6
The Cost of Doing Business

Error is only the opportunity to begin again, more intelligently.

Henry Ford

Mateo was having a beer at his favorite microbrewery when his friend Josh pulled up a stool. “Man, what happened to you? You look like you were rode hard and put away wet!” said Josh. “You look like you lost your best friend. What’s happenin’?”

“I feel like it. I just left my accountant and she is not happy with me.”

“What did you do? Embezzle from your own company?”

“Very funny,” Mateo replied. “Well, you know how those accounting bean- counter types can be. I guess I missed a few details and she is uber upset. She just went on and on! But, man, I’ve been so busy getting clients and then delivering on the proposals. I barely have time to think. Thanks for asking.”

“What are friends for? Let me grab a brew and you can tell me all about it.” Josh left and returned with a couple of beers for both of them and a platter of loaded chips to munch on and said, “Okay, so how did you irritate your bookkeeper?”

“I don’t even know where to start,” said Mateo. “I guess it all began when I walked in with a greasy McDonald’s bag in which I had been keeping my parking receipts, airline tickets, and other stuff she told me to save. I started saving stuff about six months ago. You know, stuff that would be deductible. I guess she wanted me to put them into some kind of a filing system and she wasn’t very happy when I couldn’t tell her what each receipt was for that made it a business expense. I didn’t have a mileage log either.”

“Yeah, well, you probably should have at least found a bag that wasn’t greasy,” snorted Josh. “What else?”

“Well, I couldn’t tell her if all my clients had paid their invoices—something about a paper trail,” said Mateo. “I overdrew my account at the bank a couple of times because I was out of town. I guess the overdraft charge is almost as much as I make an hour. I hate reconciling my checkbook. She didn’t like the late fees I’d been paying on insurance and some other bills, either. But what really got her fuming was that I forgot to pay my quarterlies!”

“Wow!” said Josh. “You’ve got a problem. What are you gonna do?”

“She wants me to do something called revenue projections and to track my cash flow. I feel like I am back in Accounting 101! I guess I’ll hire someone to help me get organized. Do you know anybody?”

■ ■ ■

Oh, Mateo. You are in trouble. It’s quite clear that Mateo has lost money and may never be able to identify how much. He’s already lost money on unnecessary bank charges and late penalties. He may never recoup payments from clients if he doesn’t have clear records. And he’s about to lose more. Late invoices have set a tone of mediocrity for his start-up business. He’ll pay higher taxes without good expense records and the IRS will most likely penalize him for late quarterly taxes. Even worse, messy books may limit his options for getting a loan if he needs one.

Mateo is not unlike many new business owners. He’s busy with many tasks and clients who are clamoring for his attention. All the immediate needs make bookkeeping tasks one of the last things he thinks about.

Every new consultant needs to start with a process of tracking money that is coming in and going out. Without good records you have no data, and without the data you have no way of analyzing your success (or failure), forecasting the future, or even paying your bills—in short, your business suffers. Good bookkeeping may make the difference between a successful consulting practice and an unsuccessful one— especially if it becomes another casualty of a started, failed, and closed small business.

Keeping Records for Your Consulting Business

Even if your business is up and running quickly, you land a couple of big contracts, and you have satisfied customers, you must study the numbers to know whether you are financially successful. Study your numbers? Here’s what you are looking for.

Cash flow. Will you have enough money to pay your bills this month?
Expenses. Where is all the money going? Which expenses are constant (those that do not change when business increases or decreases, such as rent, salaries, and insurance)? Which expenses vary depending on the level of business, such as travel, printing, and professional fees?
Overhead. What does it take to keep your business open?
Profitability. Which contracts are the most lucrative?
Capital. What business expenses are good investments?
Invoices. How readily are they being paid?

This chapter helps you examine various aspects of recording, tracking, and reading your numbers. It also provides suggestions to improve your financial picture. Forms are also provided that will save you weeks of work. The advice in this chapter can prevent dozens of mistakes.

Plan for the Worst

To keep myself out of financial trouble, I follow this advice: Plan for the worst-case scenario, but act as if you’re living the best case. There are two messages inherent in this statement: First, don’t spend your money until it’s in your hands. One of your clients may not pay you on time; the loan you were counting on may not be approved; an unexpected expense may occur, such as replacing your computer.

Plan for the worst-case scenario, but act as if you’re living the best case.

The first message is practical, but the second message is philosophical. “Act as if you’re living the best case” refers to the message you are sending to yourself and others. As a strong believer in positive thinking, I am convinced that much of my company’s success is due to the fact that I expect it. I believe I will succeed. You must also live the best case for your clients. Never hint to a client that business is less than great. Suggesting that your business is having financial difficulty will make clients nervous about your stability and even wary about your ability to perform the job. I’ve noticed that even the smallest complaint, such as “Our paper wasn’t delivered on time,” can cause concern. So do not mention your problems to your clients. You want confidence, not sympathy.

Do not mention your problems to your clients.

Whenever you play with your numbers, remind yourself to “plan for the worst-case scenario, but act as if you’re living the best case.” Most consultants do exactly the opposite. And by the way, if you should ever find yourself in the red, know that the IRS allows you to carry operating loss back two years and to use it to offset the income from those years. This may result in a refund. See? Taxes aren’t all bad!

Plan for problems. Portray prosperity.

Watch Your Cash Flow

You can be very profitable and still go out of business. A surprising statement? Yes, but true. Your books can display a 20 percent profit on every project, but if cash flowing into your business does not exceed cash flowing out, you will find yourself in a very difficult situation. Cash-flow problems are the number-one reason that small businesses fail. You can control cash flow. Try some or all of these suggestions to prevent cash-flow problems.

