From solo consultant to agency: The mathematics behind your first employee.
It costs a lot more than you might think to hire your first employee. We dive into the math behind when it makes sense to scale from being solo to establishing a consulting agency.
Perhaps the quickest way to earn a reasonable salary, without being bogged down by a lot of start-up costs, is to set up as consultant.
And if you dream of setting up a larger business, this is also a unique opportunity that self employed to finance your startup yourself.
However, the problem usually arises when you hit the ceiling for how many hours you can sell yourself. Because if the business is to scale, more hours must also be sold.
This means more people on the team, and you should therefore look for your first employee to help make the dream of a flourishing bank account a reality.
But before you get blinded by the dream of creating the next Netcompany, let's dive into what the economy looks like in the real world, where you don't take in investment and grow under your own steam.
Business is going well.
Let's say business is going really, really well – which it has to be before it makes sense for you to hire.
You invoice yourself 1000 kroner per hour, and have 5 more or less regular customers, which amounts to 30 hours per week.
That gives you 10 hours a week to grow the business, nurture your pipeline, and still have a healthy balance with the rest of your life.
Yes, in fact, with an average of 30 hours per week, you are at your maximum capacity for what can actually be billed without burning out. Some believe that number is twice that – more power to you.
(And yes, the real-life workweek for a founder is probably closer to 60-80 hours, but let's pretend for a moment that you've also become your own boss in order to be present for a small-time game on Tuesday at 3:30 PM.)
That gives you 30,000 a week, and well over 120,000 a month. When you work, that is.
That kind of income lands you near the top of the pie, with 1,320,000 kroner per year before tax. And we've even deducted a month for vacation.
Specifically, you are here among top 3% of the richest Danes.
If you want to climb into the top 1%, you need to cross 1.9 million per year.
The average salary for a working Dane is 48,599 before tax, so you're doing well with your 110,000 kroner per month on average (1,320,000/12 = 110,000).
But you want more. Because what can't the business look like with 3, 4 or 5 employees who can all bill 37 hours a week? (They are supposed to "only" execute and not maintain a pipeline - more on that later.)
When you have more customers, than you can immediately handle, it's on the surface a no brainer.
Let's see what the business looks like with your first employee
The hourly rate for your first employee is DKK 249.50 for a 37-hour workweek with a salary of DKK 40,000 per month. (The actual calculation is based on 160.33 hours per month.)
Let's see what that hourly rate actually ends up being, and how much you have to pay. invoice just to hit breakeven.
You sell the time for 1000 kroner per hour and put the 750.50 in your pocket. Easy, right?
With five weeks of vacation per year, there are 47 weeks that can be billed. This corresponds to 235 working days per year (and an average of 19.6 days per month).
This gives a daily price of 2,042, and with 7.4 hours of work in a day (37/5 = 7.4) that becomes 249.50 to 276 kroner per hour.
In addition, we also have 12 public holidays per year, so now we are down to 222 working days.
This gives a daily price of 2,162, and thus an hourly price of 292 kroner.
Social costs are hidden in the corner. This includes, among other things, vacation pay, insurance, contributions to education and maternity funds, etc.
Depending on how much fringe falls off, the rule of thumb is that you must include between 35% to 54% on top of your salary to social costs.
You're just starting out and not throwing around dollars, so let's just take the lowest rate for the sake of the example. The 40,000 a month now becomes 54,000, or 648,000 a year.
This now gives a daily price of 2,919 kroner, and an hourly price of 394.
This means that your profit is now down to 604 kroner per hour.
That's not entirely bad, but let's see how the math otherwise looks.
The true cost of a consultant
We have so far assumed a 37-hour workweek, but most agency owners will tell you that this is not the number that is (and can be) billed. Half an hour a day is easily swallowed, resulting in 10 hours in a month, or what is closer to 1.5 days.
The 19.6 days become 18, giving a daily price of 3,000 kroner and an hourly rate of 405.
Then there are all the little things that get in the way. The plumber has to come by and install thermostats, so you have to go home earlier and wait. There are sick days. Pretty reasonable things, but it eats into the billable hours.
If we set it low, it corresponds to one day per month, and then there are 17 working days left in a month.
This means that the daily price is now 3,176 and The hourly rate is 430 kroner.
We have assumed so far that you can keep your employees fully employed throughout the year, but you will inevitably experience downtime between projects. All in all, you should expect an additional 10% of time to be wasted here.
The hourly rate is now 473 kroner.
If you want to keep your employees, you also need to set aside time for upskilling and further training. That's an additional 10%.
The hourly rate is now 520 kroner.
