From solo consultant to agency: The math behind your first employee.
Hiring your first employee costs a lot more than you might think. We dive into the math behind when it makes sense to scale from solo to establishing a consulting agency.
Perhaps the quickest way to earn a decent salary without getting bogged down by a lot of startup costs is to become a consultant.
And if you dream of building a bigger business, it's also a unique opportunity as a self-employed person 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 you want to scale your business, you need to sell more hours.
That means more team members, so you'll need to look for your first employee to help make the dream of a booming 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 on your own steam.
Business is going well
Let's say the business is doing really, really well - which it will have to be before it makes sense for you to hire.
You invoice yourself 1000 DKK per hour and have 5 more or less regular customers for 30 hours a week.
That gives you 10 hours a week to grow your business, nurture your pipeline and still have a healthy balance with the rest of your life.
Yes, with an average of 30 hours a week, you're actually at your maximum capacity for what can actually be billed without burning out. Some believe that number is double that - more power to you.
(And yes, the real work week 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 at a little league game on Tuesday at 15:30).
That gives you 30,000 a week and well over 120,000 a month. When you work, that is.
Such an income lands you close to the top of the cake, with 1,320,000 DKK per year before tax. And we've even deducted a month for vacation.
Specifically, here you are among top 3% of the richest Danes.
To climb into the top 1% requires you to cross 1.9 million per year.
The average salary for a working Dane is 48,599 before tax, so your 110,000 DKK per month on average (1,320,000/12 = 110,000) is doing well.
But you want more. Because what would the business look like with 3, 4 or 5 employees who can all bill 37 hours a week? (They "only" have to execute and not maintain a pipeline - more on that later).
When you have more customers than you can handle, on the surface it's a no brainer.
Let's see what business looks like with your first employee
The hourly rate for your first employee is 249.50 DKK for a 37-hour work week with a salary of 40,000 DKK 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 need to bill just to hit breakeven.
You sell your time for 1000 kroner per hour and pocket the 750.50 in your pocket. Easy, right?
With five weeks of vacation per year, there are 47 weeks that can be invoiced. This equates to 235 working days per year (and an average of 19.6 days per month).
This gives a daily rate of 2,042, and with 7.4 hours of work in a day (37/5 = 7.4), the 249.50 becomes 276 kroner per hour.
On top of that, we also have 12 public holidays a year, so now we're down to 222 working days.
This gives a daily rate of 2,162, and thus an hourly rate of 292 kroner.
In the corner hides the social costs. This includes vacation pay, insurance, contributions to education and childcare funds, etc.
Depending on how much fringe falls off, the rule of thumb is that you should factor in between 35% to 54% on top of salary for social costs.
You're just starting out and not throwing dollars around, so let's just take the lowest rate for the sake of example. The 40,000 a month now becomes 54,000, or 648,000 a year.
This now gives a daily rate of 2,919 DKK and an hourly rate of 394.
This means that your profit is now down to 604 DKK per hour.
That's not bad, but let's see how the math works out otherwise.
The true cost of a consultant
We've assumed a 37-hour work week so far, but most agency owners will tell you that's not the number that is (and can be) billed out. Half an hour a day is easily swallowed up, resulting in 10 hours in a month, or something closer to 1.5 days.
The 19.6 days become 18, giving a daily rate of 3,000 DKK and an hourly rate of 405.
Then there are all the little things that get in the way. The plumber has to come and install thermostats, so you have to go home early and wait. There are sick days. Fairly reasonable things, but it eats into the billable hours.
If we set it low, this equates to one day a month, leaving 17 working days in a month.
This means that the daily rate is now 3,176 and the hourly rate is 430 kroner.
So far, we've assumed that you can keep your employees fully occupied throughout the year, but you will inevitably experience downtime between projects. All in all, you should expect to lose another 10% of time here.
The hourly rate is now 473 kroner.
If you want to retain your employees, you also need to set aside time for upskilling and training. That's an additional 10%.
The hourly rate is now 520 DKK.
In this calculation, we don't 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 arrangement, equipment for your employees, etc.
