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Examining the Factors of Independent Consulting
 
 

Examining the Factors of Independent Consulting


During this article, we take the opportunity to elaborate on some of the economic realities of independent consulting. As a new consultant, you probably have a number of questions on your mind about payment, the break-even point -- or when you think you will feel successful -- and, if you are employing a team, how to make the payroll. So we will explain all of these in greater detail, so you understand how to structure it for your consulting business.

There are a number of reasons why people become consultants. They need a challenge, they feel under-compensated, a great time period has elapsed since they have gotten a raise, their current job does not fit in with their lifestyle, they want to work independently, they want to earn more money, or they have always liked the allure of consulting. There are a number of challenges that come with valuing the worth of your consulting skills. There is also a certain mentality you must maintain in order to be successful in the independent consulting business. It requires a great deal of energy, charisma, and drive. Bottom line: It requires motivation and business savvy. Both of these are critical to your success as a consulting business owner.

These are some of the things you need to think about as you develop your economic structure. Some new consultants actually devalue their work, because they so desire to establish the business; they sell themselves short in terms of pricing and actual valuation. Never sell yourself short. There is a reason you entered the business. Although you may be new, rely on your professionalism and expertise to sell your success.

Here are some of the issues that hinder economic success for new consultants:

  • Quoting overly low fees simply to get business, because you are new

  • Lack of bench-marking for other consulting businesses, to see what they charge

  • Not understanding your value to a potential client

  • Failure to understand profit needs to maintain overhead costs

  • Failure to understand overhead costs

  • Misunderstanding the value of one's expertise

  • Fear of asking for the right price

  • Fear of working with clients

You may need to rethink how you will approach your consulting business, if you are not so savvy on the business end of operations. You could have a co-owner to manage the business side, if you only want to pursue the expertise side. However, with this article and a little research of business operations, you can be successful on both the business side and the consulting side of independent consulting.

Let us now discuss some of the challenges you will encounter, and need to think through, as you begin. We will start with a discussion about what type of consultant you are. This will help you refine an understanding of how you consult globally. Do you consider yourself a generalist, or a specialist, in the consulting industry? For example, if you consult for the safety industry, this may include a multitude of opportunities, such as environmental, hazardous communications, general safety, industrial hygiene, or emergency management. The generalist would cover all of these areas. A specialist would focus on one area, such as industrial hygiene. About half of all consultants consider themselves to be specialists. Another 35 to 40 percent consider themselves to be both a generalist and a specialist, and approximately 20 percent consider themselves a generalist. This is important, because when you are bidding for client opportunities, you want to be sure that you are capable of addressing all of the ancillary needs as a consultant. Meaning you need to know whether you can handle the work yourself, or if you need to hire someone for specialized components of the job because you lack the skill set.

Specialize or generalize?

It is important you understand whether you want to be a specialist or a generalist, because many new consultants are unsuccessful due to a lack of a clear focus for their independent consulting business. By that, we mean they are unclear of exactly what types of services they will provide, what clients they will provide these services to, and the ultimate goals their clients should achieve. Like any business you manage, you want to maintain an appropriate span of control. You may have heard the adage, "Do one thing and do it well," but often in the consulting business you need to offer ancillary services and can expand, over time, the products you offer your clients. As a business owner, you want to offer clients a number of services. As a consulting business owner, you want to determine the appropriate balance of services you can offer to clients, without losing quality. As you grow your business, you may add complementary expertise through the addition of consultants on your team. This may be beneficial as your company grows, because you can introduce one of your consultants as the expert in a particular field. It shows the breath of knowledge of your company, and helps clients feel they have the one person who can solve their problems.

What income is needed?

You probably want to know how long it will be before you can match your current level of income. We have provided this chart to show you the amount of time consultants say they are in business before they match their present income.


Leaving your existing employment gradually is the preferred method for most new consultants. As a new consultant, there are several factors you will want to look at, which include taxes, health benefits, retirement benefits, and others. You also want to look at how you can financially achieve this goal.

As a consultant, you will be responsible for your own health benefits. Health insurance is now required by law and must be factored into your operational overhead. The premiums will be affected by whether you are covering a family, yourself as an individual, or as a group, if you employ others. Typically, employees pay 50 percent or more of their monthly premium.

Although you are beginning your own independent consulting business, you still have to look forward to retirement and determine how you will contribute to, or match, contributions to a 401(k) program or other company pension. These contributions are deductible from your income tax, and you are also able to save more before-tax income, than you can as an employee. It is recommended you seek the advice of an accountant or tax expert to structure these types of investments, because you can benefit significantly through use of plans such as profit-sharing. Self- employment taxes are another factor you must include in your pricing, because the current tax rate for Social Security is 6.2 percent for the employer, and 6.2 percent for the employee -- or 12.4 percent total. The current rate for Medicare is 1.45 percent for the employer and 1.45 percent for the employee -- or 2.9 percent total.

Many consultants begin on a part-time basis and use financing from a multitude of sources to build their independent consulting business. The majority of them build their business based on profits from their own consulting work. Some build their business from the income of their spouse or significant other; and still others know there's with personal savings, severance packages, or taking out loans. How you begin your business is up to your individual financial situation, but there are a number of opportunities to finance your new business. You will need to decide your initial startup costs and develop your business plan around these cost. There are a number of tax deductions you can make as a consultant such as:

Office expenses

Utilities

Alarm services

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Automobile use

Depreciation of furniture and equipment

Cleaning services

Business expenses such as postage

Business expenses such as telephone

Professional fees, including accountants, lawyers, or web designers

Entertaining clients

Registration fees for conferences

Training materials

Professional journal subscriptions

Marketing expenses

Printing

Here are a few scenarios to help you determine what to charge; bear in mind all your overhead, cost of self-employment taxes, retirement benefits, and health benefits -- as well as the basics to begin a business, such as those in the chart above.

