What’s a Burn Rate and Why You Should Care

WHWZKYQSDROk, by now (hopefully) you’ve noticed that I’m female…and with women, people always think of the glass ceiling, or how women never get as high a salary as men do. But I beg to differ. even as a female working in a male-dominated tech industry, I think that consulting rates are not gender specific. And regardless what the market situation is, the client will pay to the value that they perceive and the intensity of their problem. As my friend Mark Walker, a very successful realtor in Western Canada, used to say, “Price is only an issue in the absence of value.”

 

Price is only an issue in the absence of value

 

How did I determine my rate when I first became a contractor? For me it was easy. I was already out there as a consultant, working for a world-class consulting firm. We all knew what our hourly bill rates were, hearing through the grapevine. What I was given as a salary, though, was not full rate, obviously. But that gave me a benchmark. (By the way, any consulting firm who thinks their consultants and sub-contractors don’t know what they charge the client are, in my opinion, pretty naive. Personally, I think it’s silly to keep external bill rates confidential. One way or the other, your subs and employees will know. Will they care? Likely only the petty ones would. Most understand that and agree that consulting firms provide the service of giving a stable salary for their employees, working the next contracts to keep their staff engaged, and doing the admin behind it all… although as time progresses, the admin effort gets so streamline that there isn’t much maintenance work there.. but I digress…)

One of the first few questions that recruiters will ask you is your availability, your resume, followed shortly by your rate. What is the rate that you want? There are a few ways to answer this question: what people are charging out there already. I always start with my benchmark, the hourly rate for my time plus expenses. Often the client will want to ask for an all in rate. An “All in” rate refers to the rate that includes your time, plus all of your travel expenses.

    • What it would take for you to travel there, and back, based on the agreed upon frequency
    • what your accommodations would be,
    • what your food would be.
    • your rental car

It usually amounts to around $10-$50 per hour on top of your rate for time, depending on where the client is geographically. Travel expenses for New York or Vancouver will differ substantially than Bangkok, for example. (Disclaimer: my practical experience as an independent IT contractor is limited to only North America.. so this may differ in other parts of the world.)A65V45DVLP

Let’s drill down into your hourly rate, because chances are, you won’t know accurately what folks in your industry charge. And more importantly, like any other business, you need to ensure that your revenue fully covers your expenses to produce that revenue, right?

We’re going to talk about your Burn Rate. Do you know what I mean by burn rate? Allow me to illustrate. When I first made the leap from employee to self-employed, I was not married, I did not have any kids, I had a cheap mortgage around $6-$700 per month. Hey, it was 15 years ago. My burn rate wasn’t more than $3000 a month. Your burn rate is exactly how much money you need to live on every month. If you do not know what your burn rate is, you need to find out. And it may or may not the same as your current paycheck. Even if you happen to live pay check to pay check. A burn rate will typically include

    • Your mortgage or rent,
    • Your condo fees if applicable,
    • any lines of credit that you were currently paying off, or any other monthly payments for debt
    • Gas for your car,
    • Your groceries bill per month
    • Mobile expenses,
    • Your utilities
    • your average amount of spending money
    • And pre-determined amount set aside for savings, and emergencies
    • (Add in Other business Expenses)

Add all of these together, that is your burn rate. Typically I would recommend that you have at least three times this amount in a savings account to as your buffer at all times. It doesn’t have to be sitting in your bank account doing nothing. You can invest it which would be the wise decision, as long as you can access it easily. Now take your burn rate and uplift it 25%. – 30%. This accounts for the amount of tax that you need  to pay to use that money. Of course, this will depend on where you live and what your local tax rates are. I live in Canada, and as a small business, average tax rates run about 30%.

So congratulations. You have just calculated the absolute lowest rate that you can accept.

Your hourly rate should cover in excess of this. The point is also to ensure that your bill rate was way more than what you would make as an employee. Now, in working with your recruiting team, you need to compare to what the market rate is. Again, if they know the value of your resume, they won’t sell you short. Let them give you some input. And this is where working with a number of recruiters will be advantageous. You have the benefit of all of their opinions, not just one.

Part of the reason why you are charging so much more as a contractor is because you need to account for dry spells and the clownliness factor. Dry spells are the periods in which you are trying to secure that next contract, and you’re not yet actually getting paid. This is where the three-month buffer comes into play. Generally, independent contractors may not work 12 months out of the year… more like 9 – 10. So your rate needs to be able to cover your 3-month buffer.

To summarize, what have we learnt in the few minutes that we had together?

1. “Price is only an issue in the absence of value.”

2. Your rate needs to cover your Burn Rate (that money that you need to live on), including savings, and uplifted by a set percentage to cover the taxes.

3. You rate needs to cover any potential dry spells and includes the clownliness factor

 

What’s your burn rate?

4 Comments

  • Randy Sylvester

    Reply Reply November 20, 2016

    What’s a clownliness factor?

    I really like your blog/website, I came across it reading the CPA magazine.

    I am a former IT contractor using SAP FICO skills, I was mostly based in Calgary while living in Sherwood Park doing a weekly commute, I ran month end for large oil/gas company for six plus years training six employees over that time to be my partner, doing the job nobody wanted until the oil gas economy crashed a year ago.I now work for government in my local area with a short drive to work.

    I would still like to be a contractor but in the meantime…

    Thanks

    Randy

    • Cat Lam

      Reply Reply November 21, 2016

      Hi Randy, thanks for checking out the articles. I’m glad you enjoy it. The ‘clownliness’ factor is something I coined that refers to the silliness that you sometimes witness when dealing with organizational politics. Whenever I come across a situation where I’m thinking… man, this is crazy. I remind myself that part of the reason why I charge a premium is to get the job done, and done well, despite what goes on in the organization. That is all. The politics is sometimes comedic, hence ‘clownliness.’ To maintain a higher level of professionalism, I’m sure you’ll agree to stay out of the organizational politics, since you’re not part of the organization anyway.

      • Randy Sylvester

        Reply Reply November 24, 2016

        Well I should be getting a premium now for the politics I put up with now as a employee but don’t of course! It was so nice previously as a contractor to not have to deal with this but until that day comes back it is what it is!

        • Cat Lam

          Reply Reply November 27, 2016

          haha! I hear ya, dude. It’s definitely possibly to get back into contracting. Looking forward to creating community to do so. Have a great Sunday!

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