For a clearer picture of your business’s financial health, you need to first estimate your revenue or the total amount of money you’ll earn in a set period (such as a year). Don’t confuse revenue with profit—that’ll be the total revenue minus your expenses.
Determine how much you should charge
Your revenue will depend on how much you charge for your products and services. Freelancers and small business owners use many strategies to establish pricing, including:
- Cost-plus pricing assesses the cost of completing a project (materials, expenses, time), and then adds an additional percentage as profit. Calculating a desired cost-plus price can be a useful way to determine your minimum acceptable price. Be sure to find customers willing to pay this price if you want to be profitable.
- Market-rate pricing looks at market averages for your industry and area to determine pricing. For example, if you freelance, look at what freelancers with similar skills and experience are charging to understand what clients will pay.
- Value-based pricing bases the cost on the ultimate value to the end client. In this scenario, you may charge clients based on a percentage of expected profit or new business.
If you’re a freelancer, you may choose to charge an hourly rate or a flat project rate. You could provide certain discounts for work quantity or consider a retainer agreement. Special services, such as rush jobs with a faster turnaround, might include an extra fee.
Remember that your rates should increase over time, as your experience and quality improve and as your cost of living goes up.
Project how much money you’ll bring in
Once you know how much you plan to charge, you can project your revenue by estimating the total products or services you plan to sell and multiplying by your price. Consider best-, average-, and worst-case scenarios based on past months, or ask others with similar experiences how much they were able to sell or work in their first year. Or start your freelancing as a side business first, which may help you better gauge what your revenue could be.
You may want to set a revenue goal based on what you’d like to earn. At a minimum, you probably want to earn enough to cover your monthly business expenses (which should include a salary that covers your minimum personal expenses). Set your goal based on what you’ll need to maintain a realistic work-life balance.
Once you’ve identified your target revenue, consider what it’ll take to reach that goal. How many hours will you need to work, jobs will you need to take, or products will you need to sell?
Regardless of how you determine your revenue, it may feel like a guess. That’s OK. Even an educated guess will help you plan and serve as a guidepost as you get started—telling you if you’re on track or need to adjust your plan.