Freelancer cost comparisons — Are you normal?

This week’s podcast with Sarah Thelwall from MyCake took a look at Turning Business Data into Brilliant Business Plans this post takes us a bit deeper and looks at a few types of costs that freelancers and SME’s incur so that you can gain a better idea of what ‘normal’ is.

Compare your Freelance finances and costs with colleages

Are your freelance costs normal?

The MyCake benchmark data for 2008-9 shows an average net profit of some 29% of turnover. However, unsurprisingly, product based companies and service based companies differ in the structure of their cost base so in order to make a little more sense of the benchmark data we need to split these out.

If we look at those users with a direct cost base of over 35% of turnover vs. those with direct costs of under 20% of turnover we start to see two very different pictures emerging. Direct costs are those incurred in the production or delivery of the product or service itself, indirect costs are things like rent/rates/travel which are not directly attributable to production or delivery but are the overall running costs of the business.

The example P&L below shows a ‘typical’ SME of one to two people whose turnover will be somewhere between £20,000 and £120,000 per annum. These two examples are based on the MyCake benchmark data for 2008-9. The service based individuals and companies (ie those with direct costs of under 20% of turnover) spend very little on raw materials (on average 6.5% of turnover) but instead spend 15.1% on wages to others and a further 11.4% on professional fees (lawyers, accountants and probably freelance colleagues). Their rent represents only 4.7% of turnover with a further 3.6% spent on office costs. Travel is a high spend area at 9.1% with marketing spend at 5.7%.

Of course there are variations depending on size of company (we’ll look at sole traders vs. ltd companies in a moment) but nonetheless the average net profit is higher overall in the service based crowd at 39.1%.

The product based crowd on the other hand are having a bit more of a struggle. Essentially this is because their direct cost base is too high – on average a whopping great 58.9% of turnover. When the average indirect cost base is 38.4% (with a large chunk of wages and professional fees in there and a healthy dose of marketing) it’s not surprising that there’s not much net profit!

This begs the question as to whether there is a difference between the smaller product based folks and the larger ones, that is to say are the larger ones achieving any economies of scale and are the smaller ones suffering from the lack of such economies? Well, if we simply look at those whose turnover takes them over the VAT threshold then we start to see some significant changes – the average net profit jumps up to 25% in part because the average direct costs drops to 39%. 

On the basis of this MyCake benchmark data we’d suggest that whilst product based enterprises do need to achieve certain minimum levels of turnover (e.g. heading for or above the VAT threshold) before their profitability starts to reach sensible and sustainable levels this is less of an issue for service based businesses where the direct costs are low and indirect costs such as travel vary in line with the levels of income achieved. The sole traders who use the MyCake system for book-keeping and/or benchmarking services vary in their turnover from start ups with less than £5k to more established businesses with over £100k turnover. Based on the above information we would suggest that the sole traders should consider whether it might be more tax efficient for them to run a Limited company. MyCake enables small businesses to review their financial information and look at it in the context of how other businesses like theirs are faring. Through the blog and the benchmark bulletins we offer general insight into small business challenges, via a subscription we offer individualised, anonymous comparisons.

By Sarah Thelwall of MyCake

Image by TheBusyBrain CC BY 2.0

What do you think? Are you flying blind? Do you have a feel for what is ‘normal’ or do you think you’d be surprised if you saw your data next to your competitors?

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