In the calculation here, we do not take into account that you can no longer work from the dining table or from the local café, but need an office, some kind of lunch scheme, equipment for your employees, etc.
If we add the "little things" on top, and put it on the low end, it is not unrealistic that your invoiced price must therefore be at least 600 kroner before you can withdraw anything for yourself.
And just because you could easily invoice 1,000 kroner per hour, are you also able to sell newly hatched students at the same price?
What do you do?
Growth is certainly not bad, but make sure to do the math with everything it includes before you decide whether to expand your business or whether you're better off going it alone.
There are also other things that come with having employees:
- MUS (if you have a corporate bent) and performance interviews. You are not only responsible for the work, but also for the people. So the staff must of course be looked after.
- Hiring and firing. You should expect to hire the wrong person from time to time, and have a certain level of turnover among your employees. This means you have to spend time finding new talent for the fold, which tends to steal hours.
- Customer the pipeline can/should mathematically only grow bigger with more employees, and it is your responsibility as CEO to keep it running. That in itself is a full-time job with employees under you.
- The administration of the business is growing. You either have to hire someone out or handle it yourself.
- Basically, it comes with a lot of responsibility that steals creativity – and in many cases the joy of running the business if you can't make a living from it.
Consulting industry is not so bad again, but it is an industry where the margin is not as big as it seems at first glance - at least if you want to be more than just yourself.
Unless your company has both the discipline and vision to build and sell a standalone product, close to 100% of capacity must be invoiced before it is a lucrative affair.
Do you hire your staff as consultants, you can of course pay them for the exact number of hours you invoice to avoid all the things we have listed above. Here there is no negotiation about holidays, 4-day workweeks or gaps between projects that must be covered by you.
If you subcontract the work, you will also get a correspondingly higher bill per hour, precisely because you will not have any of the other problems.
Especially in the beginning, it can be a good way to scale the business until you have reached a revenue level where it makes sense to move from hiring consultants to hiring full-time.
It's not going to be easy, and starting something up is always difficult, but if you come out on the other side, it's also a completely different life.
We're rooting for you no matter what, but just make sure to do your homework so you don't leverage your risk unnecessarily, and don't end up creating a 24/7 job when what you were looking for was more freedom.
(H/t Jason Bear, who delivered almost 15 years ago the original thoughts about the mathematics behind the consulting business. It also had to exist with Danish conditions in mind.)
From solo consultant to agency: The mathematics behind your first employee.
It costs a lot more than you might think to hire your first employee. We dive into the math behind when it makes sense to scale from being solo to establishing a consulting agency.
Perhaps the quickest way to earn a reasonable salary, without being bogged down by a lot of start-up costs, is to set up as consultant.
And if you dream of setting up a larger business, this is also a unique opportunity that self employed to finance your startup yourself.
However, the problem usually arises when you hit the ceiling for how many hours you can sell yourself. Because if the business is to scale, more hours must also be sold.
This means more people on the team, and you should therefore look for your first employee to help make the dream of a flourishing bank account a reality.
But before you get blinded by the dream of creating the next Netcompany, let's dive into what the economy looks like in the real world, where you don't take in investment and grow under your own steam.
Business is going well.
Let's say business is going really, really well – which it has to be before it makes sense for you to hire.
You invoice yourself 1000 kroner per hour, and have 5 more or less regular customers, which amounts to 30 hours per week.
That gives you 10 hours a week to grow the business, nurture your pipeline, and still have a healthy balance with the rest of your life.
Yes, in fact, with an average of 30 hours per week, you are at your maximum capacity for what can actually be billed without burning out. Some believe that number is twice that – more power to you.
(And yes, the real-life workweek for a founder is probably closer to 60-80 hours, but let's pretend for a moment that you've also become your own boss in order to be present for a small-time game on Tuesday at 3:30 PM.)
That gives you 30,000 a week, and well over 120,000 a month. When you work, that is.
That kind of income lands you near the top of the pie, with 1,320,000 kroner per year before tax. And we've even deducted a month for vacation.
Specifically, you are here among top 3% of the richest Danes.
If you want to climb into the top 1%, you need to cross 1.9 million per year.
The average salary for a working Dane is 48,599 before tax, so you're doing well with your 110,000 kroner per month on average (1,320,000/12 = 110,000).
But you want more. Because what can't the business look like with 3, 4 or 5 employees who can all bill 37 hours a week? (They are supposed to "only" execute and not maintain a pipeline - more on that later.)
When you have more customers, than you can immediately handle, it's on the surface a no brainer.
Let's see what the business looks like with your first employee
The hourly rate for your first employee is DKK 249.50 for a 37-hour workweek with a salary of DKK 40,000 per month. (The actual calculation is based on 160.33 hours per month.)