You can be very profitable and still go out of business.

Bill Immediately

Make billing for the work you have completed your number-two priority. (Meeting customers’ needs should always be your first priority.) Complete and deliver your clients’ invoices as soon as you finish the work. The same day is not too soon. Many organizations, including federal government agencies, have a 30-day time frame from the date they receive the invoice to the day they cut the check. If you wait a week or two to send the bill, it could be a full 60 days before you receive cash for the work you completed. Remember, they cannot pay you if you don’t bill them!

They cannot pay you if you don’t bill them!

Billing immediately is important for reasons beyond preventing cash-flow problems. The sooner you bill, the more pleased the client will be about paying immediately. Unfortunately, the value of your services diminishes with time. A client may begin to think that what you accomplished was actually a very small aspect of the total success of the project or even that the solution was his or her own, not yours! The lesson? Bill while the client is most satisfied with your work.

Use a Reliable Delivery System to Send Invoices

Ensure that your client receives your invoice. You might be emailing your invoice. In other instances, an organization may want a hard copy of the invoice. If so, send it in a Priority Mail packet. The cost will be a little over $6.00, as opposed to a first-class stamp, but the U.S. Postal Service will give Priority Mail better attention. Your invoice will have a better chance of reaching its destination in a shorter amount of time. We could give many examples of delayed or lost mail. In general, we have seen first-class mail between our offices in Virginia and Wisconsin take as long as 5 to 10 days. The Priority Mail packets usually arrive in fewer than 5 days—often in just 2 days. In addition, your client may give it special attention due to the packaging.

Tip: Get paid faster.

Take advantage of any electronic billing system your client offers—no matter how magical it may seem, it will most likely ensure a faster turnaround than the post office process. If your clients do not mention the process, ask. Your client may advise you to contact accounts payable. Do so. It is always good to have that department on your side.

Monitor Accounts Receivable Methodically

At the end of every week, the bookkeeper on staff provides me with a cash-flow report. It identifies the amount in our checking and savings accounts, overdue invoices, and those due this month and next. The report also highlights significant expenses, such as noting that payroll will be taken out the following week.

Know Your Clients’ Reputation for Prompt Payment

The strategy you have chosen will often define how readily your clients pay you. Most clients I work with pay within our 30-day expectations. Some industries are notoriously late; some of your clients may be late on occasion.

For example, if you have decided that providing service to the federal government is your niche, learn more about what you are getting into. First, although there is a prompt payment law, some agencies have a difficult time paying within 30 days. This is not due to a lack of funds, but to a lack of efficient processes. In the past, it was not uncommon for a government agency to be two months behind in paying us due to some technicality or awaiting money from a specific source. We know we will always be paid, but we do not know when! This can be detrimental to your cash flow if you are not prepared for it. Second, government work is fickle. Here today, gone tomorrow. Even with a signed contract, the federal government has the right to cancel at any time. As a taxpayer, I am fine with that. I don’t want my tax dollars used on a project someone deems unnecessary due to changes.

Government work is fickle.

The federal government also offers you the choice of accepting payment for your services in the form of a credit card. The advantage is that you can be paid immediately upon completing the work. The disadvantages are that you will take a discount of approximately 5 percent and pay a monthly fee to the credit card company to maintain the service.

Serving government agencies, especially our Department of Defense clients, has always been a rewarding part of our work, so we don’t want to eliminate it. Our strategy is to have government contracts generate a maximum of 35 percent of our revenue. This strategy has helped us balance working with great clients and maintaining a healthy revenue stream for the business.

Include Project Initiation Fees in Your Proposals

You can prevent cash-flow concerns by requesting a sum in advance to initiate the contract. Put an amount in your proposal, normally a few thousand dollars, to cover initial out-of-pocket expenses such as travel. Your contract could read, “$10,000 is due to initiate this project and to cover initial out-of-pocket expenses.” We prefer to avoid this technique, because we always want to project an image of success—including financial success. The technique, although perfectly legitimate and used by many successful firms to show commitment from the client, can suggest a shortage of cash. Your business philosophy will determine your decision on this business practice.

Offer a Prepayment Discount

Some consultants offer their clients a discount of 3 to 7 percent if they prepay. Others offer a 1 to 3 percent discount for early payment, say within five days of the invoice date. I have never done this, but those who use it like it. I admit that the reason I do not use this technique is that it feels amateurish. This is only my opinion. The decision is yours.

Refrain from Paying Client Expenses

Rather than paying for copying, research, or other direct client costs out of your pocket, send the invoices to the client. Paying for them yourself and then asking for reimbursement can tie up your cash for over 30 days.

Make Your Money Work for You

Cash-flow problems can be reduced if you ensure that the money you do have is working for you. Few people think of a business as having a savings account, but the interest you earn is as valuable as working a few extra hours! Talk to your accountant for other ideas.

Bank on Good Advice

Selecting a bank and banker is second only to selecting your accountant. It is important that you keep separate accounts for your business. Commingled business and personal funds may raise tax or liability issues. Your banking needs may not seem critical initially, but you will find that a good banker can become a close and valuable partner. How do you begin? Ask your accountant and your attorney for recommendations. You benefit when the members of your support team know each other and work together. Be sure that the bank is small-business friendly. What should you look for in a bank?

