Figuring Out Your Indirect Expenses for Profitability

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After reading my post about the importance of not impoverishing your business, Renee wrote to ask: “Do you have a list of indirects you’d be willing to share? My mind is racing!”

For the purpose of figuring out your fee, Renee, the smartest thing to realize is that the amounts you’re using for the indirects are not necessarily “actual” numbers. Some of them may be; if you, for instance, know the actual cost of your phone service, you would use that for the exercise. But others are estimated, or budgeted numbers, born from the gathering of some info and a guesstimate. Something that would fit in that category is the expense for professional development. Offerings and trainings come and go, and there’s no way to know, for sure, how much you might want to spend on training and growth each year. But you can look at what’s currently interesting you and then guess, and use that amount.

Indirects: Expenses you can't pass on to a client; expenses that pay for your business needs.

So with that said, I do have a list. It’s in three parts.

Part 1: These are pretty straight-forward expenses to come up with

  • Advertising/marketing
  • Bank fees (fees your bank charges for your account(s))
  • Books/magazines
  • Dues/subscriptions (think professional associations and other groups, as well as referral services and things like that)
  • Gifts/cards (If you give business gifts, the IRS states you can only spend $26/year per person)
  • Internet services fees (anything online you pay for that helps you with your business. Ex: Dropbox, Carbonite, web hosting, etc.)
  • Insurance (business, health, life, disability, liability for yourself only)
  • Investments (retirement plan)
  • Licenses/permits
  • Phone
  • Postage/delivery
  • Professional fees (attorney, accountant, coach, insurance agent, computer consultant, etc.)
  • Printing (cards, stationery, flyers, ads, etc.)
  • Professional Development (ongoing training)
  • Supplies (computer and office)
  • Support (contractors (not subs—those should be billed to the client directly) who help you with your own business—maybe a VA, or graphic designer, etc.)
  • Third-party professional fees (fees you pay for the processing of payments your client makes to you online)
  • Travel

Part 2: These are expenses you would want to create only if you don’t take the Federal Home Office Deduction (because if you *do*, you get the deduction at tax time).

  • Office rental space
  • Electric and maybe water
  • Internet
  • Cleaning/Updates to the space
  • Insurance for the office

Part 3: These are expenses for things you replace now and then

  • Computer(s)
  • Tablet
  • Phone(s)
  • Furniture
  • Lighting
  • Rugs
  • Software/Online tools
  • Hardware

The way to create an amount for each is:

  1. Figure out what the cost of replacement would be today
  2. Add the tax, then add 15% for inflation
  3. Decided how many years, on average, you’d use something before you’d replace it (you might want to check if the government has any guidelines or restrictions on time lines for this)
  4. Divide the replacement cost by the number of years
  5. The resulting number is the yearly amount of money you must collect via your fees so that in X years, you can buy a new version.
  6. Add the yearly amounts together, and this is the number you use for the indirect expense.

One more note… 

It’s better to err on the side of too much than too little, and I often see VAs do the opposite. If you’re thinking, for instance, that $200/year is a good amount to budget for professional development, or that $500/year is right to budget for help from professionals, that’s exactly what you’re doing. $2000/year for professional development, when starting your business, is entirely appropriate (and it may grow from there, not decrease!). And, in generally, you probably can’t even have one agreement reviewed by an attorney for $500, so thinking you’ll spend that for all professionals in a year is silly.

So do the work and find out what it costs to work with people, and to buy the things your business deserves to have access to. And use those numbers.

It may feel odd, but it’s what’s right, and it’s what you need.

If you have other questions, feel free to leave a comment. You can also schedule an On-The-Spot coaching session with me to work through this, if you need more support with it. I’d be happy to help!