As a consultant, you’re offering your expertise as a more efficient way to do things. Follow your own advice, and hire the expertise you need.
Years ago a new consultant (and fellow engineer) was grousing about how much trouble he was having with a fax program on his computer.
My response was “Why spend time on that when you could spend that time promoting your practice? Just go buy a fax. ” Sheepish, he agreed.
Done things like that myself. It is an easy trap to fall into, particularly when starting out and the budget is tight.
Here are my recommendations for setting up your professional team. Over the years, I have acquired eight that have all proven valuable to my consulting business.
(1)Attorney — Seek out an attorney who works with small businesses. If you brother-in-law specializes in divorces, move on. Better yet, ask him for a recommendation. If you don’t have a BIL, ask business colleagues.
That is how I found my business attorneys (MN and AZ.) They handled incorporations and also acted as “statutory agents.” The latter means they kept track of the annual corporate filings, for a very nominal fee.
They can also be very helpful if you are threatened with legal action. Yes, it happens, but having your attorney respond often nips things in the bud. (The voice of experience…)
(2) Accountant — Like your attorney, find an accountant who works with small business. I strongly recommend a CPA, which is very helpful if you are ever audited.
In addition to preparing your taxes, your accountant can set up your chart of accounts, and can handle payroll reports, retirement plans, and more. Trust me, it is worth it, and it leaves you free to pursue your business.
Accountants are also a good source of referrals to other specialists like financial planners (how I found mine.)
(3) Banker — As you should establish a separate business bank account, so should you establish a business relationship with a banker. The latter is very helpful if you ever need a loan for equipment or a vehicle.
While I’ve been with the same bank for many years, I’ve seen individual bankers come and go. As a result, I suggest an occasional short visit just to stay in touch.
(4) Computer — Unless you are a computer consultant yourself, find someone who can advise you and bail you out when thing go awry.
For years, we used by late business partner’s son for our PCs. When I recently switched to Apples, I found a local Apple consultant who was worth his weight in gold.
He accomplished in two days what might have taken me two months. Money well spent, and he is available if I have additional questions or problems.
(5) Internet – Planning a web site? Or have one that needs upgrading? Hire a web designer to both design and maintain your site. If you are blogging, you still provide the content, but you web consultant handles the rest.
Just today, I had a small problem with one of my sites. A quick email resolved the problem. Who knows how much time I might have spent trying to figure out what went wrong?
(6) Insurance Broker — Sooner or later, you will need business insurance. As a minimum, you’ll need “General Liability”, and perhaps “Professional Liability” insurance. If you have a business vehicle or commercial office space, you’ll need insurance for those too.
While your personal home/auto/life agent may be able to help, I’ve found a broker very useful in locating specialized policies for business.
(7) Estate lawyer — Even if you are young, it is never too soon to think the unthinkable. A sad example is the entertainer Prince, who died suddenly without a will. Not only is there infighting among relatives, but his philanthropic wishes will likely never be realized.
Ask your business attorney for a recommendation — and then meet with him or her!
(8) Financial planner — Last, but not least, add this member to your team. Time flies by, and suddenly you are looking at retirement – or worse, wishing you could retire.
Although many people fancy themselves good investors, unless you are willing to put in a lot of time and energy, I suggest professional help.
My recommendation is for a fiduciary whose fee is based on your assets under management. That way there are no conflicts — both of you are on the same team.
I found my financial advisor through my accountant, and could not be more pleased. I often joke that even when the market crashed, he lost less that I would have lost.
But the losses were on paper, and thanks to his advice, I am now very well positioned in my retirement. Which allows me time to spend on the JumpToConsulting project 🙂
So those are the eight members of my team of professional advisors. An now, the standard disclaimer – this post is educational only and does not constitute professional legal or financial advice.
But do seek out that professional advice — you will not regret it!
P.S. As an aside, most of my advisors are in small practices themselves – often one or two people. I prefer that — they provide a perspective often missing from larger firms.
© 2017, jumptoconsulting.com. All rights reserved.
Time for a financial rant – based on a recent news article.
One of the first things to do upon making your JumpToConsulting is to set up a retirement account. Trust me — years later you will be glad you did. I am!
According to a recent on-line article by CNBC, about half of US families have ZERO retirement savings. Nearly 70% of adults have less than $1000 in retirement accounts. Not good…
So take this important step right away, even if you are moonlighting. You can do it as part of setting up your business bank account, with automatic transfers to savings.
Better yet, set up automatic transfers to an IRA with Fidelity or Schwab.
We did this soon after starting EMIGURU. We first set up Fidelity IRAs. Several years later, our accountant suggested a Keogh, which let us put aside up to 25% of our income.
The best part is that 25% is tax deferred. In the meantime, compounding does its magic.
We use a financial planner with who manages the Keogh (and other investments) through Schwab. Fees are based on a per-centage of the portfolio, which in my opinion is the only way to go. As such, he is a fellow consultant and fiduciary, which means (unlike a broker) he puts my financial interest first.
