Thinking about Mistakes of Newly Self-Employed
Steve Pavlina recently blogged about top stupid mistakes of the newly self-employed. His list includes:
- Spending too much money
- Spending too little money
- Being too formal
- Failing to focus on value creation
- … and several more
To his list, I would add another mistake: Confusing business revenue and personal spending money. It’s probably a truism, but business (and business revenue) tends to fluctuate. It’s tempting to look at a successful month and extrapolate how much moolah you’re making. That’s a sure recipe for desaster, though.
I’m a bit more conservative in my approach. I budget for my business. I have an overview over how much I spend. You should budget far enough ahead to be able to take into account the payments which don’t come very often but which amount to a sizeable sum. In Germany, and with the kind of organization I’ve chosen (a GmbH — similar to a Ltd. or LLC), you need to file your annual tax returns and income reports. This costs money if you want it done right. And I want to make sure it’s done right, so I’d rather pay someone to do it who knows what he’s doing.
Project your revenue, be conservative, make a budget for the year, allow for some dips in the income curve and budget your salary or spending allowance or whatever you want to call it so that you leave enough of a buffer for those meagre times when you’re between contracts or between projects. Be reasonable in your salary or allowance. I’d rather have a regular payment (even if it is just from one bank account to the other) that I can do my personal budgeting with, than having my income go all over the place and having to constantly and consciously readjust my spending habits.
For this, as with a lot of other managerial tasks, Excel (or OOCalc if, like me, you’ve got all your machines on Linux) is your best friend. Draw up a quick spreadsheet with a “projected earnings” column, an expenditure column for your personal salary, one for each of your regular business expenditures, as well as one for irregular but foreseeable costs (such as my annual tax reporting costs or the new notebook or desktop PC). Don’t forget to take into account holidays and other days off when filling in the projected earnings column. You simply cannot work sustainably through the whole year. Having a daily consulting rate of 1000 EUR does not equal a salary of 365 kEUR per year! Add to your spreadsheet a “totals” columns and a quick chart and — hey presto! Your own cash-flow forecast diagram. The line should never go into the negative. It really is as simple as that.
Just don’t forget to update your chart regularly. And don’t forget that every earnings forecast figure you enter is a promise to yourself to work towards acheiving this figure.
As always, YMMV. Caveat Emptor. Batteries Not Included. May contain traces of nuts.
Tags: business; self-employed; budgeting; management
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