Leadership

Running an IT consultancy without a credit card

Without depending on credit, what strategies can an IT consultant employ to manage the uneven flow of expenses vs. income? Here are seven suggestions.

 The only constant in consulting is that there are no constants in consulting -- and that's especially true about the timing of income and expenses. Murphy's Law dictates that your server's motherboard will commit electronic hari-kari only after the river of receivables has run dry, so you need to have a plan for smoothing out your fiscal peaks and valleys.

It's tempting to put your expenses on a credit card and tell yourself that you'll pay it off as soon as you collect on your current big job -- but that takes a ton of discipline. One of the bad things about a credit card is also one of its most useful features: You can use it for practically anything these days. So as times get a little tight, you might be tempted to put more expenses on the card -- and stretch out your plan to pay it off even further into the future. Before you know it, you're paying a huge chunk of interest each month with no reasonable hope of paying off the principle within your lifetime.  You've just made yourself a slave to the MasterCard.

A couple of years ago, my wife and I paid off all our personal and business credit cards and cut them up. We've been running on a cash basis ever since. Sometimes it isn't easy, but the long-term payoff is huge.

Without depending on credit, what strategies can an IT consultant employ to manage the uneven flow of expenses vs. income? Here are seven suggestions.

  • Build cash reserves: The ideal solution is to have enough cash on hand to be able to use a check or debit card for everything. I don't know about you, but I'm not there yet. It requires discipline to put money into your reserves whenever you collect. That isn't easy if you've already got a pile of bills waiting to be paid.
  • Use an interest-free charge card: For many years, I used American Express for business expenses. I was required to pay the account in full every month, so I wasn't tempted to let a balance accumulate. That can work well, but you have to keep a keen eye on exactly how much you're charging. Like credit cards, these charge cards can be used for almost anything, so don't fall into the trap of using it for everything when times are tight and assuring yourself that you'll pay it off "somehow" when that invoice comes next month. You might find yourself speaking with a collection agency.
  • Get payment terms from vendors: Some companies will be willing to pay for your loyalty by giving you interest-free terms. I have an account with CDW, which bills me Net/30. That's just enough time for me to plan how I'm going to pay for that replacement router that I need immediately, because it matches my own cycle for billing and collection. CDW also gives me a discount from its normally listed prices. Sure, sometimes you can find better deals elsewhere -- and if you have the cash available you can take advantage of that -- but often, it's worth a couple of bucks to postpone payment for a few weeks. Again, you have to be careful to limit your purchases to what you can actually pay within the next month.
  • Get your client to pay expenses directly: Especially when traveling for your client, the expenses can add up quickly: air fare, rental car, hotel, meals, etc. If you're including those on your monthly invoice with Net/30 terms, you may have to carry that balance for up to two months. If your client is willing, get them to book and pay for the big items directly. You can offer clients something in return, such as being more flexible on your travel schedule to get a better rate, accepting a cheaper rental car or hotel, or charging them less (or not at all) for travel time. I've also had clients pay directly for some of my equipment and software licenses when that equipment and software was dedicated to their projects.
  • Get your client to pay for services in advance: This could improve your cash flow by 30 days (or more, if your client is habitually late), but it's only a temporary fix. It won't take long for you to get used to having that cash on the new payment schedule. Unexpected expenses will soon eat up that lead time.
  • Cut expenses: The simplest way to improve cash liquidity is to put a stopper in the drain. Do you really need that high-end server, when an older model would serve your purposes just as well? On the other hand, sometimes the latest technology can save you money (e.g., replacing CRT monitors with low-energy LCDs). Anything else you can do to reduce power consumption can make a difference of up to hundreds of dollars a month -- so turn down the heat and wear a sweater, and don't forget to put your systems to sleep at night (at least the monitors). Using free software solutions instead of purchasing proprietary licenses can save you a bundle, too. I can't speak for you, but 100% discount sounds pretty good to me. Evaluate whether paying for subscriptions and memberships in various organizations is doing anything for your bottom line. Sometimes the intangibles are worth it, but often they're not.
  • Hire a good tax man: Don't rely on my tax advice, but you may be able to save thousands annually by filing your return in the most advantageous manner. A few hundred dollars spent on someone who knows all about sole proprietorships can be a very good investment. Bonus points if they used to work for the IRS.

All of these strategies can put more money in your pocket -- at least in the short term. For the long term, you'll want to concentrate on growing your business.

Do you use any other strategies for maximizing your cash? If so, share your tips in the discussion.