Why not do it yourself? You can, but I prefer having a professional manager, letting me concentrate on making more money at what I do best. The same reason I use an accountant, lawyer, and other professionals.
Here are some savings guidelines/suggestions from the article:
- By age 30, have your annual salary saved.
- By age 35, have twice your annual salary saved.
- By age 40, have three times your annual salary saved.
- By age 45, have four times your annual salary saved.
- By age 50, have five times your annual salary saved.
- By age 55, have six times your annual salary saved.
- By age 60, have seven times your salary saved.
- By age 65, have eight times your salary saved
Fidelity simply recommends salary saved by age 30, and ten times your salary by age 67.
When younger, I must confess I was lax about this myself. Fortunately, my business partner insisted we do this. We started at age 45 for me. Never missed the money, and after 25 years at 25%, we both ended up with nice nest eggs.
Now at age 70 and starting to draw on the Keogh, I’m so glad we did this!
It is never to early (or late) to start. Do it TODAY – whether you are consulting or not!
End of rant. Remember, Uncle Daryl wants YOU to find your freedom too!
P.S. Stay tuned. The long promised Newsletter is about to launch, along with a free white paper based on a recent magazine article. If you have not done so, sign up now.
© 2017, jumptoconsulting.com. All rights reserved.
Sooner or later you will be asked to cut your fees. The reason may be legitimate (budget constraints) or your client may just be testing you (particularly if you are new.)
Either way, do NOT cut your fees. Rather, cut the scope…
- If the budget is truly limited, this may salvage the project and allow you to still help your client, albeit in a more limited fashion.
- If you are being tested, it sends a message that there is no “fat” in your proposal. This testing tactic is quite common with purchasing agents, who are tasked to get the “best deal” for their employer.
Don’t fret about doing this, and NEVER buy the business. Your time is better spent finding a client who is willing and happy to pay for your services.
This is the voice of experience speaking. Prior to consulting, I was a sales engineer for ten years. On two occasions I spent considerable time to round up “demo” equipment at substantial discounts for some “needy” customers.
Both turned out to be very poor customers, demanding extra support and hand holding while grousing all the time. Not a good deal.
As a result, this lesson was learned prior to starting my consulting firm. Good clients appreciate your value, and are willing to pay for it. If they don’t, move on.
Another example. I once put together a proposal for an overseas training project, which involved several extra tasks. Upon submission, the purchasing agent asked for a reduction, so I asked for a target price. Based on that, I revised the proposal – no small task in itself.
The purchasing agent’s response was, “We like the new price but we still want everything in the original proposal.” My response was to withdraw the proposal. I no longer felt comfortable working with the client.
I found out later that the engineering manager who initiated the project was unhappy — but not with me. Apparently this purchasing agent had done this to other consultants. While I didn’t like losing the business, at that point I felt justified in my action.
The best part was some good business came in, which I would have passed up had I gone with the bad business. Karma anyone?
Finally, the late Howard Shenson advised setting your fee at the minimum amount you would accept. That way there is no fat, and if you lose the business, you don’t end up second guessing yourself. Good advice – I’ve followed it for years!
P.S. Now back in Arizona, and hope to be posting again on a regular schedule. It was the “Lost Summer” with my sister-in-law. Alzheimer’s is a cruel disease.
© 2016, jumptoconsulting.com. All rights reserved.
Just finished gathering my annual tax information, so taxes are on my mind. It gets shipped out tomorrow to my accountant, who (as a consultant) will do the financial magic.
Years ago my accountant advised me to keep good records and to keep them clean. One never knows when one might be audited. Sometimes it is purely random, and sometimes it is the result of an abnormal condition that flags your return. .
According to a recent news article, 1 % of IRS tax returns are audited. It is slightly higher for small businesses. It seems some business owners can’t resist the temptation to fudge the numbers, either through questionable deductions or hiding income.
My advice — do NOT do this! An audit can easily cost you thousands of dollars — fees, lost time, and lost revenues. And while you can deduct the legal/accounting expenses, you can’t deduct or recover lost revenues — they are gone forever.
Furthermore, once you fail an audit, expect to be audited again. I know one small business colleague who learned that lesson the hard way. His audits went on for several years.
More advice — use a CPA! Even if you can do the taxes yourself. Nothing like having a CPA (Certified Public Accountant) sign your tax return for credibility with the tax agencies. Or at least signal them that you have a professional tax advisor in your corner.
To keep the costs down, I keep my own books. Nothing fancy here — I used Quicken for years. Although a simple check register system, it can generate various reports. Such as the P&L (profit and loss) statement, which my CPA uses to prepare my taxes.
My CPA has helped in several other ways. Setting up a chart of accounts, sharing general business advice, filing other reports, and providing vetted referrals for insurance and financial management. It has been money well spent.