Is the bank federally insured?
Like your accountant, does the bank support accounting software integration?
Does it offer the services you need: loans, checking accounts, money market accounts, advisory services, notary public, safe-deposit box, direct deposit, IRA or 401(k) services?
How experienced is management?
What experience have they had with consulting firms?
Is the location convenient for your business? What are their hours of operation?
If you plan to work internationally, can the bank handle foreign currency and offer wire transfers?
Can the bank help you set up payroll deductions for IRAs?
What kind of fees will you pay for your checking account? Is it free with a minimum balance?
Will the bank place a holding period on your deposits?
How soon will you need to order checks? How much will they cost?
What business advice does the bank provide and in what format, such as brochures, phone, or through seminars?
What networking capabilities does the bank have? Can it put you in touch with suppliers, potential clients, or other business owners?
How well did you connect with the people you interviewed? How comfortable will you be discussing your financial needs with them in the future?

Tip: Bank efficiently.

Be sure to ask your bank whether you can bank electronically. Also be sure to order checks that can be used by your accounting system and printed using your computer.

Obtain a Line of Credit for Your Business

As quickly as you can, talk to your banker about a line of credit. A good banker will understand the need and its connection to cash flow. During your start-up phase, you could use your home as collateral if your banker doesn’t find equity in your company’s reputation, accounts receivable, or contracts alone. A line of credit is invaluable during a tight spot. Generally a phone call to your bank will deposit the amount you request into your account the same day. You can pay back the loan on your terms, sometimes paying only the interest each month.

Use a Business Credit Card Wisely

A business credit card can delay a payment for up to 45 days. For example, let’s say your credit card billing period runs from the first of the month to the end of the month. You purchase office supplies during the first week. The credit card company doesn’t send your bill until the thirtieth of the month, and you have two weeks before it is due, on the fifteenth of the month. You have delayed payment for 45 days from the date you purchased the supplies. This period can be longer if your credit card company gives you longer to pay or shorter if you make your purchase later in the month. No matter what the dates, a credit card can help cash flow. One word of caution: The best way to use a credit card is to pay the balance every month to avoid the huge interest rates of 14 percent, 22 percent, or even higher. Don’t run a credit bill up so high that you are stuck paying these high interest rates.

Compare Leasing and Purchase Rates Carefully

I have always been a “buy it with cash” kind of person to avoid interest rates. In fact, I was in business for 10 years before I even considered leasing equipment. One year we needed a new copier and we were short of cash. I studied the leasing agreement. It compared favorably to a cash purchase when I considered the maintenance agreement and the outright purchase option at the end of the leasing period. Since that experience, I always compare before I buy.

Play Up Your Small-Business Status

If you are a small business, you can type “Small business. Please expedite payment” at the bottom of your invoices. We’ve never used this technique, but have been told that it works with empathetic accounts payable departments.

Act on Late Payments Immediately

Even when you stay on top of invoices and send them out in a timely way, late payments will create a cash-flow issue. First, determine why the payment is late. It can be any of the following reasons:

The client did not receive the invoice.
One or more of the organization’s processes caused a delay.
The client may be deliberately paying late to manage their cash flow or for other reasons.

How do you deal with late payments? First, call the organization’s accounts payable department to learn whether the invoice was received. If the organization is notoriously late, you may wish to call soon after you submit it to ensure that it is in their hands.

Act on late payments immediately.

Next, call the client for whom you completed the work and ask if your work was satisfactory. Assuming that the answer is yes, say that the reason you were asking is that the payment is past due and you were wondering if it was being held up for anything for which you were responsible. This will usually result in your client taking some action to help expedite your payment.

Last, submit a second bill that includes a new date, a statement that this is a “second bill,” and a late-payment charge identified on the bill. Often consultants want to give the client another chance and not add the late-payment charge. You may if there was an unusual processing problem. You should if the bill never arrived. However, if the payment is more than a week late without good reason, submit a second invoice with the additional late fee added.

What amount should be charged for the late payment? Charge 1 to 2 percent per month. The very last line on our invoices reads, “A late payment charge of 1.5 percent will be assessed for all bills over 30 days.” Some consultants use a 10- or 15-day payment schedule. If you choose something other than the conventional 30 days, it should be spelled out in the agreement or contract you have with the client.

How can you mitigate late payments? If you have had experience with a late payer, you may wish to request staggered payments including a start-up fee, a mid-project fee, and a completion fee. You could also try billing more frequently, on the fifteenth and thirtieth of the month as opposed to a once-monthly billing cycle. You may wish to offer a prepayment discount, as suggested earlier in this chapter. And, as Laurie Lewis (2000) in What to Charge states, “Do not accept more work from a client who owes you a bundle!” Make it your company policy that you do not accept new work from clients who are late in paying.

Pay Bills When They Are Due, Not Before

Have you ever received a bill to renew a magazine when the subscription still had four months left? This is a common practice. Watch the due dates on bills for professional organizations, magazines, clubs, and others whose process is to bill you three or four months before the due date. You can file the bill you receive for later payment or even toss it! One of my professional organizations bills me four times before they really expect payment.

Compare Actual Expenses to the Budget Monthly

Use a form similar to the one in Exhibit 6.1 to keep you informed about the status of your expenses: What’s been paid, what’s due this month, and which categories are ahead or behind budget? The amounts may be a real guessing game your first year, but it is a learning tool. The amounts for the second year will be more accurate if based on your first year’s final totals.

