As the owner of several (really) small businesses, including a consulting practice and a financial strategy practice, here are the top 3 things I learned to not do, from my own experience and the experience of clients.
3. Not Setting Aside Enough Money to Pay Taxes (and Build a Reserve)
I met Jane (made up name) for a one-off coaching session to help her with this one.
Every January, April, June, and September, she’d get stressed and upset because of the large sums of money she needed to send to Uncle Sam and her state’s taxing authority. Worse yet, it had to come from her personal checking, often affecting what she and her family then had left to live on.
I suggested she set aside in her business accounts enough money to cover those tax payments.
Your revenue comes in day by day (or monthly if you’re paid like me). It hits your business checking account, and from there it flows to your business expenses, with what’s left going to your personal account so you and your family can cover the expenses of your ongoing needs and wants.
If you haven’t established the habit to set aside at least 30% to cover your tax payments, you likely get that sinking feeling in the pit of your stomach when you realize you have to come up with thousands (if not tens of thousands) of dollars to pay taxes.
Don’t set yourself up for that level of stress, and possibly late-payment interest and penalties. Instead, set up a second business account other than the one into which your income arrives. Then, twice monthly, move 30% of revenues to that second account to cover taxes. Better yet, move at least another 20% to start building your business cash reserves. Quarterly, take half of the reserves you added during the most recent quarter as your profit distribution.
2. Trying to Do It All Yourself (When You Shouldn’t)
This is not easy to get right.
Too many of us try to do it all. Then, when we see the light, we often go overboard and try to outsource even those things we shouldn’t.
When you’re just starting, or when client traffic slows down, you have less money and more time to throw at problems. When this happens, cut those expenses that you can cut or trim, unless they bring in new clients (like marketing).
However, when things are humming along, concentrate your efforts and time on things that are in your sweet spot. If your practice is solo, this includes providing outstanding service to your clients, and growing your business. If you own a group practice, your sweet spot should mostly be managing your staff and bringing in more clients. Serving your own clients personally is still important, but is probably no longer where you should spend the majority of your time.
For other things, such as doing your taxes and/or payroll, drafting forms and contracts, writing emails to your list (unless you enjoy doing it and are good at it) etc., hire professionals.
Sure, this costs money, but the opportunity cost of doing yourself things you’re not great at when you could be using that time to serve your clients and bring in more clients is likely much higher.
Also, the costs of doing these things wrong can be even higher.
Just imagine having to pay a hefty chunk of change to the IRS because you made a big mistake on your tax return, resulting in back taxes, interest, and penalties. Alternatively, imagine paying more taxes than you must, simply because you didn’t know how to legally reduce them.
Similarly, drafting your own contracts and forms, whether by yourself, or using someone else’s as a template, puts you at risk of missing some important legal details that could come back and bite you. Not consulting with an attorney about how to set up your business and/or how to hire staff can also be a costly mistake.
1. And the Winner (or Loser) Is… Underpricing
When I first started doing consulting work, I charged $80/hour and thought that was insanely high because my salary at the time was worth about a third as much. It was years before I felt confident enough to break the psychological $100/hour barrier.
Now, depending on the specific service and project scope, I charge anywhere between double and quintuple that.
I don’t think there was any plausible way for me to charge anything close to my current fees when I first started, but I could easily have asked for $100 instead of $80, and had the same percentage increases from that point forward.
Had I done that, my earnings would have been 25% higher throughout (and my profits higher by even more, since my costs wouldn’t have increased).
Moving on from my own experience to that of others, I’ve had clients who so severely underpriced their services, that I had to guide them to increase their fees by anywhere from 50% to 100%(!). As I shared with them, undercharging doesn’t serve their ability to provide for themselves and their families, but counter-intuitively doesn’t serve their clients well either.
If you charge a third less than you should, your profit is probably half what it needs to be. As a result, you have to take on more or less double the amount of work. That, in turn, leads to not being at your best for every client each time you meet, potentially disappointing and losing those clients, and your own eventual burnout.
The Bottom Line
There are many benefits to opening your own practice and being your own boss. At the same time, it means that you’re responsible for making sure everything gets done, correctly and on time.
Paraphrasing a sage saying, “The wise person learns from others’ experience." The above are the three top mistakes I’ve made myself or seen clients make in their practices. Hopefully, knowing about them will help you be wiser.
This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a financial professional before making any major financial decisions.
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