If you do get audited, don’t despair. I’ve been audited twice — once by the IRS, and once by the great state of Arizona.
The IRS audit was supposedly “random.”
The conversation went something like this:
Auditor – Which is better for you? To come into our office next Tuesday or next Wednesday?
Me — Neither. But can my CPA handle this? He prepared the return.
Auditor — Uh… yes… I guess that would work.
I suspect the audit was not random at all. But the issue got resolved, whatever it was.
End of audit.
The Arizona audit was supposedly due to high medical expenses one year.
The conversations went something like this:
Auditor – I need to verify all your medical expenses.
So I sent copies of all the bills.
Auditor – Now I need to verify all your insurance payments.
So I sent copies of all the payments.
Pretty sure the auditor thought I did not save these statements. I also included a list of expenses I had missed — a couple of drug charges, plus mileage for the various medical appointments.
I then asked if I should file an amended return to get money back.
End of audit.
Thanks to a CPA, clean books, and good records, I passed both times. And I didn’t lose any sleep over either one. In fact, it felt pretty good to put a stop to any fishing expeditions.
Keep your books clean too — it is just good business to do so!
© 2016, jumptoconsulting.com. All rights reserved.
It depends… If your clients come to your office, it probably makes sense… If you go to your clients, it probably just wastes money.
In the first case, a public office adds a level of professionalism, and keeps you out of trouble with home owners associations or zoning boards. But don’t get carried away – a modest space will do just fine for the solo practitioner.
In the second case, a spare bedroom works fine. You should, however, set aside a dedicated space for your office. Working on the dining room table gets old very fast. It can also be disruptive to family life.
Some people, however, simply need a separate place to work – regardless of client contact. And some need the outside human contact that an office brings. This is often true for those migrating from the larger corporate environment.
The most important thing when starting out is to conserve resources. You don’t need fancy digs with a prestige address — you just need a safe quiet place to work with adequate resources (desk, computer, telephone, file cabinets, etc.) You are selling your capabilities, not fancy brick and mortar.
Here are some examples I’ve seen over the years:
(1) Kimmel Gerke Associates (yours truly) – Since we almost never had clients visit us, my business partner and I set up separate offices in spare bedrooms.
While we once considered sharing an office, we were both traveling so much it didn’t make sense. Besides, the telephone and the Internet worked fine to stay in contact. And we both liked our twenty foot commutes.
Our “office managers” were our wives, so we truly ran a “mom and pop” operation. Not for everyone, but it worked very well for us.
(2) Advertising – A one person agency, this consultant leased about 100 square feet of space from a print shop. I used her services with good success many years ago after a misfire with a fancy downtown agency. Hire the person, not the office.
That was all the space she needed, plus the shop provided a phone line with a receptionist. It was mutually beneficial, as the print shop now could offer additional services. Besides, she did all her printing with her landlord.
(3) Sales consultant – Another one person firm, this friend leased space in a restaurant, which I found quite clever.
His office had a separate entrance on a lower walk out level. The rent was very attractive, as this was bonus income for the restaurant, and parking was never a problem. And he always had a place to take clients for lunch.
(4) Attorney – My estate attorney is located in building with other small professional firms.
He has about 300 square feet, divided into two rooms. The back room is his legal office, with the appropriate lawyer’s desk, credenza, and meeting table. The front room is the reception area with the requisite legal library, with a desk for his office manager (his wife.)
The office is nicely appointed, but not pretentious. His fees reflect the lower overhead too. I discovered him after being gouged by a large law firm with fancy digs and high overhead.
(5) Web design – My web designer is also located in a building with other small firms.
He has about 200 square feet with a couple of desks for he and his office manager (once again, his wife.) He has a back office in Nepal (where he grew up) so this space is modest but more than adequate. He recently became a US citizen, and is doing very well – the classic immigrant success story.
He started out working from home, but with the birth of two children, he got “kicked out” of his office. He is still close to home, but is not distracted by family activities.
(5) Consulting engineer – Now, a not so successful example story from many years ago.
When we started out as consulting engineers, this refugee from a large government agency told us we MUST get an office. After all, HIS office was located downtown with a prestigious address. He even chided us for working out of our homes.
Within the next year, he went bankrupt.
So, as you consider YOUR JumpToConsulting, do YOU need a public office? Weigh the decision carefully. Unless you are seeing outside clients (or you simply need the private space,) I generally advise against it. But if you do decide on a public office, I’ve shared some clever (and inexpensive) solutions.
Conserve those resources — you can always move to a public office later. Unless you are like me, and just love that twenty foot commute!
P.S. – I once asked a fellow consultant sitting next to me on a cross country flight where he had his office. He looked out the window, grinned, and replied, “Well, today it is about 30,000 feet over Denver…”
© 2015, jumptoconsulting.com. All rights reserved.
How much IS enough? The question still haunts me…
Here are three stories. All three affected my thinking. Perhaps they will affect yours.
