee you you're not doing a great job for your clients or focusing on your craft because you're too worried about how to pay your light bill.
What if instead of rushing to the bank every time a check came in you could wait 2-3 weeks before depositing it? What if you had several months' cushion in your savings account? What if the actual money part of the business was the last thing on your mind because you had taken the steps to setup a web shop that was profitable enough to actually keep you in business?
We've been on all sides of this, and after 8 years of doing this web design thing we wanted to share a few tips we've learned.
Expenses Per Job
For every website you build, there are going to be expenses. Some of these are unique to the project - like the cost of your CMS licenses, plugins and add-ons. Or maybe stock photography or typefaces you need to buy. There could be contractor expenses if you are hiring out parts of the job that you can't do. We used to just kind of guess what this would end up costing us, especially when we did fixed bid pricing. Guess how often we ended up eating into our profit on the job? All the time.
Make sure you either spend a good bit of time writing out every single possible expense, adding it up and adding it to the cost of the job or do what we do and set up a specfic budget with your clients for expenses. We don't marke them up, but just pass on the cost line item by line item so they know exactly what they're paying for.
There are other costs to running your business. Maybe you have an office you rent. You're probably using some kind of project management software like Basecamp. Then there's accounting or time tracking/invoicing software. We have a Typekit account so we can provide our clients with awesome custom typography. Have employees? This gets a whole lot more complicated. The list can go on and on. Do you know how much all that stuff adds up to?
These expenses need to be brought in to the cost of your jobs as well. Because if there's not enough profit in your projects to cover these monthly expenses you're going to keep coming up short.
This is the one that always gets you if you're not paying close attention. Let's say you have a $5,000 project you're working on. Between a CMS license, a couple of commercial jQuery plugins and a custom font your expenses for this particular job are about $1,000. Now let's throw in about $500 to cover your company expenses, too. So you've just made $3,500 right?
Self-employment tax is going to run you anywhere from 15-30%. Let's go with 25% for this example. So that's another $875 gone from your profit.
That leaves you with only $2,625 in profit. Or basically half the job. Now imagine that you quoted that job as $5,000 of your time and didn't account for the CMS, plugins, company exenses or taxes. You just got screwed.
How do we fix it?
I know you've heard the whole “raise your rates” thing before. Sometimes that comes from a very entitled place and we're not about feeling like we “deserve” to make wads of cash. But we do want to be intentional about running a healthy business that's not in danger of folding every time work slows down. This is not only good for you financially and emotionally – it's good for your clients, too. You're going to be able to do better work for them if you're not stressed about money.
Over the next few weeks we'll be digging into lots of specific ways to setup systems and processes to stay profitable, but in the meantime start with knowing your expenses. If we go back to the $5,000 job you've probably already figured out that it was terribly priced. $5,000 of your time + $1,000 in expenses + $500 in company expenses + 25% taxes puts it closer to $7,500 or $8,000. Hey look, you're not in the hole anymore!
But wait, there's more! Even charging $8,000 it's possible you didn't make any profit. You paid yourself, your expenses and your taxes, but put nothing in the bank. That's called breaking even, not profiting.
How much profit should you be making? That's a great question. Again, we're not looking to gouge our clients, but we need to make sure we have enough money to make payments, invest in new business opportunities and grow our company. Based on some quick Google searches and talking to a couple of other web shops I think you should shoot for about 20%. You can always go higher if you want - but 20% is a great place to start.
So how about our fictional project? You should have charged over $10,000 for that sucker. That's nearly double the original quote. Insane, right?
I know this is pretty straightforward stuff, but I'm amazed at how often I have to remind myself to follow through on the math. It doesn't come naturally, that's for sure. Just remember - when pricing a job don't forget to take into account your project expenses, company expenses, taxes and that crazy thing called profit. It's the first step in running a web shop that isn't a slave to money.
In the next couple of weeks we'll look at more specific ways to get profitable. This is just the beginning. Stay tuned!