By Erin Baehr,
“You can pay for it with just one new client.” That’s a pitch I hear often from vendors. At face value, it makes sense; try out this new software, engage one new client, and it’s paid for. In reality though, if all you’re getting back from a new expense is enough to pay for the purchase, then you are essentially working for free.
Calculating return on an investment mathematically is a straightforward equation: ROI = [(Net Profit – Investment)/Investment)]*100. Spend $100, earn $200, and you have a 100% return. Sounds great. But this formula ignores the value of your time. If it took you 20 hours to earn that net of $100, then you didn’t even earn minimum wage.
When evaluating a new overhead expenditure, start by thinking about your own personal acceptable minimum wage: what is the least amount you are willing to work for? If your business is a startup, you may be willing to work for much less to get it off the ground than you would be after the business is well established. For example, let’s say you run a profitable (and completely fictional) virtual assistant business from home, and are thinking of moving into rented space. The space will cost you $300 per month, $20 per hour is your minimum acceptable wage for additional work, and your average client fee is $30 per hour. You only have to sell 10 more hours of client time per month to pay for the office. But you would actually have to sell three times that to make your minimum wage of $20. Will the space afford you the opportunity to generate at least an additional 30 hours of billable time each and every month?
You can make a similar evaluation when considering a new piece of equipment. For that same virtual assistant business, paying for a $1,000 scanner may take 100 billable hours to net your target $20 per hour income, but the added efficiency may allow you to trim your administration time, serve more clients, and ultimately increase your income.
Erin Baehr is a Certified Financial Planner™ and Enrolled Agent. She is the owner of Baehr Family Financial, a Fee Only financial planning firm in Shawnee, offering personal and business consulting on an hourly or retainer basis. She can be reached at email@example.com or 570-223-1550.