The question of enough was posed by a fellow consultant several years ago. His wife had just been diagnosed with cancer, and we were talking after a professional society meeting. He was doing some serious introspection, and as a friend and colleague I lent an ear.
“How much is enough?” he mused. He had worked hard, was successful, and had enough in the bank. His immediate priority was enjoying whatever time his wife might have.
So he backed off on the business, and they went on some cruises. She responded well to treatment, and happily, she is fine today. But it did reset his priorities on what was enough.
My first encounter with enough goes back 45 years. My new boss hosted a Christmas party at his new house on a lake. It was a beautiful place in a beautiful setting. Being recently married, I thought how nice it might be to someday have similar digs.
Later, I thanked him for the party and complimented him on his new house. He smiled, and then offered some fatherly advice.
“Thank you,” he said. “It is nice. It makes my wife happy too. But there is a downside. We put all our money in the house, and as a result, we can’t do anything else.” He continued, “You are just starting out. Be careful about committing to a big fancy house.”
I decided that our modest house was enough. Each time we moved we stuck with enough. And today we have still have enough.
My next encounter with enough came 12 years later. I was working for a successful entrepreneur, who net worth somewhere around $50 million.
An old German who had escaped Hitler, he came to America and worked as an engineer. Following a dream, he started a business in a garage. A combination of working hard and being in the right place at the right time with the right product led to phenomenal success.
But he was still an old engineer at heart. One evening at a trade show, he hosted a bunch of us for dinner. After a few beers (after all, he was an old German), the subject of how much was enough came up.
He said, “You know, a couple of million is probably enough for most of us. How can you spend it all? After that, you are only keeping score.”
Sadly, he and his wife divorced on his way to his riches. Was it worth it? Not in my book.
Finally, how much is enough for you? Thanks to starting my own consulting practice combined with prudent living, today I can say I have enough.
P.S. Now back in Arizona. Had fun on our RV trip, but always good to be home.
© 2015, jumptoconsulting.com. All rights reserved.
Here is a reply I left recently at my favorite financial blog, Mr. Money Mustache. Pete, a fellow engineer, spent the last several years challenging and cajoling people to become financially independent.
He “retired” at age 30, and now does what he wants with no financial worries. Lives a nice lifestyle in nice digs, too.
His formula is simple — cut consumption and increase savings. When your income from investments equals your expenses — viola — you are now financially independent. He did it in seven years, and you can too.
So what does this have to do with consulting? You don’t need to be fully financially independent to make your JumpToConsulting, but you DO need some reserves. Assume at least six months with no income.
So if you are overconsuming and living pay check to pay check. you can’t make a JumpToConsulting, or any other jump. You first need to cut your expenses and change your mindset and your lifestyle!
One way to do this is to move to a small town. That is what my older son (the inspiration for this blog) did this year. Here is his story:
Don’t overlook small towns – particularly those about 100-150 miles from a major city.
After living in the city, my older son recently moved to a small town in Minnesota – population 5000. About 100 miles from Minneapolis, it is beyond commuting distance so it is no longer a suburb. But it still close enough for city resources (hospitals etc.) or a big city “fix” if needed.
They bought a nice house for 1/2 the cost in the city. The grade school and a park are across the street, and the high school is a few blocks away. The kids love it – they can bike all over town with their new friends. His commute is under ten minutes of country driving. His wife works in the high school as a teacher’s aide, and loves it.
They were concerned about leaving the city, but have been pleasantly surprised. Small town festivals –wineries — microbreweries — parks with uncrowded campgrounds. It may be rural, but there is still plenty to do. And the big city is still only two hours away.
Looking for a job change, he stumbled – almost by accident – on an executive opportunity with a small medical manufacturer. The company was delighted to get someone with his talent and experience, and they pay him accordingly. The school was delighted to hire his wife too. Big city wages with small town cost of living — how great is that? Plus the quality of life.
These opportunities abound, but you must seek them out. So if you are not yet financially independent, consider this as one way to speed things up — and enjoy the journey immediately. My son admits he never dreamed they would live like this.
A few more details on my son. After taking a company through a complex acquisition, he no longer had a job. Small thanks for helping grow the firm by 10x in a couple of years as their financial guru.
So he took his MBA in finance, his experience, and his proceeds and hung out his shingle as a consultant. The early discussions with him were the catalyst for this blog.
Although he was building the business, it was going slower than hoped. When one of his clients make him an offer he couldn’t refuse as the VP of Finance for a start-up, he jumped at it. Besides, like his dad, he has a love of small business.
But after a couple of years, it became obvious the start-up was stalling. Furthermore, there was friction with the founder, who was unwilling or unable to make necessary changes. (Been there myself.) So rather than wait for the axe to fall, he started a job search.
One interesting opportunity was with a medical device manufacturer in a rural community. As both he and his wife grew up in the city, there was some reluctance to purse it. Still, the job sounded interesting, so they decided to go in a new direction. So far, so good.
