I have spoken to graduating students in various universities in the last few years, and I often open my talk by asking the question “Who wants to work for someone else or work for themselves?” And, you guessed it; most people want to work for themselves.
I’ve met many employees over the years with the same thoughts. Hey, if people didn’t, there’d be no such thing as small business!
However, working for yourself is easy to contemplate, not so easy to actually follow through. I’m certainly not against it, otherwise I wouldn’t work for myself, however I believe it is very important you understand what you’re getting in to.
You need a great amount of persistence, a huge amount of self-belief, amazing self discipline (that’s right, think work instead of golf during 9-5 please!) and the gift of being able to communicate well. On top of that, you need to be able to work 12-15 hour days for less pay than most of your friends (especially starting out), be able to lead others, and be able to balance the books (or at least understand a Profit and Loss statement).
Oh, and you should be good to very good at what service you’re trying to sell.
Why do I say the â€˜real work’ bit last? Well, for most freelancers and even small teams of two or three, administration, sales, project management, accounting, networking and everything else tends to take up as much if not more time than your actual work output.
If you thought it’d be solid days of XHTML coding or Photoshop fun, you may want to reconsider.
Has that scared you off? If not, consider that for every hour you work, there’s likely to be an additional hour of sales/project management/filing or just plain scope creep. So, if you’re thinking â€˜Bugger that $20/hr job, I’m going to go work for myself, and charge $45 and live the life of luxury!’ you are in for a rude shock.
Let’s say that 52 weeks a year, minus two weeks of holidays, two weeks of public holidays and a week of sick leave or plain old lazy time, and you’re down to 46 weeks. That’s 230 days you have in the next twelve months, or 4.4 days per week averaged out. Make it 33 hours to be safe, if we worked just a comfortable 38 hours to start with.
OK, now lets just say 10% of your time is for selling, another 20% for accounting, driving, dealing with suppliers, etc and another 10 percent just for leeway. That means you have 19.8 hours left a week of potential billable hours.
Now $45 an hour multiplied by 19.8 hours a week comes to a whopping $891.00 – sounds like a fantastic weekly wage for most people. Well, we forgot about GST on that, so let’s take that 10% off, so we’re left with $801.90 a week ($41,698 annually). Now, let’s take the income tax of $161 a week (as per current ATO tables), and we’re down to $640.90 net.
OK, now a few additional things you’ll need to fork out for in order to run your business – all of which you’ll get somewhere between none to lots back on claims (but speak to an accountant about that, not me);
- Vehicle expenses (petrol, oil, tyres, servicing, tunes, depreciation)
- Software Licensing (you know, $2,000 here, $2,000 there…)
- Superannuation (currently 9%)
- Insurance (Home/Office, contents, directors, health, loss of income, public liability, professional indemnity)
- Stationery (business cards, letterheads, with comps slips, etc)
- Hardware (PC’s, Macs, scanners, fax machine, phone system, answering machine, alarm system, modem, router, etc)
- Consumables (printer ink, paper, staples, rubber bands, envelopes, folders, pens, pencils, etc)
- Furniture (desks, chairs, filing cabinets, boardroom tables, funky prints on the walls, etc)
- Internet related costs (domain names, hosting, bandwidth, internet access, etc)
- Other items (stamps, phone calls, faxes, phone rental, etc)
- Home Office or Office (lease/mortgage, etc)
- Professional Services (accountant, lawyer, collection agents, company auditors, etc)
- Plenty of other (expensive) things
Note: These aren’t all of the potential expenses either; they are just some I could think of off the top of my head. Some may or may not be required for your situation.
So, that $16.86 net pay per hour we calculated above, minus these expenses, should leave you with just enough to buy your lunch once a week, give or take a beer or two, depending on your accountant and how willing you are to work hard.
If, after reading all of this, you are still keen to go it alone, then my advice is to read every small business website you can find, join the local library and get as many related books as you can, and if you’re lucky enough to be in Australia, search for your local Business Enterprise Centre or State Government run Small Business Development organisation.
Interrogate every person you know who works for themselves on everything from taxation to marketing to how to get time to exercise, and then once you feel you are the full bottle, then by all means, jump into it.
Just don’t forget to continue learning, stay motivated and enjoy the ride – it really is fun, if you’ve got the temperament! Enjoy!
Photo: Firm tofu, sprinkled with Cumin and Coriander, about to be cooked for vegetarian stir fry.
28 March 2006 at 3:38 pm
The majority of people I talk to in IT freelance/consulting assure me that a good rule of thumb is to take whatever the hourly rate is (to the client) and divide by 3 – that’s effectively what you can pay your employee (or yourself, in the case of a small business) once you take out all of the overheads.
$45 / 3 = $15, so your example confirms this.
Sure, freelance work sure is fun (and hopefully fulfilling) but you’ve got to be on top of it. Don’t even go into the whole stable income / “will I be able to feed and house myself next month” issue.
29 March 2006 at 6:39 pm
Good idea Jason, that’d be an easy way of roughly estimating.
3 April 2006 at 12:59 pm
… not to mention the peaks and troughs of pay. I’d recommend scrapping some of that measely $16/hr and put it away in a savings account, because not all clients are as quick to pay up and you might like and having a checque coming in doesn’t pay the bills until it clears…
3 April 2006 at 9:37 pm
All great advice Miles, Myles and Jason. I’d probably add that if you’re going to start a business (less so for freelancing) be aware that it inevitably takes a while to get things running — maybe two or three years before everything (work, stress, money) settles in to place. By then you should know what works, which clients pay on time, and what types of work are worth chasing after.
That’s two or three years of hard slog, few holidays and probably a reasonable dent in your social/family life. Be prepared for that. Save up some money before you start and take a at least a few days break so you can kick things off with reserves of both money and energy.
Starting and running a small business is an ongoing (and definitely valuable and fulfilling) learning experience. Just be prepared for some “fun” along the way. It’s called a ride for good reason – there’s ups and downs…
12 April 2006 at 10:41 am
Miles, this post is incredibly well-timed.. just the sort of stuff I need to hear. And this wisdom even comes with tofu – it’s like you wrote it just for me. Awesome.