Thursday, 5 January 2012

Have You Considered How Productive You and Your Company Are?

Back in August of 2007 I had a blog post about Making a Profit in which I briefly mentioned productivity. I would like to now expand on that and give you a glimpse of the effect of the lack of productivity on your expenses and probably also on your bottom line. 

For simplicity, let's start by assuming that you, as an event planner, are the owner of a sole proprietorship and the only salaried employee in your company. Let's also assume for simplicity that your total overhead is $24,000 (consisting mainly of rent and assorted office expenses). On top of that you would like to personally earn $70,000 per year. That means that just to break even, you will have to bring in $94,000 worth of business in the year. You are someone who charges by the hour, so your hourly billings will have to total $94,000. 

Let's make a third assumption, unfortunately not a very realistic one, to illustrate the point I am trying to make. Let's assume that you know you will get enough business to occupy you for 100% of your available working hours. What, you ask, are your available working hours? Well, to determine what your time is worth in the simplest manner, you must divide the annual company overhead plus your salary as above, by 235 (the approximate average number of working days per year, allowing for 104 weekend days, 11 statutory holidays, and an average 15 working days vacation), then divide the result by 8 (number of working hours per day, so the grand total of annual working hours is thus 1880) to get the final answer. In the case stated above, the hourly fee you will have to charge is $50.00 ($94,000/1880). 

Now, here comes the tricky part. Nobody can devote 100% of their working hours to planning special events. It is impossible. You have many other demands on your time, such as non-client meetings, medical appointments, sales calls, and especially if you are a sole proprietor, lots more. BUT - you still need to make that $94,000! How do you do it. The only way is to charge more than the break-even fee to cover your non-productive time. You should be able to get a pretty good handle on how much time you spend on non-client related activities. At the very least, keep a log of how you spend your time for a couple of weeks and you will get a reasonable estimate. Let's assume that you take an average of 2 hours a day for non-client activities. That means that only 75% (6 out of 8 hours) of your time can be devoted to actual paying clients. You therefore must raise your hourly fee to $66.67 (i.e. $50 per hour divided by 0.75).

That is not the end of it, however. If you are really honest with yourself, how much time do you waste on other activities that are ridiculously non-productive? I ask this because I have had the personal experience myself and they are insidious; they creep up on you until they eat away large portions of your day. Such activities as learning how to use a computer program as simple as Word or Excel by trial and error because you never took a course or didn't think it was worthwhile, chatting on the phone with friends about non-business things, surfing the web, spending too much time on social media that do not benefit your business, extending a coffee break, running inefficient meetings and letting discussions get our of hand, and the list goes on. Again, if you are really honest and decide to track these non-business activities as well as the other non-client business activities, you may very well find that your non-productive time increases to 50% of your day. If that is the case, then your hourly fee will have to increase to $100.00 (i.e. $50.00/0.50). 

You may now be getting close to the point that the market will not bear this fee, especially if you are new to the business. Also, your time will now be extremely compressed so that the work you do may not be of the quality needed to adequately service clients. What to do? Well, you can hire another planner but that adds to overhead so you need more business. You can work more than 8 hours a day but that can be very stressful. You can cut your own salary, but you need that to live. You can actually cut overhead by lowering your expenses or your rent or whatever, or you can be more productive by minimizing non-productive, non-business related activities. That is the best and the cheapest. So if you are in this dilemma, look very closely at how you spend an average day at the office and how productive you are. 

The other influence on your fee is, of course, the amount of business you have, which is what I conveniently eliminated by my assumption. If we bring that back into the mix, then the dilemma becomes much more complicated. After you have been in business for a few years, you can usually get an estimate of what your annual average amount of business is and that can help in determining your fee. If, for example, you have kept good records and can make an estimate that your annual business occupies about 50% of your time, then this must be factored into the calculation of your fee. If you do that, you will thus see that your fee of $100 per hour (remember, you are still very non-productive) will need to increase to $200 per hour i.e. $100/0.50). Well, this is pretty exorbitant so your solution is now not only to cut down on non-productive time but also to do one of a number of other things, namely generate more business as a first step and/or lower your salary expectations until you do generate enough business. 

I hope this helps you start to think about becoming more productive.