Exhibit 6.1 Monthly Expense Worksheet and Record

Account	Budget	Jan.	Feb.	Mar.	April	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.	Total
Accounting, banking, legal fees
Advertising and marketing
Automobile expenses
Books and resources
Clerical support
Copying and printing
Donations
Dues and subscriptions
Entertainment
Equipment leases
Insurance
Interest and loans
Licenses
Meals
Office supplies
Pension plan
Postage
Professional development
Professional fees
Rent
Repairs and maintenance
Salaries
Seminar expenses
Taxes
Telephone
Travel
Utilities
Total

Tip: Accounting software.

If you have not selected your accounting software, speak with your accountant first. Life will be easier if your software is compatible with your accountant’s software and if your accountant is familiar with the package you choose. Commonly used accounting software used by small businesses includes QuickBooks Pro, Freshbooks, FreeAgent, or Zoho Books. These packages are reasonably priced. If you are not familiar with accounting software, have your accountant help you select and set it up so that you will be able to manipulate the data to produce the most useful reports for you.

By the way, the accounting software you choose should produce most of the forms I’ve shared with you in this book. My examples are simply samples of the kind of information you will want to use to keep you informed about your business.

Track Your Expenses

Where is all the money going? If you are not good at handling the details of bookkeeping, find someone else to do it for you. Although you are a consultant, you must also consider yourself a business owner. Tracking every expense is imperative. You may be lax about requesting and saving all those $4 parking receipts when you visit the library each week. Indeed, $4 does not seem like much. However, if you visit that library once or twice a week for resources, your parking receipts could easily add up to $200 worth of expenses. If your total state and federal tax bracket is 40 percent, you’ve just thrown away $80!

Now think about how many other things you might “forget” to record, such as tolls, business-related books or magazines, client gifts, mileage, seminar supplies you purchase on-site, office supplies you pick up on the weekend, light bulbs, cleaning supplies, or paper products you bring into the office from home.

What’s the solution? Develop an easy way to gather and track expenses. For example, our consultants use envelopes for tracking expenses and for filing receipts. The 9×12-inch envelopes identify the consultant, the client, the date, and a list of the expenses. We had a printer print several thousand for a very reasonable cost. They serve several purposes: They provide a place to put the receipts while we are collecting them; they provide a method for tracking expenses by client, even if we are in the same city for two separate clients; and they are neatly stored by project for easy retrieval at a later date if necessary. Even if you use a mobile app such as Expensify to snap an image and upload it to your accounting system, the envelope is convenient to store the receipts in until you have a chance to file them electronically. In addition, I use the same envelope system to store office supply or repair receipts for the month.

In Chapter Four I listed items that might be in your monthly budget. These same budget line items are your expenses. You will want to track them for two reasons.

First, you will want to study them. Your expense record will provide the most information about your financial situation. It will tell you where you might cut back if you need to save, what you can expect in upcoming cash flow, and what you could prepay if you show too large a profit at the end of the year. (Perhaps the last item is surprising after the discussion about tight cash flow. You should assume that you will be so successful that you will face that problem in a year or two!)

Second you will want to track your expenses to ensure that you can easily compile your records prior to filing your taxes. You will want to claim as many legitimate deductions as possible because it reduces your tax bill. Poor record keeping takes cash out of your pocket.

Poor record keeping takes cash out of your pocket.

The monthly expense record in Exhibit 6.1 will be valuable for tracking your monthly expenses. The following categories identify where your money will go.

Accounting, Legal, and Banking Fees.

Find an accountant as one of your first tasks. Good accountants will save you five times what they cost. There is no way (unless you are an accounting consultant) that you can keep up with all the tax law changes. For example, whenever new retirement plans are offered or changed, my accountant informs me and helps me decide whether I should maintain the plan I have for me and my employees or switch to a new one. You will have few legal fees beyond your initial incorporation, but you will likely have some minor monthly banking charges.

Advertising and Marketing.

Initially, you will have the expense of creating a website and printing a brochure or introductory piece to let people know who you are and what your capabilities are. I started out with a simple one-page introduction printed on good-quality stationery. I never have completed a mailing of our corporate brochure, but it is useful as an introduction piece or as something to leave when I visit a potential client. Expenses here may include a special announcement mailing, books or articles you purchase to send to clients or potential clients, or marketing firm expenses you may incur.

Automobile Expenses.

Establish a good tracking system for your automobile expenses. If you use the same vehicle for personal and business use, you will most likely track mileage only. Review the apps that are available to determine how easy they are to use, their accuracy, and their cost. You probably wouldn’t think about a bookkeeping system tracking your mileage, but it can! QuickBooks Self-Employed will track and categorize each trip as business or personal. Since we use QuickBooks, this is our choice, and it’s quite comprehensive. At the end of the year it will also automatically compare your business miles with other actual automobile expenses and recommend which deduction is greater. It does have a cost—$10 per month. If you want a free app that tracks mileage and logs your expense receipts, try MileIQ or Hurdlr. Compare them and check into the details for reports you can export or share, how the trips can be categorized, and tax summaries. Both have a premium version that does much more for a small subscription fee.

If your time is limited and you need a fast tracking system now, download Exhibit 6.2, where you can track date, destination, purpose, beginning and ending odometer readings, and total mileage. Remember, you cannot deduct mileage going to and from your office. Your accountant will assist you with the nuances of mileage.

Exhibit 6.2 Mileage Log

Name: ___________________				From: _______	To: ________
Date	Destination	Odometer		Business Purpose	Number of Miles
Date	Destination	Begin	End	Business Purpose	Number of Miles






























				Total Miles This Sheet

Books and Resources.

Keep up on the latest books in your field. A good library is a real time saver when it comes to developing new materials or writing proposals.

Copying and Printing.

