CXO

A step-by-step plan to starting a consulting business

It takes more than a business card and some organizational skills to start your own consulting business. As one former IT leader explains, it requires skills, from accounting to time management, and there's more than just a few hurdles in the path.

I have been in the IT field for two decades and have worked as a consultant for at least 10 years. I am often asked the best way to start a career as an independent consultant by IT managers who are looking to do something different, enjoy more job flexibility, and, hopefully, make more money.

During my career, I have also worked as a recruiter and a managing director at a consulting company. My varied experiences have given me the opportunity to talk with hundreds of consultants over the years. From both my own experiences and the experiences of others, I've developed a start-up plan for those seeking to head into consulting.

First things first—do a gut check
Before leaving your job or shelling out bucks for business cards, you need to ask yourself these four questions:
  • What skills do you plan to consult with?
  • Do you mind long hours?
  • Do you know basic accounting?
  • Do you dread collecting on unpaid bills?
  • Do you mind doing your own marketing?

Defining the skill set
Deciding what skills you're going to market is key to being a successful consultant. I'm assuming that you have some type of programming or networking skill that is in need by someone else—otherwise you wouldn't be able to step into the market with ease. There are a wide variety of skill niches—Visual Basic programmer, Web site designer, networking expert, or another technical skill—that are in demand by clients who don't have either the staff skills or time to train staff members.

Consulting requires long hours
Once you've focused on what skills and expertise to market, you need to seriously consider the hours a consulting business involves, especially at the outset. Most consultants I have worked with know about long hours. I believe this is because most consultants initiate a consulting business by doing part-time work while working a full-time job. I began this way. I was working as a programmer full-time when someone asked me to help set up an office computer. I had to do this after normal working hours and have been doing something on the side ever since.

The accounting skills needed
Every consultant needs to be able to do basic accounting—to document project work, track and keep tabs on work time, and monitor expenses and client billing. You don't need a full-time accountant. For example, I currently have three clients that I bill outside my primary client. I have to track the hours I spend there and I then have them sign off on the hours I plan to bill them before I send them an invoice. This is important because I have had clients who are very happy with my work until I send them an invoice. They will then argue that I didn't spend that much time on the project. If you have signed paperwork saying how long you worked, then they won't have a leg to stand on. Which brings me to my next point…

The role of bill collector
You have to be professional about billing. You need to set up one day a month to generate bills and track those individuals who haven't cut you checks. This is your accounts receivable. It is very important because some very terrific clients can be the worst when it comes to remitting payment. Late payments by clients can kill a business before it gets up and running.

You need marketing skills
Every business needs marketing to get exposure and clients, and you have to be willing to sell yourself. This nontechnical aspect of being a consultant is one of the top issues that can kill a business. You will always need to be making contacts to get more business. It's imperative that you constantly ask current clients for more work and also ask them if they know of other similar businesses that can use your skills. This is an ongoing networking process that you need to develop to establish a long-term business.

Business plan 101
After you have answered these initial questions and are hopefully still excited about starting a consultancy, there are some basic steps to take.

The best way to start your consulting business is to get a client prior to starting out on your own. It's quite easy to get part-time work to see if it will be viable before you go full-time. This will also give you an idea of what kind of income you can expect when you go out on your own. The key figure you need to determine is what dollar amount you are worth to a client on the open market. Let's say you decide to bill a client to work on their computer system. You decide to charge $30 per hour for your services. This gives you a target figure to go after.

Consulting is built upon billable hours. A calendar year has 2,000 billable hours, based on a 40-hour week and an eight-hour billable day. This also takes into consideration a two-week vacation. This means that if you bill $30 an hour for 2,000 hours, in a year you would make $60K gross income in one year. This will give you an idea of what your revenue will be.

Of course, you will, hopefully, work more than 2,000 hours in a year, but you will never know this until you start. My company predicts 2,080 hours in a billable year because we want to earn the two-week vacation before we take it.

Developing a business plan
I believe in a business plan, but my experience has shown that a lot of consultants spend quite a bit of time developing a great business plan but never get any billable income.

That is why I don't advocate a business plan until you get revenue started. The best time to write a business plan, in my opinion, is when you are getting the feeling that you have too much work to do and are beginning to turn away business or starting to feel that you don't have enough time in the day to get your work done.