If we add the "little things" and put it at the low end, it's not unrealistic that your invoiced price should therefore be at least DKK 600 before you can withdraw anything for yourself.
And just because you could easily charge 1,000 DKK per hour, are you also able to sell newly graduated students for the same price?
What to do?
Growth is certainly not bad, but make sure you do the math with everything it includes before you decide whether to expand your business or you have a fatter ride on your own.
There are other things that come with having employees:
- Performance reviews (if you have a corporate hang) and performance reviews. You're not only responsible for the work, but also for the people. So of course, the staff needs to be nurtured.
- Hire and fire. 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.
- The customer pipeline can/should mathematically only get bigger with more employees, and it's your responsibility as CEO to keep it going. That in itself is a full-time job with employees under it.
- The administration of the business is growing. You either need to hire yourself out or do it yourself.
- Essentially, it comes with a whole lot of responsibility that steals creativity - and in many cases, the joy of running the business if you can't pay your way out of it.
Consulting isn't so bad, but it's an industry where the margins aren't as great as at first glance - at least if you want to be more than just yourself.
Unless your business has both the discipline and vision to build and sell a standalone product, you'll need to bill close to 100% of capacity before it's a lucrative proposition.
If 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 listed above. There's no negotiation about vacation, 4-day work weeks or gaps between projects to be covered by you.
If you subcontract, you'll also get a correspondingly larger bill per hour, precisely because you won't have any of the other problems.
Especially in the beginning, it can be a good way to scale the business until you've reached a revenue level where it makes sense to move from hiring consultants to hiring full-time employees.
It's not supposed to be easy, and starting something is always hard, but when you come out the other side, it's also for a completely different life.
We're rooting for you no matter what, but just make sure you do your homework so you don't leverage your risk unnecessarily and end up creating a 24/7 job when what you were looking for was more freedom.
(H/t Jason Bear, who almost 15 years ago delivered the original thoughts about the math behind the consulting business. It also had to exist with Danish conditions in mind).
From solo consultant to agency: The math behind your first employee.
Hiring your first employee costs a lot more than you might think. We dive into the math behind when it makes sense to scale from solo to establishing a consulting agency.
Perhaps the quickest way to earn a decent salary without getting bogged down by a lot of startup costs is to become a consultant.
And if you dream of building a bigger business, it's also a unique opportunity as a self-employed person 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 you want to scale your business, you need to sell more hours.
That means more team members, so you'll need to look for your first employee to help make the dream of a booming 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 on your own steam.
Business is going well
Let's say the business is doing really, really well - which it will have to be before it makes sense for you to hire.
You invoice yourself 1000 DKK per hour and have 5 more or less regular customers for 30 hours a week.
That gives you 10 hours a week to grow your business, nurture your pipeline and still have a healthy balance with the rest of your life.
Yes, with an average of 30 hours a week, you're actually at your maximum capacity for what can actually be billed without burning out. Some believe that number is double that - more power to you.
(And yes, the real work week 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 at a little league game on Tuesday at 15:30).
That gives you 30,000 a week and well over 120,000 a month. When you work, that is.
Such an income lands you close to the top of the cake, with 1,320,000 DKK per year before tax. And we've even deducted a month for vacation.
Specifically, here you are among top 3% of the richest Danes.
To climb into the top 1% requires you to cross 1.9 million per year.
The average salary for a working Dane is 48,599 before tax, so your 110,000 DKK per month on average (1,320,000/12 = 110,000) is doing well.
But you want more. Because what would the business look like with 3, 4 or 5 employees who can all bill 37 hours a week? (They "only" have to execute and not maintain a pipeline - more on that later).
When you have more customers than you can handle, on the surface it's a no brainer.
Let's see what business looks like with your first employee
The hourly rate for your first employee is 249.50 DKK for a 37-hour work week with a salary of 40,000 DKK 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 need to bill just to hit breakeven.
You sell your time for 1000 kroner per hour and pocket the 750.50 in your pocket. Easy, right?