Let's say you want to make a consulting income of $100,000 net income, before taxes.

This is what it will look like:

$100,000 Goal income

$15,000 Self-employment taxes

$15,000 Health benefits

$15,000 Retirement benefits

$10,000 Office equipment, supplies, and business needs

$7500 Marketing expenses

$5000 Educational, automobile, and miscellaneous operational requirements

$167,500 Total cost needed to meet your goal income

So you can see you will need an additional $67,500 to meet your goal.

So what does this mean in terms of consulting time and the work you must do to meet your goal? First, you have to do some consulting math to determine your availability, supply, and demand. To determine your supply and demand, you must determine how much you want to work within the average constraints of time per year. By this, we mean there are 52 weeks per year, with five working days, so you have a total of 260 consulting days without working weekends. There are 14 holidays. You will want to account for your vacation and sick days, as well as any days you need for administrative overhead, such as marketing or business operations. This typically averages approximately 100 days per year. This results in about 125 days per year, for you to work with billable clients.

Here's the scenario:

If you charge $100 per hour, times eight hours in a day, that equals $800 per day.

Hypothetically, if you work every day of the total 125 days (assuming you could be booked every day), times $800, you would have your $100,000 goal met; but you would still be short $67,500 in the overhead in order to make this amount, you would need to charge $175 per hour times 8 hours per day, which would equal $1340 in earnings per day. So, if you take $1340 multiplied by 125 days per year, your total would be $167,500.

There are number of things you have to take into account. Do you want to work alone, or can you take on additional consultants and gain efficiency to take on multiple projects?

If you strictly want to work for yourself, you will want to focus on the total calculated amount you want to make. If you want to hire others, use the same formula to determine how much you will need to earn, as a team, to pay your overhead costs, and also to make the profit you desire. The important thing is to make sure that you charge enough.


There are a number of things to consider as you grow your business. Part of the economic reality of independent consulting is that you do not have a continual stream of income as a salaried individual; but with the right decision making and development of proposals, you can have a substantial, continually growing cash flow.

Here are some of the factors that can improve your economic reality.

  • Update your personal competencies through continuous education

  • Improve your marketing skills

  • Expand your consulting network

  • Monitor your billing and collection for work you performed

  • Improve your communication skills

  • Further develop your character

Fee Charge Myths

What can I realistically charge, starting out? When you're determining what to charge, stick with your plan. We have shown you formulas where Profit + Labor Costs + Overhead = The amount you charge, and scenarios for the income you want to make. Use these formulas to make your decisions.

Many new consultants charge significantly less than they should, because they have a relatively small number of clients. You have to be able to charge enough to make your work profitable. Charging less as you begin your business is getting off on the wrong foot. You are not paying yourself what you are worth and clients will be accustomed to paying these low prices. As you begin your pricing, it is better to charge a higher cost, than a lower-cost. Being known as the low-cost provider within a market is not a good position. Also, never feel that just because you are starting out, this should have any impact on what you charge your clients. Charge what you are worth. There are some consultants who have left larger consulting firms where they charged a substantial amount per day, only to charge less when they are on their own, because they feel they do not have the name of the larger firm. This is a totally false mindset to have. Another myth is that once you land some jobs, you can begin charging more for your work. This is most often not the case. If a client hires you for a $5000 project and are happy with the work, the next time they reach out to you for a project, they will expect the same pricing.

Do your homework.

Good consultants know the market rate. Make it a priority of yours to see what other consultants are charging. Research the competition, and network with other consultants to develop your pricing strategy.

Determine a consistent pricing structure.

Charging inconsistent prices may undermine clients' trust. If you are consulting for clients within the same industry, they may discuss services and determine that there was a significant variance in pricing. The way to standardize your pricing is to base it on these three principles. The type of work is different. For example, all of your work is done from your office, or all that is done at a job site. The companies are different, such as large industries versus nonprofit organizations versus government agencies. Be consistent with your pricing strategy. And finally, the time period is different. You may run into situations where clients want the work done in a shorter time period than would normally be expected to accomplish this. You will need additional resources, such as more time with yourself, or to hire additional employees to help. This may affect the rate you charge.

Summary Reminders and Takeaways

Entering into the consulting business has a number of challenges in the way you structure your business legally, and conduct business operationally. There are a number of economic realities related to independently consulting. There are a number of myths, yet a number of true facts, related to the financial aspects of consulting profit. Your results will be based significantly on your motivation and business savvy.

Some of the common problems new consultants face are quoting overly low fees to get business, not bench-marking other consulting businesses, not understanding your value to a client, failure to understand profit needs in terms of overhead cost, misunderstanding the value of your expertise, and the fear of asking for the right price.

Part of your decision making that affects your profit is whether you will specialize or generalize as a consultant. The more you have a niche-based type of consulting, the higher prices you can demand.

Leaving full-time employment can be a scary proposition; statistics show over 50 percent of consultants match their present income within the first three years. There are aspects to be aware of that may affect your decision, such as health insurance requirements, lack of retirement benefits, and tax requirements.

When looking at the economic reality, you have to determine your goal income, minus your overhead.

Consultants should determine a consistent pricing structure to maintain an ethical basis. You should be able to explain how you charge for your services. Common reasons for charging different rates include the type of work, the type of companies, and the time period for consulting.

 
 
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