Sometimes when you see those big checks independent consultants get, it may seem tempting to leave an office position and strike out on your own.
Before considering such a move, it pays to take a look at the real money issues involved. This may also help you understand those seemingly amazing hourly rates.
Switching to consulting may bring real money surprises, and you want to discover them before starting your own business. Here are some tips to help ensure your budget and revenue match your expectations.
- Do you want to replace your salary? Use this simple formula to determine your current hourly income. Take your annual salary and add the benefits you're walking away from, such as health care, disability insurance, and seven-plus percent for your employer's share of social security (yes, you do pay for that when you're on your own). Do you have a 401k with matching contributions? Include that too. Check your paycheck info to see if there's anything else you forgot. The final number will generally be 35-40% of your salary. For example, if your salary is about $70,000 annually, you're actually earning about $100,000 per year.
To get your hourly rate, divide $100,000 by 2,000. That's the number of hours a salaried person works in a year based on 40 hours a week and two weeks' vacation. The final number is your real hourly rate in your current position. Now double that. Why? Because for every billable hour as a consultant, you will have at least another hour used in selling, administration, meetings you can't charge for, and travel. So if you're earning $70,000 a year you need to charge a minimum of $100 an hour to replace your current real income.
Some consultants spend two extra hours for every billable one. And don't forget the time you spend checking your personal email and socializing on the job — no one's paying you for those anymore. Also there's no pay for sick leave. If you don't feel you can charge clients that final hourly rate, you may want to think twice about going out on your own.
- When you're determining that rate, take a good look at the market. Are there pricing standards in your field? If so, unless you have something original enough to make customers want to pay a premium, as a starting consultant you cannot expect to command more than low average at best. This doesn't hold true if your work experience is exceptional. (By exceptional I mean VP of Marketing for Apple or Human Resources for Disney.)
- Be sure to factor in the costs for equipment and supplies. No more walking down to the copy room for extra paper for your printer. No more printers, for that matter. Expect to replace computer equipment every three years. Get estimates for the design and printing of professional business cards, letterhead and marketing materials. You can't skimp on them — those pieces of paper represent you when you're not there. Favorite pens? Cell phone? Internet access? Website? All these come out of your pocket before you have your first client.
- Be realistic about your initial potential as a consultant. How long will it take until your available hours are filled with paying clients? Will you ever reach your "consulting capacity?" Like a hotel that only has so many rooms per night, you have only so many hours in every day. There's nothing you can do to retrieve those unsold hours later.
Have you thought about all of these issues? If not, do so before moving into consulting. When you do decide to make the move, jump in with both eyes open and you'll give yourself the best chance of success.
Matthew Toren is an Award Winning Author, Serial Entrepreneur, and Investor. He Co-Founded YoungEntrepreneur.com along with his brother Adam. Matthew is co-author of the newly released book: Small Business, Big Vision: “Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right” and also co-author of Kidpreneurs