If you do not purchase or lease your own copy machine, build a good relationship with the employees of your local copy center. There will be days when you will need a rush job!

Donations.

Your business may make monetary or equipment donations to local charities. We donated a lettering machine to our local Head Start and old computers and software to the Salvation Army and a nursery school. Both were in good condition, but we had outgrown their use.

Tip: Purge first.

Be sure to purge any confidential or sensitive information from your computers before donating them to charity or giving them to anyone.

Dues and Subscriptions.

Dues to professional organizations and subscriptions to professional journals and newspapers, online or physical, are tax deductible.

Entertainment.

Although you can only deduct 50 percent of the expense incurred when you take a client to dinner, you must still track it and maintain receipts. Track the full amount. Your accountant will take care of the reduction.

Equipment and Furniture Purchases.

You may think these are only one-time purchases, but you may upgrade computers or need a new desk sooner than you think. Depending on the amount you purchase or on your financial situation at the end of the year, your accountant may suggest that you depreciate larger purchases over several years to capture the greatest tax advantage.

Equipment and Furniture Leases.

Be sure to check the advantages of leasing against purchasing. Sometimes it’s just a matter of preference, but there also may be savings with one or the other.

Insurance.

This is a broad category and may include fleet insurance if you own a company vehicle, fire and theft if you rent or own an office, group health if you have employees, business liability insurance, disability insurance, and a number of others. See the sidebar for more information. Again, your accountant is the best source for determining which would be better as business expenses and which would be better as personal expenses. For example, my company has group health insurance for all employees. If you are self-employed in the United States, you are (this year) eligible to deduct these premiums and qualifying long-term-care insurance coverage.

Insurance and the Rational

From day one, a consultant is exposed to risks, and in most countries you cannot operate a business without certain kinds of insurance protection. You need to be prepared for problems that you do not want to happen—but if they do, you’ll have a backup. That’s why it’s important to make time to plan for your insurance needs. Your accountant can probably help you with the basics, but you may also want to consult an insurance broker with more detailed questions. You might consider these types of insurance:

Professional liability. Also known as errors and omissions (E&O) insurance, this covers a business against negligence claims from mistakes or failure to perform.
Owner’s disability. You are the primary force of your business, as well as the bankroll. Disability is coverage when you get sidelined due to an accident or a medical problem such as heart disease, back problems, or cancer.
Commercial property. Covering equipment, inventory, and furniture in leased or owned office space is protection in the event of a fire, storm, or theft. Note that mass-destruction events like floods and earthquakes are generally not covered under a standard policy.
Workers’ compensation. Once you hire your first employee, you must purchase workers’ compensation insurance. It covers medical treatment, disability, and death benefits if an employee is injured or dies as a result of work. Workers’ comp is very inexpensive for consultants.
Home-based businesses. Your homeowner’s policy may not provide coverage the way commercial property insurance does. You may be able to ask for additional coverage.
Commercial auto insurance. If company vehicles will be used, they should be fully insured to protect your business against liability if an accident should occur. Even if you use your own vehicle, many of your clients will require you to have a floor limit of at least $1 million per occurrence.
Business interruption. More critical for businesses that require a physical location to do business, such as a retail store, it compensates a business for its loss of income during disasters or catastrophic events.

Having the right insurance in place prevents financial loss due to a lawsuit or catastrophic event. In the end, it is much better to be safe than sorry.

Interest and Loans.

You may have taken out a loan to start your business. The interest is tax deductible. Although the principle is not deductible, it will still appear as an expense, affecting your cash flow. By the way, even if you loaned yourself the money to start your business, you should track it and pay it back.

Licenses.

Check into state or city licenses that are required to do business in your city. There is usually a small annual fee.

Meals.

Local meals are tax deductible when they are business-related only. In addition, keep all receipts for food when you travel. Again, as with the entertainment category, only 50 percent of the actual cost is tax deductible. Your accountant will assist you with this process at tax time. Keep your receipts.

Office Supplies.

This category includes things such as paper supplies, ink cartridges for your printer, rubber bands, pens, paper towels, glass cleaner (to clean your copier’s glass), floor mats, light bulbs, and anything else that it takes to keep an office operating. Track these carefully.

Pension Plan.

Excellent plans exist for small businesses. Check into them soon, even if you don’t think you can afford it. Your accountant may demonstrate to you that you can’t afford not to invest in a plan.

Plan for Retirement

I am a big proponent of aggressively using tax-advantaged retirement plans such as a 401(k) or SEP IRA. The SEP IRA may be one of the best options for consultants and other freelancers who want to save for retirement. The SEP IRA is a plan that receives special tax treatment from the U.S. government. At this writing, the biggest advantage is that the limit you can save is set higher than most plans—the lesser of 25 percent of your compensation or $53,000. This is about 10 times the amount in a traditional IRA or Roth IRA. This is particularly good for consultants, whose income may sway radically from one year to the next. In addition, these plans are available to almost anyone making money at a side hustle.

Count on your accountant to guide you to the right plan.

Postage.

This is, of course, the cost of sending proposals, marketing materials, books, and other correspondence using the postal service or private carriers.

Professional Development.

Stay current with the changes in your field. This category includes the costs for conferences, training, or local professional meetings you may attend.

Professional Fees.

This category is for subcontractors you may hire to assist you with larger projects. You might hire a consultant or a freelance designer to support you.

Rent.

Track your office rent expense in this category.

Repairs and Maintenance.

Often these expenses are included in an office lease. However, you may need to hire your own cleaning firm. In addition, if you own your computers, copier, and other equipment, their repairs will be tracked in this category. If you drive over your iPhone, you’d record the cost to repair it here.