At this point, take a weekend, sit down for a few hours, and develop a basic business plan for the next three months. By starting after you get billing income, you can accurately create your business plan, instead of creating it from what might happen. This will give you a business plan that is actually a valuable tool, which you can use to run your business.

Business housekeeping
Once revenue begins to come in, it's time to set up basic business housekeeping. If you are planning on working from your home to begin with, that is fine. There are multiple business types: a sole proprietorship, a partnership, a limited corporation, and a corporation. Most people in this business start as a sole proprietorship and then change business entities as they grow. That is what I recommend to start. You will next need a business name and then some other business basics:
  • A business phone number with an answering machine or service
  • A cell phone with voice mail
  • A quality printer
  • Business Licenses should be obtained
  • Errors and omissions insurance
  • Business letterhead and invoice statements
  • A business e-mail address
  • A Web site once your business is up and running
  • Business cards with your contact information
  • A nice brochure that details your business focus and skills

This is what I call my minimum list of needs. Remember, this is just a start. As you grow and get more income, the quality of the brochures can improve as well as the business cards. Start with a black-and-white brochure after business starts coming in. You can go to Kinko's and get 100 copies printed on a color printer for $25 to $35. This is the way to go until you get cash flow. The best purchase I made was a $500 laser printer. It prints brochures and letters at a quality that is better than some corporations have. It really helps me to portray that I am a serious consultant and that I am serious about all aspects of my business.

Points of failure
I like the motto that a failure is just one more step that you have to complete before you get successful. With this in mind, I will be remiss if I don't point out what some of the most common failures are in the consulting game. You need to think of these failures as items you should constantly be revisiting to ensure that you aren't making these mistakes again. I even place them on my to-do list for review every Monday morning. Here are some major points that cause problems.

Marketing effort
The easiest way to do this is by word of mouth. But in today's market, this isn't all you need. The best ways for a full-time consultant to market is to attend business conferences or meetings of the chamber of commerce and meet potential clients. It is also a good idea to set up a booth at a local business expo and give out your business information brochures and business cards. You can even do a giveaway of something like five free hours of consulting services. Have everyone fill out a form and drop it in a box. If you get 50 responses, you have 50 potential customers that you can call to drum up business.

I did this once and gave away four free one-hour evaluations of accounting and computer systems. I ended up calling 10 people who filled out their business cards and giving them all the free evaluation. Of those 10 people, I got five projects that kept me busy for at least six months.

Billing hurdles
Most consultants hate to deal with billing paperwork, but it's an area that has to be done professionally up front. Every hour you work, you need to get a signed statement from the clients verifying that you billed those hours and then, once a month, send invoices to your clients requesting payment. By doing this up front, you will be sure that you get paid and you can also cut off any client who has a problem with your work before you roll up a big invoice.

My experience has shown that clients have no problem trying to put off paying you if they think they can get by with it. This is part of the real world. By establishing your professionalism up front and by billing monthly or weekly, your client will know that you mean business and that your work does have value.

Not meeting deliverables
Another pitfall is when you can't meet a deliverable for some reason or another. If you see this happening, it's imperative that you tell your client as soon as possible. You may even have to do some work free to make sure you get anything at all. This happens to everyone sometime. It isn't always your fault, but it is something you will have to learn to deal with.

Cash flow or no flow?
Last, but not least, is cash flow. This is where adequate billing comes in. You have to know how much cash you need to keep your business going. Most businesses fail because they don't have enough cash to fund daily operations.

Some business experts say you need at least three months of funds to get a business going; others say you need six months of cash in the bank. I hate to support either notion because I don't know everyone's personal situation. That is why I always encourage new consultants to start while they still have a full-time job because they don't have the cash flow pressures that they would have if they go out on their own immediately. After you get a feel for what you can make, you can then decide how much cash you need in the bank before you break out on your own.

A big step
Consulting can be a lucrative business. It's definitely a way to become self-employed and make a good income, but it does have its pitfalls.

The best way to avoid the pitfalls is to set aside time weekly (I personally did this every Sunday night) to review what you have planned for the next week:
  • Are there any problems that I need to address with my current clients?
  • Do I need to make any marketing meetings or calls this week?
  • Are there any critical lunch meetings I need for the following week?
  • How is my cash flow looking for this week and for the next four weeks?
  • What are the deliverables I need to make for the next week?

By following this basic list, I was always able to attack my next week with confidence and knew that I was ahead of the game.

 

Editor's Picks