Plenty of workers dream of making the leap from traditional employment to entrepreneurship or freelancing work – of walking into their boss’s office, resigning on the spot, and riding off into the sunset of freedom they envision their new lives will entail.
But unfortunately, many of these same workers find that the world of self-employment isn’t everything they imagined it would be. Take, for example, a graphic designer I had the chance to work with a few years back – let’s call her Barbara (not her real name).
Barbara was incredibly skilled, so it wasn’t a surprise to me that she received enough interest in her work to go it alone as a freelancer. Immediately after she left her full-time job, Barbara secured several website redesigns – and although she would have preferred to work on bigger-picture branding projects, her income from these clients was enough to pay her bills and keep her fledgling service afloat.
Barbara knew she should be grateful for the work, but after a few months, she was burned out. She was working around the clock, handling not just her design work, but the administrative side of her business as well. Worst of all, she wasn’t even doing the work she really wanted to. Barbara felt like a failure – how could she be so unhappy when she was “living the dream” that so many of her former colleagues aspired to?
The truth is, Barbara wasn’t a failure – she just wasn’t thinking like a business owner!
Business Owners versus Employees
Business owners and employees, as general groups, have vastly different sets of concerns. Employees must worry about completing their tasks on time in order to get paid (and to not get fired), while business owners must concern themselves with keeping a steady stream of orders or projects flowing in to keep the company running.
Business owners aren’t inherently better than employees, or visa-versa. However, when employees who have only ever worked in traditional roles leave these positions to work for themselves – essentially jumping into company ownership roles overnight – they risk running their businesses with the wrong mindset.
In Barbara’s case, her history as a traditional employee taught her to say yes to projects and to work on them until completion. She had never before had to look at the bigger picture, which led to her feelings of frustration and burnout. If you see your own situation mirrored in her struggles, consider the following “business owner” practices all former employees must learn to implement when heading out on their own:
Business Owners Bill for Overhead
If you’re a traditional employee, $20-30 per hour might seem like a generous wage; if you’re a business owner, it’s not nearly enough.
Remember, as a business owner, you’ve got additional expenses to cover that were previously taken care of by your employer. You need to set your wages to account for these costs, not just your daily living expenses.
Here are a few of the extra expenses you’ll need to take into consideration:
- Taxes. Self-employed people pay both self-employment taxes and the employer’s half of Medicare and Social Security taxes. Most experts estimate that self-employed workers should set aside at least 20-25% of their pre-tax income to account for these costs.
- Insurance. If you aren’t lucky enough to have insurance benefits through a spouse or other family member, you’ll need to purchase your own. Even with the passage of the Affordable Care Act, health, dental, vision, liability, life, disability and other types insurance can run you hundreds of dollars each month.
- Retirement contributions. You may no longer have an employer match for your retirement account, but that doesn’t mean that your financial needs later in life disappear. Set up an IRA, SEP-IRA or SIMPLE-IRA of your own and contribute at least 5% of your earnings to avoid missing out on important compounding interest benefits.
- Office equipment and supplies. Want to work from a desk? Need to order a new set of business cards? As a freelancer, you can’t just expense these costs to your boss – they’re your responsibility now. – Advertising expenses. Getting the word out about your business often means advertising, and those costs will fall to you. While it isn’t universally true that you’ve got to spend money to make money, you’re still likely to incur costs drumming up new business as a freelancer.
Given that all of these expenses must be accounted for, it’s no surprise that many freelancers require an hourly rate of at least $50-100 per hour to pay their bills. Maybe it’s time to move away from using freelancing calculators to determine your hourly rate and instead start charging based on the value you bring your clients – a great resource for how to do this is our free eBook Breaking The Time Barrier.
Business Owners Think Long-Term
Business owners are constantly thinking ahead about the futures of their companies. Should the business put more of an emphasis on one product than another? Are there any potential industry shifts on the horizon that could affect the company’s prospective customers and how they should be marketed to?
Freelancers, on the other hand, have a tendency to think only as far as the next project. Take Barbara, for example. Although she wanted to focus more on branding and identity work, she took on the website design projects needed to pay her bills. And because she undercharged for those projects, her schedule was packed too tightly to allow her the spare time needed to network and market herself to take on the kind of work she wanted. Talk about a lose-lose situation!
The key to avoiding this trap is to set aside time for business planning and strategy. If possible, try to commit at least one hour a day to business growth – not client work. Use this hour to research your industry, brainstorm new product or marketing ideas, network with potential customers or even undertake the professional development work needed to position yourself for the kind of work you want to do – not just what’s fallen into your lap.
Business Owners Outsource
Finally, do you think the CEO of Microsoft does his own accounting? Do you think that Apple’s chief executive is the one writing the press releases that appear on the company’s website? Of course not – these business owners know how to outsource!
When you’re a solo entrepreneur, you may be required to wear many different hats due to limited funds. But as soon as your business allows you some wiggle room, take a lesson from these owners and outsource certain company needs to the professionals who are more qualified to take them on. Where should you start? Typically, freelancers’ money is best spent passing off accounting and legal needs to experts in these areas.
Barbara’s story has a happy ending. Although it was difficult for her to turn down work, Barbara freed up the time in her schedule needed focus more on business networking and professional development. As a result, she was able to take on more of the work she preferred at higher rates, which then allowed her to work even fewer hours and delegate important business tasks to other consultants and professionals.
She’s happier, healthier and making more money than ever – all because she took the time to look at her growing freelance company as a business owner, not as an employee.
Have you run into these types of challenges before? Share how you overcame the employee mindset and learned to run your company like a business owner by leaving a comment below.