In a previous post, Jennifer Kruschwitz helps optics professionals to determine if consulting is the right career path for them. Here she provides advice for how to start your business once you’ve decided to make the leap into the consulting world.
You’ve made the decision: You want to be a consultant. If the opportunity to do a little “pre-launch” planning is available, the first thing to do is pay off any accumulated debt. It is often said that consultants make large amounts of money. That might sometimes be true, but the money often comes in waves. There may be times you are so busy that the money seems to be rolling in, but these may be followed by periods when it’s a struggle to find work.
Start from a strong financial position. Be sure that you have a financial safety net in place for the lean times. When things are going well, you should always be prepared to contribute a significant percentage of your earnings to your safety net.
Get your paperwork in order. You’ll need brochures to describe your abilities, invoices, business cards and letterhead. Stick to a budget: flashy items are expensive, so keep everything simple.
Learn to be a legal eagle. You will need a good understanding of contracts, nondisclosure agreements, and so forth. If you can acquire legal counsel before launch, get acquainted with key aspects of intellectual property and ownership law. Most contracts are very specific in that the customer retains rights to all of the IP that comes out of the consulting agreement. Make sure that the confidentiality of any information provided to a customer will not stop you from being able to work for other clients.
Determine your rates. Establishing an hourly fee is not as straightforward as you might think. One way to determine a ballpark rate is to take the amount of money you would like to earn in a year and divide it by the number of hours you plan to work. Or you could take the hourly rate currently being paid by an employer and multiply that number by two or three. Make sure your rate includes business costs as well as salary. These costs can include health care, life insurance, retirement, business overhead, legal and accounting fees and self-employment taxes. Whichever way you calculate your “worth” as a consultant, here are a few things to keep in mind:
• Research consulting rates for your field. Know what rate will allow you to maintain a competitive edge.
• Be ready to justify your rates. If you are an expert, your rates should reflect that expertise. It has been observed that consultants who charge too little for their services are not taken as seriously by clients.
• Be flexible and know your market. There may be times when, to win a job, you need to change your rates to meet the range specified in a given proposal.
Don’t forget the IRS. Keep your financial records well organized. Open a separate checking account for the business—it makes it easier to keep track of your earnings—and pay yourself from that account. Keep all receipts related to business activities (i.e., parking, tolls, travel, supplies) in a central location and, if you can, enter them in a database. If the business is run from the home, save utility bills, phone bills and so forth. There are specific requirements governing the deductibility of expenses incurred by home-based businesses, and the consultant needs to be aware of them.
It’s a good idea to have a tax advisor available to get things up and running. The Web site HRBlock.com has helpful tips for the self-employed. There will be self-employment taxes to consider in addition to income taxes. Estimated taxes on your consulting income must be paid quarterly to the federal and your state government. There are heavy penalties associated with not paying quarterly taxes on time and in the proper amount. Organized recordkeeping and timely tax payments will make tax time a relatively painless experience.
Consultants are a fundamental component of today’s business marketplace, but consulting is not for everyone. Once you decide to start a consulting business, there’s no doubt there will be challenges ahead. The ways in which those challenges are met and overcome determine the ultimate success of the consultant.
Jennifer D.T. Kruschwitz is an OSA member and senior optical coating design engineer at her own company, J.K. Consulting, Rochester, N.Y., U.S.A.