There are few more gratifying accomplishments than making it on your own. But here's what you should keep in mind as you figure out what to charge for your work and how to budget for your future.
Perhaps, the greatest advantage of hanging out your own shingle or making that consulting or coaching business full time is the independence that comes with being your own boss. But the higher expenses and other costs come along with your newfound liberty.
The way we think is conditioned by our life experiences. If we've spent our life in a classroom, we tend to think as a student or teacher. If we've spent our work life as an employee, we tend to think as an employee.
Many new entrepreneurs talk-the-talk of the entrepreneur -- but their thinking is still grounded in their life as an employee. This can be deadly to their goals and aspirations.
Most employees don't think about where the money comes from to pay their weekly wages and benefits. Or how the cash must flow to meet next month's payroll. Or what accounts are becoming payable, or when tax deposits, rent, and loan payments are due. Or where the money will come from to allow the company to deliver a large order just received from its largest customer...
It's difficult for an employee to learn to think "outside the box" -- whereas the entrepreneur thinks only outside the box, because the box is the venture, and the entrepreneur needs to keep the box firm, clean, full and together.
New entrepreneurs must learn to continually question their assumptions. The decisions that are most likely to come back and bite them -- perhaps put them out of business -- are typically NOT the consequence of bad judgment or faulty reasoning -- but the consequence of applying perfectly sound judgment to wrong assumptions.
All in all, if you go out on your own, you may need to bring in up to 20% more than before just to break even, especially if you can't piggyback on your spouse's health insurance, says David Strege, a financial planner in West Des Moines, IA.
Entrepreneurs in New Jersey pay taxes of 27% to 59% of their net income, including federal, state and payroll taxes. As an employee, you pay 6.2% of your earnings (up to $106,800 this year) for Social Security and 1.45% of your income (with no limits) for Medicare, while your employer pays an equal amount. But when you say goodbye to being an employee, you pay the whole 15.3%.
Also, you'll need to budget carefully and pay estimated taxes four times a year. Miscalculate and pay too little, and you will owe penalties to the Internal Revenue Service and maybe your state.
Here are some steps to take before you hang your own shingle:
Work up a business plan to see how much you need to earn, where your income will come from and what your expenses will be. Understand that you will probably only be able to bill for half the hours you work during the week in your new venture.
Consult an accountant to help you set up your bookkeeping and other record keeping systems.
Decide whether you will do business as a sole proprietor, a limited liability company (LLC), a partnership or corporation.
Unless it's critical, forgo renting a fancy office or buying expensive equipment until your business is well under way....and....expect not to draw a salary until your business venture breaks even or better for three or four months in a row.
One bad assumption many new entrepreneurs make is: In this business, I must purchase (build, own, have rent, show, etc.) _______________.
Not if you can't afford them! And affordability isn't limited to just not having the money. If such acquisitions would seriously reduce your margin for errors, if they would decimate your life savings, or expose you to impossible debt, or put you into business with investors you neither know nor understand -- you'd better stop and think hard about whether they really are "affordable".
If you decide they're not affordable, that doesn't mean you have to give up. It just means you have to look for "better ways" -- ways to do what you want to do with what you CAN afford. And in the process, you just may discover that the new ways you find -- albeit though necessity -- result in better value -- including quality, service and/or price -- to your customers.
Sources: The Wall Street Journal, May 6, 2009 and "The Signature Marketing Series" at The Entrepreneur Network (TEN)