Related resources

Get weekly consulting tips in your inbox TechRepublic's IT Consultant newsletter, delivered each Monday, offers tips on how to attract customers, build your business, and increase your technical skills in order to get the job done. Automatically sign up today!

About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

31 comments
Marty R. Milette
Marty R. Milette

I recall flying to Canada from Russia. I had been out of Canada for a number of years and didn't have a credit card anymore. Although I had over $10,000 in my pocket IN CASH -- and willing to make whatever deposit was required -- was unable to rent a car and was turned away from a hotel room in a blinding snow storm because I didn't have a credit card at the time. In the UK, it has been suggested to me to have a credit card set up ONLY for business-related expenses -- to make accounting easier. In the UK, there is no such thing as 'flat rate' expenses -- so this seems the best and most intelligent way to work withing the system.

Sterling chip Camden
Sterling chip Camden

You're right -- both are next to impossible to get without a card. I'm traveling next month to see a client, so what did I do? My client is being billed direct for the hotel, and I'm not getting a car -- they're picking me up and dropping me off at the airport.

reisen55
reisen55

And one day my colleague reviewed his credit purchases for his clients and there were over $5,000 he had not invoiced them for. Ok, we are not too big on invoicing here, but my rule of thumb for my clients is to have them PAY in advance of a purchase or pay directly themselves. This is a sound rule to follow.

PMPsicle
PMPsicle

If you are thinking of using credit cards to provide financing be very careful. A line of credit will cost you in the area of 7% unsecured (at least up here). A credit card on the other hand can cost you upwards of 25% interest per year (or as LITTLE as 20%). At 25% and minimum payments you will NEVER get out of debt. So if you are going to use credit cards DON'T miss a payment and DON'T pay just the minimum. Always pay credit cards off in full ... even if you have to borrow from a line of credit to do it. Glen Ford, PMP http://www.debtfreelivingltd.com/+gford and http://www.trainingnow.ca

Sterling chip Camden
Sterling chip Camden

It may seem like you have more buying power using credit, but you actually lose buying power by spending so much of your money on interest.

cmaritz
cmaritz

Sorry Chip I don't have much to add to your OP, but thanks for the advice and comments this thread has generated. So much of it is discipline, as you and others have rightly mentioned. It seems to be all about timing. I mean, if I had no credit card, then I would have to save up to buy something, that would take time and patience whereas with the credit card I can have it NOW oh goody gumdrops! Now suppose I get a credit card, and then (with supreme discipline) I first save up my real money to a level that is similar to my credit card limit, and from then on I treat THAT value as the new 'zero' and my credit card 'debt' as being the amount short of THAT value (and if I ever spend all the way down to actual zero, that would be like maxing out the credit card). Ideally it would work like using a credit card but without the world of escalating pain in the form of credit interest. And of course I would still HAVE the credit card for certain things that might be difficult or impossible to do otherwise, e.g. online payments, etc. And, all it takes is a short (hopefully) time of saving at the beginning. And after that, discipline. Non-stop. Of course easier said than done. I'm the last one to talk because I have yet to try this approach *ahem!* Anyway, that was more of a thought experiment than anything else. It takes discipline and restraint not to 'become a slave to the MasterCard'. Another, perhaps more practical, piece of advice was from a pastor I heard who suggested: pay off everything you owe on your card every month, and when the first month comes when you CAN'T do that, either cut up your card, or entrust it to someone who will not let you touch it (and better not use it themselves!) until you can pay the outstanding amount back. Still, all of this is more aimed at personal finance. I have no idea if these ideas could work in business (where the scale, and no doubt many other factors, are totally different). So there's my (hopefully one day interest free!) 2 cents, to be taken with a bucket of salt.

Sterling chip Camden
Sterling chip Camden

... for less than $300 balance, my mother kept her check ledger as if the $300 didn't exist. The only time she was reminded that it was there was when she got her monthly statement and had to mentally subtract it from the result. AFAIK she never had to pay the monthly fee, and that was back when times were tough and we squeezed every dollar to see if we could ring out a few more cents.

PMPsicle
PMPsicle

Your technique is actually one that is used to fix people's credit. Some companies have pre-paid credit cards. You pay them (up front) the amount of your limit. You get to use the card up to the limit. You then pay off the amount each month. They report it as a regular card, your credit improves and they aren't taking a risk. The problem for the rest of us is one - that our credit card companies keep increasing the limit. And two - it takes a heck of a lot of discipline. But a great idea otherwise. Your pastor's advice is great. As long as the card holder doesn't just spend the money another way (like debit cards). But definitely a good idea in any case. Glen Ford http://www.TrainingNOW.ca

jmgarvin
jmgarvin

A lot of customers won't pay in advance and to purchase from vendors, sometimes you need a CC...it's possible, but it's better just to have a revolving line of credit and be careful with it.

