As the old management saying goes:
“What gets measured, grows.”
Tech startups (and startups in general) are typically fiends for metrics, measuring everything and tracking their growth. Freelancers, on the other hand, are notorious for being less-than-organized. There’s so much work that comes with running a business-of-one that it’s easy to let measurement slip through the cracks — which can easily lead to your business downfall. Enter: your key performance indicators.
What are KPIs?
“KPI” stands for “key performance indicator.” Basically, a KPI is just an important metric that indicates how your business is doing. Need some examples?
What is this?
Almost everyone is familiar with profit. It’s the money you make, minus your business expenses (including taxes). Far too often, freelancers gauge their business expense by the money that comes in the door, without considering business expenses and taxes.
You know how sometimes you have those months where you feel like you’re doing really well, and making a good amount of money, and then the end of the month comes and you’re pretty much flat broke? That’s what happens when you don’t pay attention to your profit and focus on increasing it.
What is this?
This one is a little more math-heavy but not difficult to figure out. You can look at month over month growth or year over year growth or both. To figure that out, you’d take the metric you’re measuring your growth for (using the previous example, profit) and divide the new number by the old number.
Let’s say in April you made $3,500 in profit, and in May, you made $4,200 in profit. Dividing 4,200 by 3,500 gets you 1.2. A number above one means you’re growing, a number below one means you’re not growing, and the decimals are the percentage points — so in that example, your profits grew by 20% month over month. (If the resulting number had been, say, .8, that’d mean that your profits shrunk by 20%, because it’s showing you that in May, you made 80% of what you made in April.)
Until your business is at a point where you’re not only meeting all of your base income needs, but also, for example, handling longer term issues like setting aside money for savings (both personal and business) and retirement, you want to make sure your business is growing, not flatlining. Keeping an eye on your growth rates and noting when your business is growing (and when it’s growing by more than it had previously grown) lets you make sure that you’re preparing for the future.
What is this?
This is a catch-all category that can cover several different metrics as they relate to pitching yourself for freelance gigs, including:
How many pitches you’re sending in a given month
How much time you’re spending per pitch
How many of those pitches are successful in landing new work
If you’re just starting out, you can’t rely on word-of-mouth to kickstart your business — you need to be as proactive as possible, and pitching yourself is part of that. If you aren’t tracking your pitching efforts (and the results), you don’t have a place to start improving your efforts. Using the above examples:
You want to send as many pitches as possible (as long as you’re maintaining a decent success rate). Set a monthly or weekly goal and work to maintain it for as long as you need more clients.
But you want to spend the lowest amount of time per pitch possible, so that you still have plenty of time for your actual client work. You can decrease the amount of time you’re spending by using systematizing and templates, as described here in step two. This metric should steadily go down (until eventually, it won’t any more, when you’ve streamlined the process as much as possible).
And, obviously, you will want to achieve the highest success rate possible — and ideally, one that grows over time.
Hourly rate per client or project
What is this?
It’s pretty self-explanatory — you’re using a time tracking solution, right? (If not, check out this article for some suggestions.) Divide your agreed-upon price by the amount of time you’re spending on a client’s project, and you’ll have the hourly rate.
If you charge per project (or based on another non-time-based method), you need to keep an eye on your hourly rate per project and client. Why? Because some clients are higher maintenance than others, or some projects get out of scope quickly, and if you aren’t tracking your time (and breaking it down into the equivalent hourly rates) then you have no way of seeing where you’re losing time and, on the other side, seeing what projects are the most profitable.
When you break down your rate per client, you’ll notice that some clients end up drastically lower than others and you can take action accordingly, raising your profits as a business. The first time I checked this math, I wound up with an hourly rate ranging from $45-115, with two clear low-laying outliers. I fired those two clients and found more clients like the higher-averaging clients. The next month, my range was from $87-164 — still a wide range, but obviously an improvement across the board.
Average hourly rate
What is this?
Again, it’s easy — once you know what your average hourly rate is per client, you can average that out across clients to get your overall average hourly rate.
There are three reasons to track this:
If you primarily don’t bill based on time but do every once in a while, knowing your average hourly rate gives you a baseline to price yourself at.
If you keep track of your average hourly rate from month to month (and year to year), you can make sure that it’s increasing (or at the very least, staying the same).
It gives you a baseline to judge high maintenance clients at; if a client is sending you a certain amount of money a month in income, it can be hard to turn down that work. But if you have math to look at and see that the money Client X is paying you breaks down to $25 less an hour than your average hourly rate, it’s much easier to feel secure in raising your rates (or finding a replacement client).
Both of those last two metrics are particularly relevant if you don’t charge based on time. However, if you do charge based on time but don’t bill for certain tasks (administrative tasks or meetings, for example), then they’re important as well — because a client that loves meetings can kill your profit margins.
Choosing your KPIs
Something to keep in mind is that the thing that makes a KPI a KPI is that they’re a key indicator. That means that at any given time, you need to have three KPIs or less. It’s okay to track other things, but tracking a metric doesn’t make it a KPI.
When you’re deciding what metrics to choose as your KPIs, think about:
Your current business stage: Is growth more important or do you want to focus on maintaining your current level of profitability? If growth is important, then you need to track growth and pitching metrics; if you want to focus on maintaining, you’ll be making sure your profit levels are even from month-to-month.
Your business model: If you bill hourly and bill for all tasks/time (including meeting and administrative time), then you don’t need to worry about average hourly rate or rate per project/client.
Your current business goals: Again, if you’re a growing business (or want to grow), that means you’ll be paying attention to different metrics than if you’re in maintenance mode.
Homework and next steps
Choose 1-3 metrics to be your KPIs.
Make sure you have a way to easily track them — the aforementioned article lists several time-tracking tools, some of which including billing and invoicing features, which can give you a place to look at time and income all in one spot.
In 3-6 months, make sure to revisit and see if it still makes sense for those metrics to be your KPIs.
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