I’m proud of my son for taking that chance, and for working hard, like a good consultant, to make a positive impact on the world.
I’m also proud of his brother. A financial attorney in a large Manhattan firm, he recently took a chance and initiated a special project on alternate currencies. As their “Bitcoin-guru”, he too is working very hard to make a positive impact on the world.
Well done, both of you!
P.S. Thanks to the Internet and Fed-X, one can easily consult from small towns. And depending on your niche, you may even find plenty of clients right in you own backyard.
© 2015, jumptoconsulting.com. All rights reserved.
Here is a reply to a post by Michael Zipursky over at Consulting Success, where Michael discusses the pros and cons (mostly cons) of accepting equity or shares as payment for services.
Either way, both Michael and I do NOT recommend this.
I completely agree! Never took stock, nor did I ever agree to work for free on proposals, with the idea that I would get the business if the company won the project (sometimes suggested by defense contractors.)
If asked, I simply explain that I’m too small to carry anyone for free. Better to pursue paying jobs than to lose opportunities being tied up with freebies. Besides, if they really need you they will find the money.
While I have a soft spot in my heart (or maybe my head) for startups, I’ve avoided them and pursued Fortune 1000 clients instead. Even then I’ve been burned (bankruptcies), but only twice in 28 years. Great post!
As a new consultant, you will run into this sooner or later, particularly with smaller firms. Some are strapped for cash — probably not good clients anyway. Others may be testing you — assuming you are hungry for business.
Neither are a good deal. Better to focus your time on real paying prospects.
Remember, you are a professional, just like your dentist or doctor. Very doubtful they would go for this either.
© 2015, jumptoconsulting.com. All rights reserved.
Here is my reply to a post at Consulting Success regarding fees. Good info on this site — but with an emphasis on business/management consulting rather than on technical consulting.
As consulting engineers, we’ve used “project fees” for years. When quoting, we provide a budget and a general estimate for time. We use an internal hourly rate for estimates, but don’t include that in our quotes.
To me, hourly rates are useless. For example, if I’m getting a kitchen remodel, I don’t care what the contractor’s hourly rate is — I just want to know how much the project will cost. BTW, I’ve used that analogy on procurement people when asked about hourly rates.
Finally, we don’t bid “fixed fee.” Rather, we include a statement that “we will not exceed the budgetary estimate without client approval.” This gives us some room for contingencies or small changes. Clients and procurement people seem to like it too.
Hope this helps. I always appreciate Michael Zipursky’s insights.
Do you have questions of fees? Ask away…
P.S. Been a crazy week here, as Mary broke her arm. On the mend after surgery…
© 2015, jumptoconsulting.com. All rights reserved.
Do you treat all clients the same? That question was posed recently on Succeed, a small business forum on LinkedIn. Always ready to share my opinions, here is the answer I posted there.
Like so many have said already, we strive to treat all our clients with respect. But in reality, some clients are better than others.
So, we divide our clients into three categories: A, B, and C.
Everybody starts out on the “A- list”, regardless of income potential. Size doesn’t matter. We’ve had small clients turn into large clients and/or great referral sources.
— Those who pay promptly and are pleasant stay on the A-list.
–Those who pay late drop to the B-list.
–Those who pay REALLY late or are difficult in other ways drop to the C-list.
Since much of our business is repeat business, it helps us prioritize our responses. Most of our clients are a sincere pleasure to work with. As for very few who are not — well, life is too short to put up with them.
Some further clarification. Just because they look like a good client does not make them one. Over the years, we’ve had to move a couple of well known companies to the C-List. Usually the problem lies with the bean-counters, not our direct clients. But getting paid on time is important – and it shows appreciation and respect for your work!
Take care of your GOOD clients — and they will take care of you!
© 2013, jumptoconsulting.com. All rights reserved.
In my last post, I discussed how consulting eventually led me to Financial Independence. The primary focus was prior to making my JumpToConsulting. In this post, I’ll elaborate on things done at and after my break for freedom.
First, I put away a startup stash. This is key, as there is nothing worse than having to give up too soon because you’ve run out of money. In my case, I had enough for six months with no revenue, or a year with half revenue.
Although I was pretty sure I’d make it this time (after a false start a few years earlier), a safety net still made sense. That also made Mrs. JTC more comfortable, although she was behind me right from the start. Plus as an engineer, it is always good to have a Plan B.
As it turned out, we never really needed to dig into the startup stash. Thanks to all the plans and a couple of startup contracts, we ran in the black right from the start. And although I stepped out first, my business partner was able to join me in a few months.
Next, we watched our income/outgo like a couple of hawks. No fancy offices – we both used spare bedrooms in our homes. No fancy cars either. Neither were really necessary, as most of our business was on-site, and often out of town.
Each month we would review both our bookings and our billings. The latter is really important for cash flow. Unfortunately, clients often delay paying (particularly their smaller vendors), so you need to stay on top of your the payables.