Let's see what that hourly rate actually ends up being, and how much you have to pay. invoice just to hit breakeven.
You sell the time for 1000 kroner per hour and put the 750.50 in your pocket. Easy, right?
With five weeks of vacation per year, there are 47 weeks that can be billed. This corresponds to 235 working days per year (and an average of 19.6 days per month).
This gives a daily price of 2,042, and with 7.4 hours of work in a day (37/5 = 7.4) that becomes 249.50 to 276 kroner per hour.
In addition, we also have 12 public holidays per year, so now we are down to 222 working days.
This gives a daily price of 2,162, and thus an hourly price of 292 kroner.
Social costs are hidden in the corner. This includes, among other things, vacation pay, insurance, contributions to education and maternity funds, etc.
Depending on how much fringe falls off, the rule of thumb is that you must include between 35% to 54% on top of your salary to social costs.
You're just starting out and not throwing around dollars, so let's just take the lowest rate for the sake of the example. The 40,000 a month now becomes 54,000, or 648,000 a year.
This now gives a daily price of 2,919 kroner, and an hourly price of 394.
This means that your profit is now down to 604 kroner per hour.
That's not entirely bad, but let's see how the math otherwise looks.
The true cost of a consultant
We have so far assumed a 37-hour workweek, but most agency owners will tell you that this is not the number that is (and can be) billed. Half an hour a day is easily swallowed, resulting in 10 hours in a month, or what is closer to 1.5 days.
The 19.6 days become 18, giving a daily price of 3,000 kroner and an hourly rate of 405.
Then there are all the little things that get in the way. The plumber has to come by and install thermostats, so you have to go home earlier and wait. There are sick days. Pretty reasonable things, but it eats into the billable hours.
If we set it low, it corresponds to one day per month, and then there are 17 working days left in a month.
This means that the daily price is now 3,176 and The hourly rate is 430 kroner.
We have assumed so far that you can keep your employees fully employed throughout the year, but you will inevitably experience downtime between projects. All in all, you should expect an additional 10% of time to be wasted here.
The hourly rate is now 473 kroner.
If you want to keep your employees, you also need to set aside time for upskilling and further training. That's an additional 10%.
The hourly rate is now 520 kroner.
In the calculation here, we do not take into account that you can no longer work from the dining table or from the local café, but need an office, some kind of lunch scheme, equipment for your employees, etc.
If we add the "little things" on top, and put it on the low end, it is not unrealistic that your invoiced price must therefore be at least 600 kroner before you can withdraw anything for yourself.
And just because you could easily invoice 1,000 kroner per hour, are you also able to sell newly hatched students at the same price?
What do you do?
Growth is certainly not bad, but make sure to do the math with everything it includes before you decide whether to expand your business or whether you're better off going it alone.
There are also other things that come with having employees:
- MUS (if you have a corporate bent) and performance interviews. You are not only responsible for the work, but also for the people. So the staff must of course be looked after.
- Hiring and firing. You should expect to hire the wrong person from time to time, and have a certain level of turnover among your employees. This means you have to spend time finding new talent for the fold, which tends to steal hours.
- Customer the pipeline can/should mathematically only grow bigger with more employees, and it is your responsibility as CEO to keep it running. That in itself is a full-time job with employees under you.
- The administration of the business is growing. You either have to hire someone out or handle it yourself.
- Basically, it comes with a lot of responsibility that steals creativity – and in many cases the joy of running the business if you can't make a living from it.
Consulting industry is not so bad again, but it is an industry where the margin is not as big as it seems at first glance - at least if you want to be more than just yourself.
Unless your company has both the discipline and vision to build and sell a standalone product, close to 100% of capacity must be invoiced before it is a lucrative affair.
Do you hire your staff as consultants, you can of course pay them for the exact number of hours you invoice to avoid all the things we have listed above. Here there is no negotiation about holidays, 4-day workweeks or gaps between projects that must be covered by you.
If you subcontract the work, you will also get a correspondingly higher bill per hour, precisely because you will not have any of the other problems.
Especially in the beginning, it can be a good way to scale the business until you have reached a revenue level where it makes sense to move from hiring consultants to hiring full-time.
It's not going to be easy, and starting something up is always difficult, but if you come out on the other side, it's also a completely different life.
We're rooting for you no matter what, but just make sure to do your homework so you don't leverage your risk unnecessarily, and don't end up creating a 24/7 job when what you were looking for was more freedom.
(H/t Jason Bear, who delivered almost 15 years ago the original thoughts about the mathematics behind the consulting business. It also had to exist with Danish conditions in mind.)