Sterling chip Camden
Sterling chip Camden

For me, they're just too easy to let get out of hand. Just knowing that I can make a partial payment when I get in a pinch makes me more careless with expenses. Maybe I'm not disciplined enough, but I find it better to go without than to lean on a credit card.

PMPsicle
PMPsicle

Good list. Budgeting is a core skill with any small business but especially with consultants. When building cash reserves always remember to pay yourself first. Roughly 10% of your net should be put into tax-deferred savings (401K I believe is your version of an RRSP). Another 10% should be put into short term savings (i.e. safety net). This should be done before you "pay yourself" (in other words right after paying the company expenses and before subtracting your wage). One neat trick to help with this is to pay yourself the same wage you would be earning if you were to work for someone else. The remainder (there better be a remainder or you need to get out of the biz) is then put away as a safety net. One other trick is to use lines of credit. For example, putting your mortgage on a line of credit will allow you to pay down the mortgage when times are good and draw from it when the times are bad. Unlike a credit card which is new, often frivolous purchases, the line of credit is typically limited by the original use (e.g. mortgage). Fourth tip is to develop multiple streams of income. For many of us, we deal with only one client or group of clients at a time. That's the definition of high risk. If the market goes south on us our income is going to suffer. As entrepreneurs one of the things we need to do is constantly look for ways to leverage our businesses to create new businesses (i.e. multiple streams of income). If one stream dies then presumably the others can take up the slack. Bottom line, is that you need to spend with discipline. And hope that you're prepared when the land turns to swamp beneath you. Glen Ford, PMP http://www.TrainingNOW.ca

Sterling chip Camden
Sterling chip Camden

At one time we used a line of credit on the mortgage -- but when housing prices went south down here in the US the lender closed it down completely -- even though we never missed a payment. I had to wonder, if we had to suffer this when our credit and income are fine, what must others be suffering who aren't as well off?

PMPsicle
PMPsicle

Yeah, unfortunately, your banks didn't listen to the advice we've been discussing. Now everyone else (in the U.S. and elsewhere) is paying the price. The Debt Counselling company I work for has a solution to that ... basic idea is to mortgage your house for the max, and then invest the extra amount in a better return investment. Your taxes are different down there so I don't know if it would work for you. (Up here that makes the mortgage tax deductible without making the capital gains taxable - a big advantage) Glen

JohnMcGrew
JohnMcGrew

...to reinforce your image as a genius as your businesses all go down the tubes. Although I majored in economics, I'm no "financial advisor". But I do know plenty who are, and I do consulting for a few. At the moment, none of them can conceive any investment that is safe enough to risk going into debt over, and certainly nothing that's paying 8%. I'd love to see this guy's balance sheet.

PMPsicle
PMPsicle

I actually do have one, however, I am not an investment dealer and I do not play one on TV. Talk to a professional. You'll find they usually have investments that the average person doesn't use. I'm also in Canada and my tax situation is different from you. By using my mortgage to fund an investment, I automatically save 25% of my interest or better. So I'm going to repeat my advice -- GET PROFESSIONAL ADVICE BEFORE ATTEMPTING ANY ADVANCED CREDIT OR INVESTMENT TECHNIQUE including this one! If you don't think this will work for you, fine. What matters is that you begin thinking of the biggest sink hole for your cash as an investment. And treat it as such.

brasslet
brasslet

...as his highly leveraged business ventures went banckrupt back in the earlt 1990s. He reportedly was close to being personally banckrupt as well. Not a man to emulate, unless your ego (like his) is so huge that you are willing to risk everything , all the time, with the hope of getting lucky at some point. As you said, Glen, this is not a financial column -- but as you've already written reams, please give us a short sentence or two on that 8% sure-thing investment. That is what your advise hinges on..or is that part of what you're selling? You should call your company OPM Industries.