Salaries.

Pay yourself first. You’ve heard that advice before. This category also includes anyone else you have hired, such as your secretary, receptionist, assistant, or professionals who are on your payroll.

Seminar Expense.

You may need to purchase a video to use during a training session. You may require some materials that you use in your sessions. For example, I use crayons, Play-Doh®, clay, jump ropes, and other toys in my creativity sessions. Sometimes it is easier to purchase these on-site than to ship them. I also purchase in bulk to save money.

Taxes.

This category may include local business taxes, personal property taxes, unemployment taxes, self-employment taxes, FICA, and other payroll taxes. You may have several subcategories here.

Tax Talk

You will select your own fiscal year. To make it easy, I selected the calendar year. If you have specific reasons to choose differently, just let your accountant know.

Most consultants will pay quarterly taxes based on their estimated amount. Your accountant will determine the amount based on your previous year’s income. You generally have to make the payment if you expect to owe taxes of $1,000 or more.

The Internal Revenue Service has established four due dates for paying estimated taxes. Typically, the due date is the fifteenth of the month in which they are due. If the fifteenth falls on a weekend or a federal holiday, the due date is moved to the following business day. A payment not postmarked on or before the due date will be considered late. You will likely be penalized.

Estimated tax due for income received:

January 1 through March 30
April 1 through June 30
July 1 through September 30
October 1 through December 31

is due April 15.
is due July 15.
is due October 15.
is due January 15.

Telephone/Internet.

Telephone calls, fax transmissions, and your email expenses are listed here.

Travel.

Travel expenses include taxi fares, Ubers, airfares, hotel rooms, shuttle buses, parking, tips, and other costs incurred as a result of getting to and staying at a site to conduct business. The expense report in Exhibit 6.3 will help you to track travel and other out-of-pocket expenses you incur throughout the month. When you or an employee turns the report in at the end of the month, it can also be used to compile all that is due for the month.

**Exhibit 6.3** **Time Sheet and Expense Report**

Utilities.

Electricity, water, heat, or air conditioning may be included in your office rent. If you are working out of your home, your accountant will assist you to determine what percentage of the total you can consider a business expense.

Breaking expenses into categories like this creates a system that makes it easy for you to track expenses, manage cash flow, and predict revenue needed for next month as well as next year. In addition, the structure will pay dividends in time saved when preparing your tax statement.

Savings and Your Business

Although a business savings account is not an expense, you should plan to sock away 30 percent of your revenue in a business savings account. A portion of that will pay for your taxes and the rest for the proverbial rainy day. What could go wrong? A client could cancel a big project a month before it is to start, which is probably too late to land a new project. You may need to replace computers or your copier during a month that is already soft. You may have a delayed payment from a client. Or perhaps several of these things happen at the same time. Yes, hopefully you requested a line of credit, but don’t dip into it unless you really must.

In the end, it is not what you make, but what you keep. Watch your expenses!

Set Aside Petty Cash

If you find yourself digging into your own pocket to pay for postage or other small purchases during the month, you may wish to create a petty cash fund. Having cash on hand eliminates the need for you to record every little expense for reimbursement. To establish the fund, write a check out to petty cash. Keep the money in a safe place separate from your personal money. The form in Exhibit 6.4 provides an easy way to track these expenditures.

Tip: Form finesse.

Although these forms are all downloadable at www.wiley.com/go/newconsultingbiech, most forms will also be found on the accounting software you select. Become familiar with the software so that you can customize the forms early to make them work for you.

Charge Your Client

In general, consultants are not very confident about what we charge our clients. Perhaps this is due to the many jokes and cartoons referencing consultants and their fees. I remember how difficult it was to state my fee when I first raised it to $1,000. “I charge one th-th-th-thousand dollars a day,” I would stutter. Certainly the exercise in Chapter Three showing how easily a $2,000 daily charge can accumulate should allow you to feel more confident. Although it is important that we know that our prices are fair and value-filled, it is even more important that our clients be satisfied that they receive value for their investment.

If consultants have difficulty in stating fees, we have even more difficulty in ensuring that our clients know what we did for them. Granted, much of our work can be elusive, intangible, and invisible, but that does not mean that it is not valuable. Keep your work in front of your clients—not bragging, but informing. Try these suggestions:

Itemize your invoice to include specific results and accomplishments.
Itemize things you did without charge and specify the amount as $0.00. We often list books we have provided at no extra charge or an unscheduled, impromptu meeting.
Submit your invoice in person, discussing what it covers.
When on-site, save the end of your day to update your client about recent activities and their results.
Submit a brief ongoing status report if visits are not practical.
When your client requests something special, follow up personally with the results.
Keep the client informed of what is happening behind the scenes. What should the client expect to see or hear?
Make a phone call during extended time periods when you are not on-site to stay in the loop and to show that you care.
Send books or articles. We all read something and think that it is perfect reading for a particular client. Make it possible by sending it!

Each of these ideas ensures that you keep your client informed of the value you are adding to the organization.

Keep your client informed of the value you are adding to the organization.

Invoices

As mentioned previously in this chapter, issuing invoices should be one of your top priorities. They should be submitted as soon as the project has ended. If the project’s duration is greater than 30 days, bill monthly or every two weeks for deliverables you have completed, plus the expenses incurred. This is best for you and for your client. You prevent cash-flow problems, and your client will find it easier to pay several small invoices than one large one after four months. The invoicing summary in Exhibit 6.5 provides an easy method to track the date you invoiced the client, what services you invoiced for, and the date the client’s payment was received.

