Many years ago, in some software project management course we were drilled with concepts like waterfall, JIT, Agile and others. The one thing that I still remember from those courses and go back to frequently is the teachings of Edward Deming. Many of his 14 points we cite on a regular basis. He’s also very quotable. One of his more memorable quotations that stuck with me was “You can’t manage what you can’t measure”.
As a small agency, this was our first big year in operation and we wanted to be sure that the company was healthy and was doing well rather than secretly haemorrhaging money. The simple and most logical system for us was to track our time. We couldn’t improve our minimum hourly rate if we didn’t even know our productivity or costs. This first year set our baseline to better get a handle on how and where our time and money went.
One of the early questions when starting your own company or going freelance is always where does my time go? Lots of professionals stop working at a set time. It creates a separation between life and work. Others have different advice. Some companies expect you to have 6 hours of billable time a day, others want you to log 8, but someone else is determining what is billable and what isn’t. We didn’t tie hours worked or logged to a salary, everyone’s needs and abilities are different. More importantly, we want to know what an average day or week looked like.
This article is going to be a very open-book about how and where our time went in 02012. We honestly can’t tell you if this is normal, or good or bad. It worked for us and should at least be a wake-up call to anyone interesting in making the jump. I would guess that no matter your industry, your results won’t be that far off from ours.
After logging time in 02012, we averaged around 125h per person per month. Which means we were logging about 29h a week on average. We can now put this value into our equation to better estimate an hourly rate since we know we’re logging around 30 hours. The downside now is to estimate how many of those 29h are actually billable and how many are sunk costs. Billable hours is the real number we need to calculate a minimum hourly rate.
Even though we managed to track 30h a week, there were certainly weeks with more hours than others. A few conference trips which were hard to estimate where that time went as well as some work just plain forgotten to be logged or even more realistically, banal work like checking email in the evening not being recorded as ‘work’ even though it is. So if anything, we’re under estimating our hours worked, hopefully not billable hours.
This is certainly something to keep better track of in 02013 and try to monitor this month-by-month so we don’t get lazy in reporting or punching the clock, or more likely we’ll accept that we are not even 80% productive and adjust our rates accordingly.
Every hour spent in 02012 was put into one of eight categories: Administration, Consulting, Design, Meetings, Presentation Preparations, Programming, Research, and Writing. The actual percentage breakdown was surprising. We think of ourselves as a software solutions company. We mostly focus on working with clients to solve problems by using the Internet. This could be in the form of surveys, maps or static websites. It didn’t surprise us that we spent more time Programming than Design, but the amount of time spent in Meetings and on Administration was shocking!
For every two hours of programming, we spent one hour in a meeting. Every day, we spent around 30 minutes on Administrative issues. This includes time spent creating invoices, chasing invoices, responding to email requests, and time with the accountant and lawyers. This is probably the largest group of non-billable hours and that’s 30 minutes a day. In 02013, we certainly want to minimise time or at least get paid for as much of it as possible. Knowing that ~6% of the time on any project is administrative means when we are done estimating the number of programming hours we’ll need to add 50% for meetings and another 6-10% for administrative time. This will keep us from undervaluing our effort.
Presentation Preparation was a bit over 2% of our time which is not directly billable either. This was time taken out of the normal work day to either create slides for a talk or seminar. Reusing slides cuts this number down as well as getting some money to give the talk. We also spent around 5% of our time writing. This was for this website, but also on books, articles and for other customers. Some of these hours were compensated for, but the majority were not. These are acceptable sunk costs because giving a presentation could be thought of as part of a marketing budget, whereas spending time with your account or lawyer is less like to generate new leads and revenue.
So what was the biggest take away knowing our hourly breakdown by work categories? We never expected to spend so much time in meetings! After talking to a few people this is exactly what they told me. The best way to kill a great programmer is to promote them into a manager. I’ve seen it several places, people who love to code start a company and become the CTO and then spend the vast majority of their time NOT doing what they love. If you are going to make the jump to freelance or a small company you can’t just hide away and do your thing. Almost a quarter of your time will be spent in meetings, there is no way around that.
We tracked the time we spent for each client. This is the obvious thing to track so you can invoice them. Now, for us, we have several different rates depending on the customer, the type of work, the exchange rate and other factors. So simply knowing the number of hours or the percent of time one client demanded doesn’t directly mean they were the most or least profitable. We spent a few, very lucrative hours with a few clients and would love to do more work like that, where as we’ve spent longer times with other clients but we were guaranteed a steady income at a lower rate.
