If you’re burning the midnight oil, make sure it’s actually making you more money than you’d score as a barista.
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If you’re not treating your side hustle like a business, you should be, and here’s the first step: You need to figure out if you have a profitable side hustle by calculating your side hustle’s margin.

Since you’ve dedicated valuable after-hours work to your side hustle, you want to make sure you’re actually making money from it, and profitability is one of the core metrics you need to watch to make sure that happens. After you take into account all of your expenses — including your time — how much are you really making from your side hustle?

The only way to figure that out is to understand your side business’ margin, and don’t worry, it’s not as complicated as it sounds.

Is my side hustle profitable? The basics

There are three numbers you absolutely need to know to calculate your side hustle’s margin that will help you figure out how profitable your side hustle really is.

  • You need to know how much money you’re bringing in from your side hustle.
  • You need to know how much you’ve spent on your side hustle, and how much you continue to spend on it.
  • You need to look at how much you want to earn per hour at a minimum. For this one, try asking yourself, “If someone offered me X for an hour of work, would I give up that hour of Netflix binging?” If the answer’s no, it’s too low and you need to aim higher with your hourly rate.

From there, your business margin is…

The total amount you make minus your expenses minus the number of hours you spent on it at your hourly rate.

Ok but like, show me the numbers

Here’s an example.

Let’s say you run an Etsy shop, and it brought in $400 in sales last month. You spent $50 on the cost of your materials, and you spent seven hours crafting and shipping out your products. If you’d like to earn $25 an hour, here’s what your margin would look like.

$400 in sales – $50 in materials – $175 in your hourly rate = $175.

Your side hustle actually earned you $175 dollars in this situation, even after you paid yourself for the time you spent on it. Congratulations, you officially have a money-making side business!

What if my hours are what I sell?

If your side hustle is a freelance gig, you might be sitting there thinking this doesn’t apply to you. If you are, you’re wrong.

Just because you sell your hours and expertise as your primary product doesn’t mean you get to opt out of thinking about the profitability of your side hustle. In fact, it matters even more because you can only sell so many hours. Time is a pretty finite resource, after all.

If you’re living that freelance life, even as a side hustle, the calculation stays exactly same. What this should help you realize is that your hourly rate for yourself isn’t what you need to charge your clients, since that total client rate needs to cover all of your expenses.

If that includes your laptop, your website costs and some industry conferences, you might need to up your rates to make sure you can pay yourself $50 an hour and cover all of your expenses.

Wait… what if my margin is negative?

So you’ve gone through all of the steps, looked at your side hustle finances and … oh no. You’re rocking a negative margin. Your total income from your side hustle doesn’t actually cover your hourly rate and your expenses, and you didn’t even notice.

Don’t worry. The first step is noticing because when you’re side hustling, it’s easy to miss that you’re not actually making the money you thought you were. An extra $400 is an extra $400, after all, and you could easily miss the fact that after you covered expenses, you would have actually made more money if you spent that time working at Starbucks.

That’s what usually happens when you’ve got a negative margin: Your hourly rate is what really suffers, and you end up making less than you should for an hour of your time. It’s especially important to watch out for since your side hustle is probably something you do outside of a regular 9-to-5. You don’t have unlimited time, so you want to make sure you price it accordingly, even to yourself.

Here’s what you need to do to improve your margins

If you’ve figured out that whoops, you’re undercutting yourself on your hourly rate, or even just that your margin isn’t where you want it to be to create a profitable side hustle, don’t worry. There are steps you can take to improve the situation.

Step one: Re-evaluate your prices.

If you’re in the position of setting your own side-hustle prices, whether it’s freelancing or selling stuff on Etsy, raising your prices to a level that’s profitable for you is one way to improve your margin. It’s worth checking out what your competitors or peers are charging, but at the end of the day, the numbers need to work for you. If that means being the premium-priced option, and you can back it up, do it.

Step two: Cut your costs.

The other side of the equation is to cut your costs. If you’re already rocking a low hourly rate, I don’t recommend making peace with paying yourself less, so take a look at the other expenses in your margin calculations. Which ones could you get rid of or scale back? Are there alternatives you could try that wouldn’t impact your process or your product?

At the end of the day, your side hustle is probably something you started to make a bit of extra cash. Knowing your margin will help you make sure that you’re not accidentally losing money on it and help you earn more than you would have by taking a part time job for someone else.

And hey, who knows: If you keep running such a profitable side hustle, maybe you’ll be in a position to hire help this time next year.

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Header image: Adobe Stock

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Posted 03.02.2017 - 01:10 pm EDT