Exhibit 6.5 Invoice Summary

Work Date	Organization	Consultant	Invoice Number	Billed	Paid	Facilitator Fee	Materials Fee	Expenses	Total Due





















Total

Your invoice should provide all the information necessary for a client to quickly approve payment. Include these items:

Your corporate name, address, and telephone number. (During start-up, use your stationery rather than have actual invoices printed.)
A numbering system for tracking invoices.
The billing date.
The address and the name of the person to whom the invoice is sent.
An itemized list of the tasks completed, dates, and hours, if appropriate.
The name of the person completing the tasks.
An itemized list of the expenses incurred.
Total of the entire invoice.
Terms of the invoice, such as due date and consequences of late payments.
Your Federal ID number
The name of the person to whom questions may be addressed (optional).

Tip: Customize your invoice.

Your accounting software should have an invoice format; however, I recommend that you adjust it to meet your needs and to have a more professional look. Check to see whether you can add your logo. Once you have an invoice format that meets your needs, save the template on your computer to make it easier to invoice each time.

In addition to the invoice, attach copies of receipts incurred as expenses—for example, a hotel bill, meal receipt, or copy-center invoice. Although your client may not require these receipts, I believe it builds trust and is a good practice. Exhibit 6.6 is a simple yet complete invoice format.

The Clients’ Expenses

For what expenses can you expect the client to be responsible? In almost all cases, the client will reimburse all travel expenses incurred when you are away from home: airfare, taxis, mileage to and from the airport, parking, reasonable lodging, meals, and tips. If you have agreed to it, a client may also cover material costs, audiovisual equipment and supplies (for example, LCD or video rental), seminar supplies, room rental, or refreshments. Depending on the industry you serve and your pricing structure, your client may also reimburse you for telephone expenses, overnight mail, computer time, or computer program development. We consider telephone calls and express shipping a cost of doing business and include them as a part of our overhead.

Do not expect a client to cover laundry, dry cleaning, liquor, upgraded hotel rooms, entertainment, or unrelated phone calls when you travel. Local travel and meals are not reimbursable. Postage is not generally reimbursed, unless you have a large mailing to send as a part of the contract.

In any event, all reimbursables should be clearly spelled out at the beginning of any contract.

Project Revenues

Equally as important as tracking expenses is projecting revenue. We project revenue by the month. This works for us because we have been able to adjust our accounting processes so that we pay bills only once each month. You may wish to track revenue weekly, especially if cash flow is a concern. The revenue projection form in Exhibit 6.7 can be transferred to a spreadsheet so that you can keep a running total by month as well as by organization.

Exhibit 6.7 Revenue Projections

Organization and Project	Jan.	Feb.	March	April	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.	Total






















Total Revenue

Deal with Bad Debts

Bad debts occur when your clients do not pay you for the services provided. They occur infrequently in the consulting business, but when they do, they can be devastating to a small business. Although we have never experienced a bad debt, professional firms may experience bad debt rates from 5 to 30 percent.

If this should occur, you may use a collection agency to assist you. In some cases, you may choose to take the matter to your local small claims court. They are generally well informed and very helpful.

Keep an Eye on Your Numbers

Although you are a consultant, you should never forget that you are running a business. Businesses exist to make a profit. The numbers will spell profit or loss for your business. You must establish processes for gathering the numbers and then keep an eye on them. As a good business owner, you will want to know where you stand financially at any given time, which means that you must read the numbers, compare them, and play with them. Read them and know what they mean. Increases? Decreases? Compare them to the last project, last month, last year. Are they better? Worse? And finally, play with them. What if you invested in a new computer system? Prepaid bills before the end of the year?

Never forget that you are running a business.

What specifically can you look for when you are studying your numbers?

Expenses

Certainly you should compare your actual expenditures with your budget. Are you over? Under? Both are worthy of investigation. If the actual is over the budget, look at the detailed report. What pushed you over the limit? Is it likely to occur again? Should you adjust your budget to account for the difference? What about being under budget? That’s good, so don’t worry—right? Wrong! If you have budgeted for something and the money wasn’t spent, you need to examine this as well. Perhaps a marketing mailing you budgeted for was not done. This may affect income several months down the road.

Businesses exist to make a profit.

It could be worse. Once I discovered an extra $600 in the budget. First I felt smug; then I became curious. When I finally discovered what had caused the difference, I panicked. The fire insurance on our new office building had not been paid! Remember, being under budget can be as bad as being over budget.

Tips to Make, Save, and Shave Money

I know what it’s like to pinch pennies when the outflow is larger than the inflow. I’ve found that all these ideas work to save and shave money in my consulting practice.

Do more targeted, personalized marketing. Once you find the ideal client, stay with it until you land a deal. Working a few ideal clients seems to result in more work than building an entire audience.
Write a book and get it out there to result in little cost and lots of payback.
Buy office supplies in bulk to shave the cost—especially when they’re on sale. We use a specific high-quality paper that goes on sale at Staples once a year. We load up—and because we buy several cases, they deliver it free.
Word of mouth is critical—especially when you support something within your targeted community.
Pay off any debts before you focus on saving. Get rid of the interest payments.
Remember to ask for the sale.
Fire clients that are not profitable.
Invoice your clients the same day or within 24 hours of completing the project.
Maintain your office in your home for as long as you can. To maintain your sanity, post your office hours and create other office rules.
Network in all the right places—not just all the places.
Compare costs before you buy anything: a good used desk at Goodwill versus a new one at Office Depot.
Your insurance broker may be nearly as important as your accountant. Chris Caldwell has saved us thousands of dollars over the years.