We did spend money on necessities, such as collateral (business cards, brochures, etc.) but even then we did not overspend. No fancy multicolor brochures — just two colors (blue and gray) on gray stock. We did hire a graphics artist for a logo and typesetting, and it all turned out very professional looking.
After two years, we set up retirement accounts. By that time, we knew we were going to make it, and the income was more predictable. Our accountant suggested Keogh plans, which let us put away up to 25% of our income in tax deferred accounts.
To even out the personal cash flow, we both drew modest salaries – about 80% of our previous corporate salaries. This forced us to be frugal, and helped maintain a cushion in the business account for slow months. It also assured that the Keogh funds would be available at year end.
Any additional profits were distributed as a bonus. Since we were a Subchapter S corporation, these were not “retained earnings” so we paid taxes on the bonus. These funds were put into our regular savings/investments.
At our accountant’s advice, we eventually hired a “fee only” financial advisor. Good thing we did — when the market went sour, he minimized our losses. That lets us focus on making money, while he manages it. Like us, he is a professional who knows his stuff and does his job well. We consider it money well spent.
A word of caution! You need to discuss these issues with financial professionals – your accountant, attorney, and financial advisor (if you have one.) The laws are constantly changing, and unless you are a financial professional yourself, you need their advice. The last thing you need is to tangle with the IRS.
Finally, we didn’t win the lottery — our incomes were comparable with corporate salaries for engineers, plus a reasonable profit for our risk. It was the combination of regular savings in the tax deferred retirement plan plus self-enforced frugality that eventually led to Financial Independence.
You can do it too, and you don’t need to be a consultant. But you do need to exercise some financial discipline and planning. Trust me, it is worth it! Good luck…
© 2013 – 2014, jumptoconsulting.com. All rights reserved.
Since it is the Fourth of July, a rant on independence seemed appropriate. After all, it was my overwhelming desire for Occupational Independence that got me into consulting in the first place.
When I started my consulting practice, I was NOT Financially Independent (FI) — which I define as being able to quit one’s job and live off one’s investments. That came later. But the consulting practice put me on the path to FI.
There are two ways to achieve FI — save/invest more, and spend less. When your investment proceeds equal or exceed your cost of living — viola — you have become FI.
That doesn’t necessarily mean you quit working — but it does man you no longer need to do so. It happened to me after about ten years in my own business. One day, reviewing my finances, I realized I was there. Trust me, it is a great feeling!
With a wife, two kids, and a mortgage I had been locked into a job like so many others. As an engineer, the job was good and paid well. But having grown up less than affluent (my dad died when I was a teenager) I had learned to be frugal. For somewhat similar reasons, so had my wife.
No, we were not paupers. We lived in nice houses, but they were always less expensive — and ostentatious — than many of our peers. We drove decent cars, but most were used — and we drove them into the ground.
We took fun vacations, but many were with a used tent camper — no expensive ski trips or cruises for us. (We did go to Hawaii and Disneyland a couple of times — on free frequent flyer tickets.)
We remodeled, repaired, gardened, and generally had a good time. Because education was important to us, we sent both kids to college, where they graduated debt free. Savings, scholarships, part time jobs, and state universities all helped there.
We did stash other money away. At first, it was not enough to become fully independent. But it was enough to make my own JumpToConsulting in 1987. I figured the start-up stash would last six months with no income, and a year or more with any business at all.
As it turned out, the stash was more than enough. As an aside, I had tried this once before, without enough stashed away. After three months, I threw in the towel and went back to work at a regular job. The second time, however, I was better prepared (and wiser for having tried the first time.) More details here.
Starting any business (consulting or otherwise) does focus you financially. Resources are scarce, and you can’t squander them. You carefully evaluate purchases, and you make tradeoffs. You do NOT waste money!
Incidentally, Warren Buffet did the same thing — even as a child he often traded spending a dollar today for ten dollars in the future. I guess he has done OK.
On a smaller scale, Mr. Money Mustache (a fellow engineer) retired at age 30 by following the same practices. Actually, he didn’t really retire — he now just does what he wants to when he wants to, but with no financial worries.
Hop over to his blog to learn more –– lot’s of good practical advice backed up with engineering data and mathematical “rules of thumb.”
- I particularly like his Rule of 752 — save a dollar a week today, and in ten years you will have $752. For monthly expenses, use 173.
- Another rule – save 50% of your income — and retire in 17 years. Better yet, save 75% and retire in 7 years, which is what MMM did. Yes, it is doable – you just need to do it. (Kind of like dieting… down 20# here in the last six weeks… perhaps a future post?)
Finally, consulting is just one of many paths to achieve FI. By being financially prudent, living beneath your means, and stashing away as much as you can, you too can become Financially Independent.
Happy Independence Day! Start today, and you’ll get there a day sooner than if you wait until tomorrow!
P.S. See more details in the next post – Financial Independence – Part II .
