How to start your own design agency: Lesson 2 - Manage the money
Danny Brooks and Natasha Zlobec are the names behind Phage, a two-person design agency based just down the road from Design Council in Clerkenwell. They specialise in print, corporate identity and digital design for clients in the creative and luxury sectors. They spoke to us about some of the lessons they’ve learned since setting up their studio 13 years ago.
It’s a good idea to get some experience and learn from your mistakes before going it alone. Working at an agency before starting up can also be a good place to find a business partner.
Danny Brooks and Natasha Zlobec, directors and co-founders, Phage
Lesson 2: Manage the money
Once you have your business partner, or have decided to go it alone, the next thing you need to work out is how much you’re going to charge.
Work out your survival budget
Work out a minimum survival budget based on how much you need to eat and to pay your rent, and then add on any business overheads such as telephone bills and studio space or desk rental.
Base your estimates on time
As a service-based company, you’ll be selling your time. If you don’t charge accurately for it, you won’t make any money.
Once you have your annual survival budget, you can work out a sensible hourly rate based on the number of hours you have available for billable work. For example, if you work eight hours a day, five days a week, and take four weeks of holiday a year, that adds up to 1,920 working hours per year.
Knowing that around 40% of those hours are going to be taken up with the day-to-day running of your business – finding clients, doing the books, planning, etc – which leaves 1,152 hours left for billable client work.
You can then divide your survival budget by your available billable hours to get your minimum hourly rate. For example, if you want to earn £30k per year and have £15k per year business overheads, you'll need to make at least £45k per year to survive. By dividing £45k by your available billable hours (1,152), you can see that you need to charge an hourly rate of at least £46.88 to reach your target.
Make your goals realistic
Keep things modest at the beginning – bear in mind that you’re unlikely to be working at full capacity from the get-go.
We saved money in our first year by working out of Tasha’s flat and meeting clients at their offices before moving into our own studio space.
And don’t forget that you will have to pay tax on your income, although you can also claim legitimate business expenses too!
Once you’ve worked out how much you need to charge per hour to stay afloat, you need to be able to accurately estimate how many hours a job is likely to take.
It’s a bit boring, but keeping timesheets really helps with this. Timesheets make costing quicker and easier because you can base your quotes on similar previous projects. Timesheets also help you to explain your costs to clients when asked, and will help highlight when a project is running over budget. Over time they will also provide insights into which types of work (and clients) are the most profitable and help with your future planning.
By basing quotes on estimated hours you also give yourself a bit of flexibility to go back to your client if the project scope creeps or if they start asking for things that weren’t in your original proposal…
Invoice in stages
Once you’ve set your hourly rate and worked out how many hours a job is likely to take, you need to make sure you get paid! We’ve found that a good way of doing this is to break down a project into key stages – design concept, development, implementation, etc – and to invoice on completion of each stage.
If a client misses a payment, you're more protected than if you wait to invoice everything in one go at the end, and it's a great way of closing off each stage of a project. It also helps with cash flow and forecasting, enabling you to plot when you expect different jobs to be paid.
Remember that it’s not always about the money. You might offer a lower rate for a project that will build your portfolio in an area you want to break into or for a client you really want to work with. Or maybe it’s for a charitable cause that you support.
Be critical, though. Design is competitive and there are a lot of potential clients that will take advantage of this. Be cautious of clients who try to negotiate you down on price with the promise of lots of future work.
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