JohnMcGrew
JohnMcGrew

This is why you don't make sense. On one hand, you argue that it's smart to leverage your house to the max, and then you observe that you yourself have lost 10%-20% over the last year. So what has that done to your balance sheet? What are you really worth? If you're actually mortgaged to the max, then you are already a glorified renter, with liability! At least a renter can walk away with no damage to their net worth or creditworthiness. The difference between myself and the neighbor who's leveraged at nearly 100% is that I can get out of my house any time I want and come out ahead. And if I owned my house 100%, the worst my balance sheet could get would be zero. The problem in America right now is that there are millions of people with net worth far less than zero, with hundreds of thousands in debt that they may never escape, simply because they leveraged their own homes to the max. For the sake of disclosure, I am part of a partnership that owns several other properties that are leveraged. But I'd never consider using my own house to do that. Good thing too, because I personally know other people who've run businesses similar to mine, but did use their own homes to leverage. Now they don't own anything. And yes, I know exactly what my house is worth. Actually, I am very fortunate that I am in one of the few neighborhoods in my city that has actually had values go up. But I really can't take credit for that so much as I would like. Having a background in economics and appraisal certainly has helped. But it was just as much luck that I ended up in a neighborhood that has held. (knock on wood). So, you'll have to forgive me that when I heard that a "financial debt counselor" would advocate this kind of strategy; It's akin to an IT professional advocating that anti-virus is a waste of money, firewalls are cumbersome and unnecessary, and patching your OS is a waste of time. Yeah, it might work for Donald Trump who has an army of really smart people employed only to watch his back. But it's been complete disaster for millions of Americans who've leveraged themselves to insolvency, and find themselves at retirement age with a balance sheet that is

PMPsicle
PMPsicle

It probably would help if I used the right person's name. I was, of course, referring to Robert T. Kiyosaki (who wrote Rich Dad, Poor Dad) and not Guy Kawasaki (ex Apple and an important author in his own right ... just not about using money wisely). Glen Ford

PMPsicle
PMPsicle

My responses ... 1. You've nailed a big part of the mortgage/investment technique ... let someone else take the risk. It's the same technique as Mr. Trump has used. (And it's why I suggested you do a risk analysis on your investment in your house.). Guy Kawasaki has written a number of books (Rich Dad, Poor Dad) on the subject but he made his money the same way Donald Trump did ... with someone else taking the risk. 2. I studied and worked as an accountant. And I've completed the Insolvency Counsellor qualifications (admittedly I haven't applied to the courts for certification -- but I'm not sure I want to go into that business). 3. Your home is your biggest purchase ... and most likely your biggest single investment. Maybe you should think of it as an investment. After all, you can always rent an apartment! As for not taking a hit, have you checked its worth lately? I don't know about you but I've lost 10-20% over the last year. (Our property tax is market value based so I get forced to keep track every time I see a tax bill). And that's if you can sell it. 4. Remember I'm paying 5-6% after tax without the investment and 3-4% with the investment. That means I'm getting a 4% spread. And I can get 8% fairly easily (making it a 6% spread -- and if the bank is happy about that why should I complain). Not only that but I'm transferring the risk of not making my mortgage (and thus losing what I have invested in my house) to the bank. Look, I'm not saying that this is good advice for anyone. It is, however, a technique you need to learn about. If only to help you understand how to spend your money wisely and not get caught in many of the myths around money. If it works for you, great. If not, fine ... find another technique. And as always, get professional advice. Glen

JohnMcGrew
JohnMcGrew

...down here's we're currently having a very hard lesson about debt. And the biggest part of that lesson, is that there is very little "good" debt. As for the lessons: 1: Donald Trump is "not poor", because he's a shrewd businessman and shameless self-promoter. But how many of his projects have gone bankrupt over the last 25 years? I've lost count. But his secret is that when one of his deals goes down the tubes, it's usually with other people's money. He's "not poor" because he's suckered others into going into debt for him. They lose their shirts, and he goes on to the next project and debt-ready "partners". I don't know anything about Guy Kawasaki, but my guess is that he's "not poor" because he's sold lots of books to people looking for easy ways to be "not poor" too. Either way, I don't think it's smart to try to be Donald Trump unless you've had Donald Trump's background, experience, and trust fund to begin with. 2: As an author of countless lines of accounting software, I am sure that I am far more familiar than most with what a balance sheet is supposed to look like. And my background in economics left me with enough knowledge to know the difference between income producing assets, expenses, and how to price "risk". 3: I don't think of my house just as an "investment", but also as place to live. That it's worth much more than I paid for it is a reassuring bonus. And of every asset that is on my balance sheet, it's the one that has not taken a hit. That said, the one thing that I am certain of is that while my stock portfolio may be worth nearly half of what it was a few years ago, and after the upcoming inflation, (inevitable from the government planning to stimulate the economy by printing $3-trillion) my house is likely to be the one asset I own that is not going to diminish in value. No matter what happens to the economy, it will still keep me dry and warm. 4: Actually, I've been doing much investing lately, as much of our economy is at fire sale prices, and I'm sure that my cash will be worth much less in 2 years. However, the last thing I'd do is go into debt to do it. The biggest lesson of the current economic meltdown is that most people do not have a clue as to how to put a value on "risk". So yeah, I can leverage my 5% mortgage, which is actually costing me less than 4% after taxes to make a near-certain 6% or more. But what is the cost of the risk in that spread? I say it's far more than 2%. I like sleeping at night, and knowing that all that separates me from financial doom is a 2% spread wouldn't help that. In fact, the only reason I'm not paying off my mortgage faster than I have to is because I'm pretty sure that we're going to be seeing '70s-like inflation in a few years, and I like the idea of paying the rest of if off with worthless dollars. And if we've learned anything over the last 18 months or so, there's very little that is "certain". You're right about one thing: "The recession just changes the point where good becomes bad.". But if "good debt" can so quickly and easily become "bad debt", then I have to ask if it was ever really "good debt" to begin with. Some of my income-producing assets are now housing people who found that out the hard way.

