For any business to be successful, you must ensure your income is larger than your expenses. But determining the cost of doing business becomes more complicated as you grow and add customers, employees, contractors, and physical offices. This is especially true for agencies, who may work with multiple subcontractors and varied project sizes.
The cost of doing business may vary from year to year or even from month to month. Hidden fees, startup costs, and other expenses can derail your budget if they exceed your income.
Digital agencies need to track their expenses to keep their business afloat. Knowing your business costs can help you accurately bill your customers to ensure your business remains profitable.
What is the cost of doing business, and how to calculate it right
The cost of doing business includes every expense your company has. Some expenses are one-time, while others may be annual, monthly, or weekly. To calculate the cost of doing business correctly, you need to estimate these expenses together.
As your business grows, you may add new expenses, so the cost of doing business may fluctuate. To calculate it correctly, you'll need to factor in each one of these expenses. It's essential to monitor your costs and adjust your billing accordingly.
The core cost types you should consider when starting your agency
There are several hidden costs when doing business, so calculating your costs can become complicated. Here are a few key areas to remember as you estimate your business expenses.
Depending on your business model, startup costs can be either incredibly low or very high. If your business has a physical location, startup costs include furniture, a security deposit for a lease or purchasing the building, equipment such as computers and phones, and more.
There may be other startup costs even if you operate an entirely remote workforce. You may need to hire an attorney to help you form your business legally. You will need to pay a fee to register with your state's Secretary of State, which will become more expensive if you hire a company or attorney to write on your behalf. You may also have equipment costs even if your workforce is entirely remote.
Fixed costs are a bit easier to calculate. These include the rent or mortgage payment for your building. There are also costs for software such as time tracking, accounting, invoicing, project management, and other subscription software you need to run your business. These could also include internet and cell phone bills and other utilities.
Calculating labor costs isn't as straightforward as it may seem. When calculating your employee wages, don't forget to include expenses like the employer portion of payroll taxes and federal and state unemployment insurance. Overtime pay increases all of these costs exponentially.
If you use contractors, your labor costs may be more straightforward but fluctuate based on the project.
Business Insurance Costs
Every business needs insurance, but your needs vary based on the type of business you run. You may need worker's compensation insurance if you have employees. Other types of startup business insurance costs include:
- Errors and omission insurance
- Liability insurance
- Insurance coverage on your place of business
- Coverage for vehicles your agency owns
Speak with an insurance agent to make sure you're fully covered in the event of any accidents or liabilities and include your premium expenses in your business costs.
To get customers, you'll need to advertise your business. Advertising costs can include building and maintaining your website or contracting with a company to run paid ads on different platforms or email campaigns. Other costs may include creating content such as blogs, ebooks, or other assets you use to market your agency or physical marketing costs like printing mailers or buying advertising space.
Unfortunately, you can't plan for every business expense. Hidden costs could come in the form of non-billable hours for clients or other unexpected costs such as equipment replacement or repairs. They could also include payment for professional services such as hiring an attorney or paying for accounting services. To avoid derailing your company's expenses, it is better to add a small budget as hidden costs when you calculate your cost of doing business.
How to set the right price for your services and stay profitable
Now that you know the cost of doing business, you can determine how much to charge for your services to stay profitable.
When estimating how much to charge for your service if you're billing hourly, estimate how long each employee will need to work on the project. You'll need to charge the client enough to cover your business cost, such as your employees' salaries, and you may have sufficient to make a profit.
If you're charging a project fee rather than an hourly one, you can estimate how to charge using the same method to calculate the total project fee. Estimate the total hours and multiply the hourly rate times the number of hours you expect your employees to work. You will want to slightly overestimate this number in case you spend more time working on a project than anticipated. Add enough to cover your overhead and profit to calculate your project fee.
Calculating your agency fees may take some trial and error. But you can use these tools to help monitor costs and make sure you're charging enough to stay profitable.
Keep tracking the working time for each client
Even if you're charging a per-project rate, tracking your employees' time on each project is essential. You may find that you spend much more time than expected and aren't charging enough to cover your labor costs. To be sure, you can use time-tracking software to keep track of the time spent on each task, project, or client.
Track the expenses for each project
In addition to labor, each project may have additional expenses such as software licenses, business trips, or other costs. Track your business expenses for each project, and ensure you're charging these fees back to your client or including the expenses in your agency fee.
Looking at your business costs regularly to adjust your billing process when needed is essential. As your business grows, your costs and income will grow as well. Tracking each expense and the time spent on each project, and adjusting your billing accordingly, will help you ensure your agency remains profitable.