With five weeks of vacation per year, there are 47 weeks that can be invoiced. This equates to 235 working days per year (and an average of 19.6 days per month).
This gives a daily rate of 2,042, and with 7.4 hours of work in a day (37/5 = 7.4), the 249.50 becomes 276 kroner per hour.
On top of that, we also have 12 public holidays a year, so now we're down to 222 working days.
This gives a daily rate of 2,162, and thus an hourly rate of 292 kroner.
In the corner hides the social costs. This includes vacation pay, insurance, contributions to education and childcare funds, etc.
Depending on how much fringe falls off, the rule of thumb is that you should factor in between 35% to 54% on top of salary for social costs.
You're just starting out and not throwing dollars around, so let's just take the lowest rate for the sake of example. The 40,000 a month now becomes 54,000, or 648,000 a year.
This now gives a daily rate of 2,919 DKK and an hourly rate of 394.
This means that your profit is now down to 604 DKK per hour.
That's not bad, but let's see how the math works out otherwise.
The true cost of a consultant
We've assumed a 37-hour work week so far, but most agency owners will tell you that's not the number that is (and can be) billed out. Half an hour a day is easily swallowed up, resulting in 10 hours in a month, or something closer to 1.5 days.
The 19.6 days become 18, giving a daily rate of 3,000 DKK and an hourly rate of 405.
Then there are all the little things that get in the way. The plumber has to come and install thermostats, so you have to go home early and wait. There are sick days. Fairly reasonable things, but it eats into the billable hours.
If we set it low, this equates to one day a month, leaving 17 working days in a month.
This means that the daily rate is now 3,176 and the hourly rate is 430 kroner.
So far, we've assumed that you can keep your employees fully occupied throughout the year, but you will inevitably experience downtime between projects. All in all, you should expect to lose another 10% of time here.
The hourly rate is now 473 kroner.
If you want to retain your employees, you also need to set aside time for upskilling and training. That's an additional 10%.
The hourly rate is now 520 DKK.
In this calculation, we don't 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 arrangement, equipment for your employees, etc.
If we add the "little things" and put it at the low end, it's not unrealistic that your invoiced price should therefore be at least DKK 600 before you can withdraw anything for yourself.
And just because you could easily charge 1,000 DKK per hour, are you also able to sell newly graduated students for the same price?
What to do?
Growth is certainly not bad, but make sure you do the math with everything it includes before you decide whether to expand your business or you have a fatter ride on your own.
There are other things that come with having employees:
- Performance reviews (if you have a corporate hang) and performance reviews. You're not only responsible for the work, but also for the people. So of course, the staff needs to be nurtured.
- Hire and fire. 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.
- The customer pipeline can/should mathematically only get bigger with more employees, and it's your responsibility as CEO to keep it going. That in itself is a full-time job with employees under it.
- The administration of the business is growing. You either need to hire yourself out or do it yourself.
- Essentially, it comes with a whole lot of responsibility that steals creativity - and in many cases, the joy of running the business if you can't pay your way out of it.
Consulting isn't so bad, but it's an industry where the margins aren't as great as at first glance - at least if you want to be more than just yourself.
Unless your business has both the discipline and vision to build and sell a standalone product, you'll need to bill close to 100% of capacity before it's a lucrative proposition.
If 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 listed above. There's no negotiation about vacation, 4-day work weeks or gaps between projects to be covered by you.
If you subcontract, you'll also get a correspondingly larger bill per hour, precisely because you won't have any of the other problems.
Especially in the beginning, it can be a good way to scale the business until you've reached a revenue level where it makes sense to move from hiring consultants to hiring full-time employees.
It's not supposed to be easy, and starting something is always hard, but when you come out the other side, it's also for a completely different life.
We're rooting for you no matter what, but just make sure you do your homework so you don't leverage your risk unnecessarily and end up creating a 24/7 job when what you were looking for was more freedom.
(H/t Jason Bear, who almost 15 years ago delivered the original thoughts about the math behind the consulting business. It also had to exist with Danish conditions in mind).
