Math can trick you if you’re not being careful

Last week I talked a bit about Michael Hyatt’s book The Virtual Assistant Solution. His fifth of six points to help you be more productive asks you to do some math. It goes something like this.

If you make $50 an hour you save money if you outsource a task to someone that you pay $12 an hour.

Yup the math on that works out but it can also be tricky. Do you actually have the work to do at your $50/hr rate while the other person is working at $12?

Are you going to end up doing more busywork instead so then you really just losing $12 an hour with no real boost in your billable time at the higher rate.

What about taking taxes out of your $50/hr (probably 30% to be safe) and then business expenses (20% as I’ve discussed)

That leaves you with $25/hr actually retained. While it’s still higher than the $12 you might pay someone else it’s not as much higher as your original math might lead you to believe.

Math tricked me and I just lost money

The first 2 weeks of this month I contracted out a project so I could work for a client full time for the week and let another freelancer work full time for the week on another client.

I charge $3000/wk and paid $2000/wk. So that’s a $1000 spread of money I earned right?

Well not really since in this case I was paid in Canadian funds and was paying in US. That made the $2000 almost $2300.

And what about taxes?

Yeah that’s right the guy that told you to make sure you account for taxes forgot to account for taxes when he did the math.

30% of $3000 is $900 which left me with $2100 for the project. Out of that I paid $2300 to my sub-contractor. Even if I didn’t suffer from conversion my spread was only $100 which is not actually profitable at all.

My saving grace is that I have months of cash in the bank. The lesson sucked to learn but with my cash buffer it’s not really that painful. Most freelancer’s I know would struggle to pay themselves for the month after loosing $600 in a month.

When you do math to see if it’s worth sub-contracting out work or hiring a VA make sure that you are really smart about it. Make sure that you’re going to have work for yourself to do and not just waffle around doing nothing productive.

If you’re not careful the math can easily trick you and you can be paying someone else for the priviledge of running your business.

photo credit: blah blah photos…blah blah blah via photopin cc

4 Comments

  1. Chris Thurman March 25, 2014 at 8:17 am #

    I think your math is wrong (in a good way this time). The $2,300 you paid to your contractor is a business expense, thus not taxable. So you would have to pay taxes on the gross profit (sales – cost of goods sold) or $3,000-$2,300=$700. 30% of $700 is $210 so you still made out with $490 in profit.

    • Curtis McHale March 25, 2014 at 8:52 am #

      That may be so but I’m always going to save taxes on the full cost without trying to figure out what is not taxable. I think that when you have to start figuring out the ‘not taxable’ portion so that the project is profitable you’re just trying to be tricky which isn’t good.

      Yes I realize that it’s not really a ‘trick’ but if you need to do that to make a project profitable I don’t think you should be in it.

    • Fred April 7, 2014 at 10:19 am #

      Thanks, Chris–I wondered that as I was reading the post itself. I think Curtis’s point definitely stands (to me, the crux is, “Will your extra time actually be filled in with immediately available, paid client work?”), but it’s a relief to know that I’m starting to understand taxes.

  2. Emily Roy March 25, 2014 at 4:54 pm #

    Thanks for this post! I am so sick of simplistic math when it comes to VA’s.

%d bloggers like this: