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Consulting 101: Replacing Your Previous Income or How Many Proposals Do I need to Write?
The ultimate goal for every single consultant I've ever met is always the same: Control their destiny while replacing their previous full time income. At the end of the day we all have to eat and there's nothing wrong with that. Yes, we'd like to make even more money but that's pushing it (at least at the start). So let's examine the math in the context of a consulting partnership with the following criteria: So, at first glance, in order to replace their prior incomes, S & G need to make $155,000 + 10% or $170,500 -- correct? No. Not at all. And here's why: salary isn't your "fully loaded cost". The term "fully loaded cost" means "The total cost to employ person X including Salary, Free Soda, Insurance, Vacation, etc". Fully loaded cost is usually expressed as a percentage of salary and it's more than you think when you add it up (I'll save the actual numbers for another essay). For a large company, fully loaded cost can be as much as 50% to 100% of salary. For a startup it tends to range at 25% to 40%. So, how much business do our two consultants need to handle to replace their previous income? Here you go: $170,500 * 1.4 or $238,700 I used 40% because, when doing any kind of business forecasting that affects you personally, ALWAYS MAKE COSTS AS HIGH AS POSSIBLE AND PROFITS AS LOW AS POSSIBLE (sorry for shouting). Everyone wants to be optimistic but the real world isn't always so kind. How Many Proposals Do I Write?Ok now. With $238,700 (I'll call it $240,000 from now on to make it simpler) in required revenue the question becomes very, very simple: How many proposals do I have to write this week / month / year? Well, we talked about your pipeline earlier and this ties back to that. Here are the questions to ask yourself:
Now, here's the math again. With a 20% close ratio you are closing 1 in 5 proposals. To match your previous income then you need to have total bids out of:
If your close rate is 50% then you need to have total bids out of:
Now, if your average bid is $20 K taking the average close rate of 20% gives us:
I bet you never thought that when you left your day job you'd be writing 60 proposals a year, did you? Here's the other set of numbers. Again, if your average bid is $20 K taking the average close rate of 50% gives us:
ConclusionThese numbers are probably scary to people. They shouldn't be -- what these should do is give you a framework within which you can build your business. And, if you've ever wondered how big, successful companies keep meeting their financial numbers quarter after quarter, it's because they know this kind of stuff perfectly. Most small consultants don't have a good handle on this and I hope that this makes it a bit more clear.
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