Hey Reader,
Buckle up - we're gonna talk money today!
In our coaching call yesterday, an Accelerator member asked me to explain the difference between hourly burn rate and her break-even rate. She had just completed the Functional Financials calculator, and noticed something strange:
Her hourly break-even rate was larger than her hourly burn rate.
I’ll admit - I completely spaced on the definition in the call!
At first glance, the two hourly rates appear to mean similar things. They both reference a relationship between money and time. They both are calculated using the same expenses. And they’re both vital to running a successful creative service business.
But they mean very different things.
Burn Rate
Burn rate refers to the sum of your expenses over a given time.
For example, let’s say your business expenses total $4,000 per month. This includes everything from software to your salary. If your business is “open” for 40 hours per week (160 hours per month), your hourly burn rate would be $25 per hour.
In short, your business “burns” $25 every business hour.
Burn rate is an incredibly helpful metric to track. We can use this to calculate our runway, and evaluate if we are spending our time wisely.
But it’s different than our break-even rate.
Break-Even Rate
Break-even rate refers to when your expenses and your income are equal over a given time.
Wait… hold on…
You might be thinking that sounds a lot like burn rate… And I agree: it can be confusing! But here’s why it’s wildly different:
Break-even rate is calculated by a completely different type of hour.
In most creative businesses, the only activity that generates income is when we’re actively providing the service. When we do the work. It’s the hours spent working on client projects: in meetings, jamming on Webflow or Illustrator, or sending emails.
This type of hour is what we refer to as a billable hour.
And the reality that most service providers don’t recognize is that even though we’re open for 40 hours per week, only a fraction of those hours are billable.
To continue our $4,000-month example:
We may be only working on client projects for 20 hours in a given week (80 hours per month).
The other twenty hours might be spent on drafting proposals or creating social media content. Still working on our business… but those wouldn’t be considered billable hours.
In this case, your break-even hourly rate would be $50 ($4,000/80)… double that of your burn rate!
But why?
Those twenty hours of client work have to bring in enough money to cover our expenses for the entire week. For solo-studio and freelancer businesses, the break-even rate for a billable hour must be greater than the hourly burn rate to cover the expense of non-billable hours.
Make sense?
Your break-even rate is essential for calculating your project’s profitability. And while I strongly believe against charging by the hour, knowing your hourly break-even rate can be a godsend when estimating the bottom-line price for new projects.
Remember, break-even rates are just that: breaking even.
We should always try to profit from the business: it’s the only way we can take vacation time, build out runway, and bridge the revenue gap between projects.
It’s a simple concept, but it is the defining difference between life and death for a creative shop.
This gets crazy if you have a team.
Break-even isn’t always higher than your burn rate.
Let’s say you bring in two freelancers to help out with your client work. They each work 20 hours per week, and each cost an additional $2,000 per month. Your expenses jumped from $4,000 to $8,000 per month.
How does this affect your rates?
In this new example, your burn rate skyrockets. Since your business is still open for 40 hours per week (160 hours per month), your burn rate is now $50 per hour. That means for every hour you’re “open,” you’re spending $50.
It’s getting expensive in here!
But out of those 40 hours per week, you no longer are limited to 20 billable hours. By adding the two freelancers, you actually have 60 billable hours in a single week. Yep - your capacity tripled!
Never thought you’d be able to work 60 hours in a 40 hour week did ya? So how does this even work?!
Billable hours are per person.
Now you have 240 hours per month worth of billable hours (60 hours per week). With all the extra manpower, your break-even hourly rate actually decreases to $33.33.
Financial literacy is essential.
I’m no finance dude.
But I can’t tell you how many hard lessons I’ve learned because I didn’t understand simple financial concepts.
Knowing things like burn rate and break-even rate would have saved me a lot of pain over the years.
And if I can prevent others from learning lessons the hard way… I will. It’s why I do this.
Speaking of which, let me re-emphasize this: Try to move away from hourly billing. Don’t confuse my use of the word “rate” with “price.”
Happy Saturday, friends!
Ben Burns
P.S. We do cover these concepts and much, much more in Futur Accelerator. Again, not to spam your inbox, but I’m proud of what we’ve built, and I want to share. When you’re ready, we can help.
P.P.S. I haven’t announced this publicly, but my wife and I are expecting our third kiddo any day now: a sweet baby boy! Just wanted to give you the heads up in case I don’t show up one or two of these Saturdays.
Was this worth more than $5?
The best way you can say thanks is to chip in for a cup of coffee and keep the caffeine flowing. Appreciate you.
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