© 2013, jumptoconsulting.com. All rights reserved.
Should you pay referral fees? That question was recently posted at LinkedIn on the Business Consulting Buzz group:
Referral Fees for Independent Consultants?
Interested in your opinions: As an independent Consultant, would you be willing to pay and/or receive referral fees?
Here is my reply:
As consulting engineers, we are concerned that referral fees might be perceived as conflicts of interest. As such, we do not accept (nor pay) any fees from the vendors serving our technical community.
When asked for vendor recommendations, we give clients at least two. If asked for our preference, we will share that with an explanation. Our vendors understand that no fee is expected, but we hope that the courtesy of a recommendation will be reciprocated.
We do, however, pay a referral fee to marketing partners for consulting business. These currently include a manufacturer’s rep (we are on their line card), and a training firm (we are in their catalog.) We also have agreement letters in place.
The percentages vary from 10 to 30% of the fee, depending on the effort. 10% is for a qualified lead that we pursue/close; 20% for a purchase order; and 30% for collecting the payment and sending us a check for our share. We pay referrals only when we get paid, and only on the fee (not expenses, as we do not mark up client expenses.)
Also, we don’t partner with consulting colleagues. We tried sub-contracting for a while, but it was more hassle than it was worth. When appropriate, we simply pass along leads with no strings attached. We make sure our clients understand that no money changes hands on referrals, and that we are out of the loop. In other words, we passed along a name — please make your own business decisions.
Hope this helps. Feel free to contact me. Been at this consulting gig 30+ years, happy to share, and still learning…
If you are on LinkedIn, you may want to join this group. If you are not on LinkedIn, what are you waiting for? LinkedIn is where the professionals hang out.
© 2013, jumptoconsulting.com. All rights reserved.
As a follow up to an earlier post on LLCs, reader C asked about fees. Here is my response:
Thanks for the advice on LLCs…
Another quick question — how do you go about setting up your fees?
Glad my advice helped. Still remember the questions I had many years ago and how others helped me.
Ah, fees. The number two question I hear, after “How do I get clients?”
I plan to do some detailed posts on fees, but here are some quick comments:
– Three popular methods are hourly/daily, project based, or value based. Starting out, you’ll likely use a combination of hourly/daily and project based fees.
– You will need to establish an hourly rate for internal use. It is also helpful when someone just wants a few hours of your time. For longer term projects, you want to move into project based fees.
Most people want to know a project estimate, not your internal billing rate. Think like a remodeler — how much will it cost to redo my bathroom? Not, how much do you charge by the hour?
– Incidentally, value based fees are great if/when you can get them. I think they are better suited for management consultants, where you can charge based on anticipated ROI.
This is a bit harder for technical consultants, which is where you would seem to fit. In those cases, most people want a solution to a specific problem, and want an idea of the overall project cost.
– Back to the hourly rate. You fee should include your salary, overhead, and a profit.
For a very quick estimate, take your existing salary and multiply by 2. Then add a profit of 20% — after all, you are in business and entitled to a profit. These numbers are typical of many businesses today, and should put you in the ballpark.
As such, this is what it would cost a client if they hired you outright (except you get the profit…) These figures can be refined, of course, but are a good place to start.
So, if your salary is $100,000/year, figure $240,000. Divide that by 261 days, and you have a daily rate of $920/day or $115/hour. This is a MINIMUM — if you work for less than this, you might as well stay employed.
Even if you are part time, you should shoot for this as a minimum, as the market already shows you are worth this to an employer. You can use this rate to estimate project costs.
– Another method is to ask others in your business area. Most consultants will share that info if they don’t see you as a threat. You can also often get that info through professional organiztions.
Once you get a range, shoot for the 1/2 to upper 2/3 point when starting out. You want to be neither too cheap nor too expensive.
Whatever you do, do NOT lower your rates to buy business. A client that buys solely on cost is NOT a good client, and often more trouble than they are worth. (Incidentally, that is a little experience speaking there.)
– If you can charge more, then by all means do so. You do need to charge a premium for short term projects, as your down time and marketing costs are higher.
For example, we do a lot of short term (week or less) projects, so we charge about double what long term consulting or contract engineers charge.
We also charge a premium above that for training projects. Occasionally I’ll get a pushback, but I point out that we “hit the ground running.”
– If you are bidding projects, you need to spell out very specifically what IS covered and what IS NOT covered. You can always do extra work, but only for an extra fee.
Along that line, if someone wants to negotiate, NEVER reduce the fee without reducing the scope. Sometimes people are just fishing around (particularly if you are new,) so hold your ground.
If they do agree to a lower scope, that is fine — maybe they truly don’t have the funds to do everything they wanted to do in the first place.
Anyway, hope this helps. Looks like I have the makings of another blog post here 🙂
Thanks for the response and all the great information. I’ve got a lot to think about and get prepared.