According to the data, we were our own 3rd best client! Which is nice that we could spend nearly 20% of the company time on internal projects. My guess is that even more time was spent here that was not recorded. With few exceptions, none of this time directly generated revenue. It might have generated leads, new conference invites and even directly to work, but it is hard to attribute this. I have no idea if this is ‘normal’ or not, but when we are looking at the total number of billable hours we expect, we can see that 20% won’t be. In an 8h day, an hour and a half will be spent on internal projects.
If we look at the categories that were attributed to just (optional.is) as a client, you can see we spent a large percentage of our internal time programming. Some of this is code to get the website, the contest page and newsletter all up and running, but much of this is also projects which may or may not turn out to be products and therefore this sunk time might pay off in the future. It is a small risk we’re willing to accept as long as it doesn’t hurt the bottom line too much.
Writing was logged more than programming, which means we’re trying to be very active in our communications and sharing with everyone, much like this article. It is also something we can recommend to anyone, no matter your profession. Spend time becoming a better writer and communicator. We know how much time we spent on that last year and don’t see it getting any smaller this year.
The 3rd largest internal time sink is Administrative time. This is probably because we are such a small team we need to spend a lot of time on silly things like payroll, but as more people come on board, they won’t be directly adding to this number and the percentage will slowly get smaller in relation to everything else.
Effort vs. Income
We do have a variable billing rate, so not every customer is getting the same price per hour on the invoice. Luckily we don’t have that many customers or rates, but it could easily get out of hand if we’re not careful. What this does mean is that we can look at which clients are sucking-up loads or our time without having a good return on investment. This doesn’t mean they are bad clients, but they are a target for a rate increase or hours decrease. If the best use of your resources is purely to generate revenue, then you should chase the best paying customers for more hours. Hopefully, everyone will see that there are some projects which are rewarding, yet not the highest ratio of pay per hour. Also, the worst performer doesn’t mean you are losing money, they could be paying a great hourly rate, it’s just the others are paying even more.
You can see that Client 2 has the worst ratio. We’re spending more time with them than we are getting paid for! Some of this is slow invoices, we did the work in 02012 and will get paid in 02013. I am positive we are not losing money on Client 2, the hourly rate they are charged is still above our minimum. Since this all relative to the other clients, it looks bad, but what it means is that some clients are at a much higher rate which skews the percentages. Remembering Edward Deming’s quote, “We can’t manage what we can’t measure”. Knowing who the clients generating low revenue and high work load allows us to examine them more closely to make sure everything is going well.
Product vs. Hourly
One of the advantages of having a digital product you can sell, is that you get more income as you get more customers. That 1h meeting still needs to happen, but it now can be amortised over several customers making it more profitable. In 02012 we had a pretty good split between income from products versus hourly invoices. This also means we are spreading our risk. If we were only a product company and a competitor entered the market we might lose customers and revenue, but at least we have some invoiced customers to make payroll. And vice versa, if a customer pulls out, we’re not scrambling to get more contract work because we have a steady income from the product to keep us afloat. Which is a good position for anything in life, not just a company.
Over the course of 02012 we spent a lot of money on various things besides salary. One of our goals for 02013 is to better categories these expenses and run similar breakdowns, but we can tell you what percentage of our expenses were salary versus various other costs like rent, office supplies, flights, hotels, etc.
Office Supplies is probably on the low side in general. Our rent was either free, working from home, or cheap desk rental with other companies. This includes insurance, accountant fees, legal, general office supplies, banking fees and other non-salary/tax/travel costs. Most of the travel expenses were reimbursed by conference organisers, but there were additional costs incurred through out the year for travel to meetings, etc.
We didn’t spend any money on marketing or attracting more customers. We had plenty of great work, so there was no need to spend the time and money seeking anything more. We’re also virtual, so beyond a computer, which we already owned, there wasn’t much we bought. If you are looking to start, I would probably over estimate on Office supplies to be on the safe side.
The tax percentage was so large due to fees from our first year of incorporation. You pay your previous year’s taxes the following year. So we got hit with lots of first-time costs in our second year. Now that we were up and running, these were payed more frequently during the year and therefore in 02013, this should be a smaller percentage.
02013 Annual Report
If people find these numbers interesting and useful for comparison to themselves, we’re happy to continue to remain open about how our time is spent and begin to compare, year-by-year, to see how it is shaping-up. We’re in no way saying this is ‘normal’ or even if there is a ‘normal’, but we found some surprises and want to share these with anyone else thinking about making the jump. If you are better prepared and know what to expect, you can better budget your time and adjust your hourly rates to compensate. That gives you a better chance of survival and sharing with the world your great work. Good luck!