This editorial continues the “So you want to be a consultant” theme.

A Story

Let me start this editorial with a story. The main character is YOU. Imagine you are now a newly minted, card carrying member of an elite organization know as Software Consultant. This is a huge day for you as you are about to come face to face with an elusive creature: THE CLIENT. Your pitch goes well; the client likes you, they like your depth of experience and they are ready to engage you in your first paid gig. But before you can start the project there is a catch. The client wants you to loan his firm $32,000.00. As beads of sweat appear on your brow, you timidly ask what they mean. You see, the client didn’t come out and say they wanted a direct loan. What they really said was “We pay all of our contractors on a NET/30 basis.”

So how do NET/30 terms translate into a loan of $32,000.00? Let’s do a little math: You start the consulting gig and work four weeks at a rate of $100.00/hr. That translates into a net invoice of $16,000.00 which you crank out in QuickBooks in a matter of minutes. Then you return to work for another four weeks (approx 30 days) at the same rate of $100.00/hr and now you cut your invoice for another $16,000.00. Now the client owes you a grand total of $32,000.00 and has yet to pay you a dime. Now let’s say they “ran short on funds,” or “the angel money they were promised didn’t show up” or “the dog ate their homework.” Where does this leave you? Well, it leaves you short $32,000.00 and doubly worse, out 320 billable hours for the two months. Should all go well you will get paid but in the mean time you have killed your cash flow and taken on a risk you should have never entered into in the first place. So what’s the solution?

Get Paid Up Front

Most clients are very reasonable when it comes to paying some form of deposit up front. Generally my terms are a percentage of the total project agreed upon amount to be paid up front. All monies paid up front are considered non-refundable deposits that will be deducted from the final invoice. Another method is to have clients buy a block of hours ahead of time. When the hours have been “used up” the client is to be sent another invoice with terms “due on receipt.” This works well with a lot of clients. The basic concept is to mitigate your risk on starting up with a new client. If possible, you should not be a bank for your clients.

Everyone Wants You to Be THEIR Partner

Being a consultant is a fun gig. It gives you opportunities to meet a diverse set of people from a diverse set of industries. It also gives you the opportunity to work on new and sometimes groundbreaking ideas with a number of companies or individuals. In my 15+ years as a software consultant I have come across numerous offers of partnership. Here’s how these offers generally arise: “Hey Rod, I have a great idea. We could create a new website for selling cogs and sprockets online to people in the gizmo business. If you could build the web site I’ll cut you in as a partner.” Gee thanks. You want me to do all the work building a website for your great idea and then you’ll cut me in on the deal. Wow that sounds like a great deal to me. NOT! If you read my last editorial, you will know that adopting a partner is a risk that should be carefully considered. Also, you cannot eat, pay bills, or get that new copy of Halo:Reach with all the sweat equity you are providing. When faced with these offers I recommend you turn them down unless the other “partner” is providing the capital to get the new venture off the ground.

Start Out Correctly

Starting a business is not just as simple as getting some business cards, talking to clients and writing code. There is a lot of work to just get it started up properly. The first step is to set up your company properly. The basic structure of companies are: sole proprietorship, LLC, Corporation(S or C). The one I would recommend staying away from is sole proprietorship. If you are a sole prop you are exposing yourself personally should some software project of yours go wrong. I highly recommend structuring your company as an LLC or a corporation. In order to understand the ramifications of each you need to add two “partners” to your consultancy. A CPA and a lawyer. Each of these people will help you organize your company properly from the get-go. Also, the CPA will help you at the end of the year do your taxes because when you have a company, the concept of paying taxes properly gets more complicated.

Spend Money to Make Money

When you are a consultant you need to make sure your hardware and software are reasonably current and that you have adequate resources to accomplish your work. You would be surprised at the things you will need: laptop, desktop, monitors, printer, cable modem, laptop bag, travel bag, office supplies and the list goes on. You will also need to stock up on books or technical references, join organizations (ACM, IEEE, etc), spend money on travel for training and/or conferences. It all adds up so be ready to spend some cash on getting your basic toolset in order.

Cash Is King

When you start a new company you need to watch your cash flow like a hawk. If you don’t have cash to get you to that out of town gig you are limiting your reach. If you need to repair that broken laptop you need cash to make that happen. So when you are spending money to make money, keep your cash flow in mind. Early in my consultancy I leased hardware in order to preserve my cash on hand. Another mechanism for saving cash flow is to buy hardware from outlet sites or other consultants. Why buy new when you can buy good hardware at reduced prices? Another consideration is to keep your fixed overhead to a minimum. From time to time over the last 15 years I have had office space. This is fixed overhead that you don’t get back. The cost of the overhead needs to be offset by productivity to be justified.

I hope that these ideas have given you some things to consider when you start out as a consultant. Here’s a call to action for you: For my next editorial, I would like to print some of your advice for other readers. If you would like to participate in this, contact me via Twitter @rodpaddock and we can work on getting your ideas printed in my next editorial.