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Want to form software development agency

Long story short: I've been working in a full service web agency for 4 years, then 3 years as a freelancer. Since I am in a let's say popular geographical location for outsourcing, I get a lot off inquiries on linkedin and other networks for project development. As the title says, I am looking to start my own agency for software development, and offer it as service. Do you have some good literature to point me into right directions. What I am mostly interested about is the economics part: - how to form my price - what expense to calculate in And mostly stuff about pricing. But also, i assume i skipped some other stuff as well, so feel free to mention what you find appropriate. [–]tenantreport 8 points 2 years ago be ready to make 50 cold calls a week while you're getting started. Have a bookkeeper come in at least once a month to sort everything and track daily expenses Be clear whether you're hiring contractors (recommended) or taking on employees (not recommended, at least at first). Have a lawyer write a standard contract that details the work's nature. Is it work for hire (your client owns the code), or do you retain the copyright? Or some hybrid where you give the client a non-transferable license to use your proprietary frameworks/code for a single project? Use version control; that will help with legal problems down the line. Your contract should be clear that new features require a change order and that it will cost money. New shops often let clients railroad them into adding "just a minor feature," which doesn't exist: you should have test cases, QA, documentation, and version control for everything you do Get a good idea of the tax situation in your area. For example, you will have to take 40% off the top for corporate taxes alone. permalinkembedsavereportreply [–]TransitUX 2 points 2 years ago Following for Dev info permalinkembedsavereportreply [–]LiquidSolidGold 2 points 2 years ago Figure that whoever you hire as your first number of employees will only be able to do 50% of what you would be able to do. Determine how many developers you'll need in the future, when you have multiple clients or projects. Figure out what their salaries will be. Figure out any costs you're going to have each month, figure it out for the year. Determine how much you want to pay yourself. Once you have the total cost there. TRIPLE the cost. I'll just us some basic numbers. Imagine you figure your total costs are $100,000 a year. (Or whatever currency you use). You'll triple this to $300,000/year. Then, if you work 40 hours a week, this brings your hourly rate to $144/hour if you figure (at least in the US) you work 2080 hours a year. Why this number? Well, you're NOT going to have 2080 hours of work for each developer, it will be much less. You need to cover costs when you don't have revenue coming in, so the price needs to be high enough to cover the costs during the dry spell. Or, if you are in India, you can just do what the Indians do. Set your price at $15-30/hour, then when a customer has something that will take 2 hours at $150 to do a good programmer to do, you tell them it will take 10 hours and be delivered in 3 months for $30/hour which still comes out to basically the same but takes longer. (A little sarcasm here). permalinkembedsavereportreply [–]komasinski [S] 1 point 2 years ago Great, thank you so much for the list. When you say TRIPLE the cost - is this multiplication based on some theory or just your suggestion? I am really curious about this part - how to calculate everything as precisely as possible. permalinkembedsaveparentreportreply [–]LiquidSolidGold 3 points 2 years ago It's just my personal rule of thumb and that is the minimum. But it's pretty accurate. You can get complicated and try to figure it out, but if you just use this rule, it works out pretty well. Determine what you want to pay yourself, determine what you will need to pay anybody you hire. The hardest part of your business will be the employees. This will be your biggest cost. Determine any other costs. And costs are always higher than you think they will be. With your first employee, you will work harder. Not only will you be paying them, they'll get less done than you think they will, and you'll need to coach and mentor them which will take up a lot of your time. When you hear about business owners working insane amounts of hours, this is part of the reason. If you spend 3 hours a day with your employee, you still have to get your 3 hours work done. So if you think it will be an 8 hours day, no, it will be 8 + the 3 you need to make up. To factor the cost of hiring your employee, just take 3 months of their salary and use that as a ballpark to get an idea on the cost. Of course, you can go figure it out by calculating your time, opportunity cost, and as you grow, the cost of advertising or using job boards that want $300-1500/month to post a job opening. And all the time you'll spend in interviews, replacing somebody who quit, etc. So here are some basic numbers. Let's say you want $100k/year for yourself since you're getting started. Maybe you find somebody for $100k to help you as well. Let's just look at the employee, they are $100k. So, you want to shoot for $300k in revenue. Now let's get into some more math. With payroll tax, the cost to hire, etc. The employee actually costs you about $120k. You also have to pay for payroll and any benefits. When I first started my business, my cost for professional services, some attorney fees, etc., ran me $27k. But let's say you can do it for $10k. You're at $130k in costs now. So at $300k, this leaves you with $170k. But then you learn your employee is not as productive as you thought, so even though you set your pricing based on 3:1, you learn the actual revenue generating is closer to 2:1. Which makes you glad you based your operating numbers on 3:1. So, you now actually only have $200k in revenue and $130k in costs. This leaves you with $70k, which is short of your $100k salary goal. But, you are a working business owner and you're able to manage the employee and business and squeeze out 50-80% of a productive use of your time, because a lot of your time will end up on admin and other tasks that do not generate revenue. So, you roughly break even and at the end of the year, you show a small profit for $80k after all salaries and expenses are paid. Congratulations! But, $80k is NOT enough money, you're taking on $300k in risk to only get $80k which can be wiped out quickly! I know, because we had a couple month period one year that cost me $254k. So I'm glad I used this method and have money to cover costs while we waiting for things to turn the corner. Oh but on that $80k, since on paper your income in your wages and company profit, the IRS considers your income to be $180k. This puts you in the 32% federal tax bracket. Your W2 wages are good to go, you need to pay tax on that $80k. Maybe you have state taxes like I do, which is about 6% and then local taxes which for me is 2.75%. This is almost 40%, it's a but less because of progressive taxes, but let's keep it simple. You actually only have $48k left now. So now you're operating a business with salaries alone running $240k/year with payroll taxes/benefits factored in. This is $20k/month. This doesn't include buying equipment and other things you'll need, online advertising, all the $5-8/mo tools you'll use. So you work all year long and starting Jan 1, you have enough in the bank to survive a max of 2 months. That's pretty risky! And let's say you have a dry spell that eats up that money. And what do you do if your key employee quits after you're used that money to pay them and yourself? Or, what do you do if your employee quits right in the middle of a big project? What happens if a year in, there is a high demand for what your employee does and they start getting job offers for $140k instead of the $100k you are paying? And don't forget, the longer your employee works for you, the most they are worth. So you're not giving them 3% raises, you are giving them pay adjustments. This taps into your $40k profit from the previous year even more and means you'll have even less profit the coming year, unless your business is growing and you have more employees. But hiring more employees eats up more of your time. So you hire your 2nd employee. This adds another 3 hours of tax on your day. Do you then work 14 hour days? Or do you cut back on your actual work day and drop it from 5 hours of actual work to 2 hours of actual work? Also, this cuts into your profit even more now too. You are more likely to see a decrease in profit until you get to about 7 or 8 employees. From 1 employee to 8 employees is referred to as the valley of death and is a major reason most companies do not make it 5 years. Hope this helps. It's hard work!

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