Value

Compare some of your expenses to the time invested to determine whether the value warrants the expense. For example, you have hired two associates to help you deliver services. Your receptionist is stretched, but you cannot justify hiring a bookkeeper. So now you find yourself doing the payroll every other week. Check into the payroll services that abound. They do it all: figure salaries, compute the taxes, write the checks, deposit the taxes, and provide monthly as well as year-end reports and W-2s. And they do it for a reasonable fee. Consider the time you are investing in payroll or any other administrative task. Is it the best use of your time? Is this where you should invest your value?

Growth

You will certainly be comparing income to expenses, but you should also watch the overall growth trend. Is the number of projects increasing? Is your gross income growing proportionately? Are expenses growing at the same, greater, or lesser rate? You might think that growth is always desired. That isn’t so. It is not desired if you have overscheduled yourself. It is not desired if you have decided not to hire employees. It is not desired if the projects are less profitable. And it certainly is not desired if you are working harder and enjoying it less.

Seven years into my business I wrote a letter to Peter Block, the guru of all consultants. He had published Flawless Consulting a few years before that. This is what I wrote:

Dear Peter,

For the past year I have been working harder but making less money. I have searched the library for a book, an article—anything that will provide me with a benchmark against which to compare my business. I want to know what the average consulting firm spends on marketing. How can I determine how much my employees should be billing? What is considered a good profit margin in “the business of consulting”? I will call you next week to find out whether you can recommend a book.

Thank you.

Elaine

Peter Block read my note. When I called him, he said, “I’m going to do much more than recommend a book. I want you to pull all your records together, such as your expenses for this year, your taxes from last year, your income summaries for the past three years, and your projected cash flow and income for the next year. After you have everything together, call me back. Plan to talk to me for two hours! And by the way, there isn’t a book to read about this stuff!”

I couldn’t believe my ears! Peter Block was going to consult with me on my consulting business! We had a great conversation. He provided me with sound business advice—you might say it was “flawless consulting”!

Peter’s advice encouraged me to examine marketing dollars wisely, study business numbers and data carefully, and explore the advantages and disadvantages of hiring employees and forming partnerships. And the fact that there wasn’t a book—well, that was a downright shame! It was also what prompted me to write the first edition of The Business of Consulting in 1999.

All of the topics in this book—especially this chapter—are written in the same spirit—sound advice and practical suggestions for your business of consulting. My phone call with Peter resulted in developing several forms to monitor my business.

Exhibit 6.8 is a form for you to track the time and materials used on individual projects. If you want to record and compare the profitability of various projects, you will find Exhibit 6.9 at www.wiley.com/go/newconsultingbiech, entitled Program Development Cost versus Revenue. It can assist you in determining which projects are the most profitable and can help you with bidding on new projects. It may also signal that it is time to fire a low-profit-margin client!

Exhibit 6.8 Project Time and Expense Record

Date	Team Member	Task Performed or Materials Used	Hours or Expense	Salary or Cost

Certainly, growth can be exactly what you desire and what you have planned for. Given that, there is still one more thing to watch for. Fast growth can lead to cash-flow issues. You may need to invest in new projects up front that are not in your budget. Check the cash-flow suggestions earlier in this chapter and keep an eye on the numbers.

Consider Capital Investments

You are running a business. That means that you have capital investments, and with that goes responsibility. If you own equipment, put each item on a preventive maintenance schedule. Clean phones, computers, copiers, printers, and other equipment regularly. You will benefit in the long run. Equipment will last longer and it will not break down just when you need it to complete the last-minute details of a program you will conduct the next day!

Your library is a capital investment that can easily walk out the door without your vigilance. We have a complete library that can easily compete with any area library in the training, business, consulting, leadership, talent management, creativity, and communication categories. Many of our local clients and other consultants, as well as employees, borrow volumes from it. Although we want to share the resources, a Library Sign-Out Sheet allows us to do so without worrying about unreturned books. Exhibit 6.10, which you can find at www.wiley.com/go/newconsultingbiech, is a copy of that form.

This chapter should have driven home the importance of tracking and monitoring your income and expenses. You could be the best consultant in the world, but if you do not make money, you will not remain in business, and the world will never know about your consulting expertise.

For the Consummate Consultant

Yes, there is a cost to doing business, and it requires your eagle eye to ensure that the cost doesn’t outpace the revenue. Never fear, with the right tools in your toolbox you will build a solid foundation and use them to track your success.

Don’t Mingle Your Money. Commingling personal and business accounts can cause problems downstream. Don’t even think about it! Creating the right accounts and structure for your business from the outset can help prevent future financial missteps and headaches.

Repeat Business Is Good. Aim to bill 50 to 75 percent of your annual revenue from the previous year’s clients. Experts estimate it takes 7 to 10 times the investment to sell to new clients. You don’t want to be dependent on one or two large clients, but you still want to balance enough repeat business so that you are not constantly on a client hustle.

Study Your Numbers—Religiously. Other than billing your clients as early as possible, tracking your numbers every week at a specific time is the best activity to keep you in business. Know your numbers to:

Predict cash flow concerns well in advance.
Stay on top of your marketing plan to keep your pipeline full.
Forecast big-ticket purchases.
Prevent excess spending.
Know what you need to earn each month and how much money you owe now.
Track when money is due to you.
Discern which projects have been the most profitable and why.

Your numbers will predict much of what you need to know—including whether you are fizzling out on the job