My pleasure. Stick with it – I’m sure you will do well. — Daryl
P.S. To my blog followers:
–If you have a quick questions, please drop me an email – which may get answered in a future post (disguised of course.) NO CHARGE for brief questions – they make great post fodder! Plus I simply enjoy hearing from my readers.
–If you want in-depth personal help, I’ve decided to add individual “telephone advising” for a nominal fee. See the new Services page.
–As an alternate to the above, I’ll also soon be including a FREE monthly group call-in session. (Watch my blog – still setting that up.)
© 2013, jumptoconsulting.com. All rights reserved.
Just finished reading this book. A great resource for anyone (including consultants and wannabe consultants) seeking financial freedom along with occupational freedom. This is the latest book by Dr. Thomas Stanley, author of the bestsellers The Millionaire Next Door and The Millionaire Mind.
Unlike too many financial guides with their special formulas on getting rich, Dr. Stanley’s book shows HOW others have already done it. For the past 20+ years, he has conducted extensive research on the lifestyles and behaviors of the affluent. As an engineer, I love it — don’t just give me a theory — show me the data!
His results are revealing. As it turns out, most high net worth individuals are not who you think they are. Surprisingly, your plumber or hardware store owner driving the beat up pickup truck may well be a multimillionaire — while your doctor in the McMansion with the Mercedes, (or even your corporate boss) may be worth a lot less.
The difference is in what Stanley calls balance-sheet affluence (BA) versus income-statement affluence (IA). It turns out that many who earn high incomes squander their wealth in high consumption (or as he calls it, hyperconsumption.) As a result, they fail to convert their high earnings into wealth.
- Among the worst offenders — doctors, attorneys, and mid-level managers. With their high incomes and high status jobs comes an expectation of high consumption. They often live beyond their means, with big houses, fancy cars, expensive suits, gourmet food and wines, and more.
- Among the best wealth builders — business owners (including independent consultants), engineers (yea my fellow geeks), and college professors. Although by no means poor, many of these folks practice frugal living, living below their means and investing the difference. One day they wake up wealthy — and not from winning the lottery.
Stanley’s arbitrary criteria for affluence is a million dollars in net worth (assets minus liabilities). He likes to exclude non-investment real estate, since as we have seen in the past few years this represents illusionary wealth that can quickly evaporate.
The real question, of course, is how long can you live off your assets and their passive earnings? With proper management, a million dollars in assets can last a LONG time…
So what does this have to do with consulting?
- First, you don’t need a million dollars to start a consulting business. You do need, however, to have your finances under control. That means minimal debt combined with a frugal mind set. A modest mortgage is OK, but big car payments and lots of credit card debt are NOT OK.
- Second, if you are not in a solid financial condition, I suggest fixing your financial problems prior to making a JumpToConsulting. And when you do make the jump, you’re not likely to get rich right away, but done right you can make a decent living and untimately create your own financial independence.
- Third, once you do make the jump, keep the frugal mind set. Don’t put your money into a fancy car or office to impress clients. Rather, put your time and money into building your business through diligent sales, marketing, and delivery of services. Continue to live below your means.
- Fourth, as soon as you can, set up a Keogh or other retirement plan, and treat it as a necessary business expense. If you set aside 25% of your W-2 income every year, it forces you to live on 80% of the full income (plus that 25% is tax deferred) As Stanley points out, the 80% method is a great way to build wealth in a relatively painless way.
For those of you who love stats and examples, here are just a few:
- Only about 3.5 % of the US population has a net worth of over a million dollars. This translates to about 3.5 million households.
- Only about 0.1% of the US population has a net worth of over ten million dollars. And only a tiny fraction of those are sport stars or celebrities. According to Stanley, you are more likely to catch malaria in the US that to have a net worth over ten million dollars.
- Most true millionaires (not the pretenders) live in houses that cost under $400,000, drive Toyotas or Hondas, wear Timex or Seiko watches, and have never paid more than $400 for a suit. So much for emulating the lifestyle of the rich and famous.
Finally, why did I include this in a blog on consulting?
Because Uncle Daryl Wants You — To Be Free. Starting and building your own consulting practice is one way to do this, and I wanted to share my experiences and advice here. There are a multitude of other ways, but virtually all of them share a common theme of managing your finances wisely to create your wealth.
And in case you are wondering — yes, my wife and I are financially independent. That was not the case when I started my consulting practice 30+ years ago, but thanks to working hard, a successful practice, and frugally living beneath our means, we made it. You can too!
Stop Acting Rich… and Start Living Like a Real Millionaire
Thomas J. Stanley, Ph.D.. — Wiley — 2009
Web Site: http://www.thomasjstanley.com/
PS – Interested in more of this? Check out Mr. Money Mustache, a blog I just discovered on financial independence by a fellow geeky engineer who retired eight years ago at age 30. Married, with a kid no less, so it can be done by a family — not just single persons.
© 2012, jumptoconsulting.com. All rights reserved.