Budget- part 1

1. Budget- part 1 The purpose of this exercise will be preparing appropriate plan for budget.

2. We are going to look at two approaches: • top-down approach • bottom-up Top-Down approach The top-down approach is for when a client comes to you and says, can you do this project for $X? You have to decide whether to take the project, but first you need to work out all the costs involved to understand what (if any!) profit there would be in it for you. Bottom-up The bottom-up approach is for when a client asks how much you charge for a project, so you have to put all the elements together to work out your project rate.

3. Top-Down approach For this tutorial, we are going to use the example of creating a finished version of a white paper, including layout and graphics. As a freelancer, you may only do one part (in this case, writing) so when the client comes to you and says, “We have a budget of $6,000 for this 10-page white paper, are you able to supply the finished product for that?” you need to be able to work out an accurate budget estimate to understand if you are able to take it on.

4. Top-Down approach Step 1: Direct Costs 1. Direct Labor Costs Direct labor costs cover the costs of hiring other freelancers… but don’t forget to include your costs too! You will need to research the rates and time involved in hiring other freelancers so that you can estimate this accurately. 2. Materials Do you need to physically print any of the white papers? If so, the cost of materials may include paper and ink for printing. Also think about software or hardware costs if you have to update your existing computing equipment. 3. Travel Do you need to travel to meetings with the client, or pay for the travel of your sub-contractors? Do you have a mileage rate? You need to estimate your travel costs at the start and be clear who is paying for them.

5. Top-Down approach Step 2: Indirect Costs Many people estimating projects forget to include the indirect costs – and then find themselves out of pocket by the end of the project. Indirect costs include overheads, such as office space rent, furniture, and equipment costs. These can often be difficult to estimate precisely, but you should be aware of them and factor them into your budget. 1. Office Costs If the project takes a number of weeks, it is worth considering the ongoing costs of office rental, especially if this is not already included in your hourly rate. There may also be internet, electricity, water and heating costs to take into consideration. 2. Equipment Equipment costs may include the computer and printer you are using. You can think of this more as 'wear and tear' because you are not buying them solely for this project. 3. Administrative Costs You may have a contract with an administrative assistant. Although they are not a direct part of the project, they are still part of your overhead costs. If you are hiring an admin assistant specifically for this project, you should add them to the ‘direct labor’ costs.

6. Top-Down approach Step 3: Estimating the Indirect Costs Once you have an idea how long a project is going to take (see my previous post on creating a project plan), you can calculate the approximate total for the indirect costs. If it will only be a matter of days, you may choose to disregard these costs, but if the project takes weeks or months, you may well want to add them up to ensure your profit margin will not be eaten up by these ongoing costs. If you know your weekly or monthly bills, you can estimate the costs for the duration of your project. For example, if your project will take 6 weeks and your internet bill is $50 per month, then the cost will be approximately $75 over the project. For other costs, you could look back at what you spent over the last year as a whole and divide it by 52 to give an average weekly cost for expenses such as equipment.

7. Top-Down approach Step 4: Agreeing to the Brief Once you have determined all your direct and indirect costs, you will have arrived at an overall figure. The original question asked by the client was, “We have a budget of $6,000 for this 10-page white paper, are you able to supply the finished product for that?” The total cost estimate for the project is: $5,822, which includes your hourly rate. Any spare money in the budget on top of that can be extra profit. So the answer is “Yes, I can!”

8. Bottom-Up Estimate This approach is broadly similar to what we have already covered, except instead of giving us a budget and asking whether we can work within that, a client may come to us and ask, “What would you quote for this work?” In this case, it is more important to show exactly how we have arrived at this figure. If we came back to the client and said that we would charge $5,800 for producing a white paper, they may think this sounded very high. Once we had presented them with a breakdown of all the costs, however, this may seem more reasonable.

9. Bottom-Up Estimate • Hourly Rates Versus Overall Charges • Many freelancers prefer to give an overall fee for a job such as writing a 10-page white paper. This is because an hourly rate can sound high to a client, who doesn’t realize the costs of freelancing (your rate may already reflect all your indirect costs, as well as pension payments and healthcare). Giving an overall figure for freelancers can sound more persuasive. • Notice that we have simply taken out the hourly rates in this version.

10. Bottom-Up Estimate 2. Simplifying Your Estimate Although you may need to go into a high level of detail for yourself to ensure that you account for all your costs, your client will not need to see this level of breakdown. What your client wants is an easy-to-read account of where their money is going: they need to see they are getting value for money. If you have your indirect costs built into your hourly rate, then you could remove the Indirect costs section to give a concise estimate to the client. Another option is to give the total for indirect costs (without a breakdown) and name it Administration, which will greatly simplify this estimate.

11. Bottom-Up Estimate