PMPsicle
PMPsicle

so I'll keep the answer short and sweet. 1. Check out the books of Guy Kawasaki and the history of people like Donald Trump. These guys are not poor ... and their income is based on this trick. 2. Learn the difference between an asset (which generates income) and a prepaid expense. 3. Do a risk analysis on your home (you'll find it isn't a very good investment. Far better to offload the risk to someone else). It's also a prepaid expense not an asset. 4. Do some investigation of investment possibilities especially non-standard ones. You'll find that there are still good vehicles out there paying higher than mortgage rates. And finally, remember that my tax laws are different than yours. You get to deduct your interest ... I don't. You pay taxes on the sale of your primary residence ... I don't. That affects the post tax rates. P.S. Smart money is always to avoid bad debt. Smart money is always to embrace good debt. The recession just changes the point where good becomes bad. P.P.S. DO NOT DO ANYTHING WITHOUT EITHER KNOWING WHAT YOU ARE DOING OR HAVING PROFESSIONAL ADVICE ... OR BETTER STILL BOTH!

JohnMcGrew
JohnMcGrew

Max out your mortgage and "invest"? That's the kind of insane thinking that got our economy into the mess that we're in! Have you not been reading the paper? We're currently using my tax dollars to pay off banks and losers who thought that this was a great idea! If you've got sterling credit and stable (for the moment) income, you might be able to get a mortgage at 5%. Please tell me where you can safely "invest" for anywhere near that. With simple savings currently paying less than 3%, and CDs even less, there's little you can do with that money that might be "safe" that comes anywhere near close to justify the tax spread. This barely works when you cost your "risk factor" at zero. No way. The smart money these days is to avoid debt at all costs.

PMPsicle
PMPsicle

It's easier up here because doing that makes your mortgage deductible. Our normal situation is that the mortgage is not deductible from the mortgage and the capital gains is free of tax for the principle residence. This trick, however, makes your mortgage deductible and therefore reduces the post-tax cost by 25-50% (meaning 5% interest becomes 2.5 to 3.75%). Finding an investment that returns more than 4% isn't that difficult even in today's market. The real nice thing is that the principle residence remains capital gains free (unlike in the U.S.) as this is considered financing of the investment. WARNING! There are some other elements involved in order to protect your home investment ... don't try this without the help of a counsellor. Glen

Sterling chip Camden
Sterling chip Camden

Most people in the US can take their home mortgage interest as a Schedule A deduction, making it non-taxable. Depending on how they invest it, that interest could also be tax-free. But the trick is to find an investment vehicle that provides a better rate than what you're paying on your mortgage -- and you also have to factor in the non-liquidity of those assets.

lccurtis1
lccurtis1

Those where some great tips. I started a consulting firm in 2000 and had to close shop in 2004 It really hurt me in the end to use credit cards. I basically screwed up my credit and some customers did not pay for my services. So I ended up bankrupt. I have just recently taken another chance at this and I think your advice is very sound

dba88
dba88

Something absolutely MUST be done about the way credit card (cc) companies do business!! Their interest rates are off the charts and the rules behind them charging what they charge borders (almost) on illegal! They possess the right to change the rules on the fly! Even if you're one minute late making a payment. I've been in trouble with it before and indeed it took a tremendous amount of discipline, expense and change on my part to get out of trouble!! The credit card lobby in Washington, DC is extremely wealthy and politically supercharged. For consumers to fight their unfair practices we must garner the ability to regulate them, but I'm not sure which organizations or movements are attempting to do this! Out of any business at this time in the the U.S., we need to put a choker collar on them to stop charging us 36% interest, making changes to conditions on the fly, charging exhorbitant late fees, etc. It's absolute robbery and no one is doing a darn thing about it!!

JohnMcGrew
JohnMcGrew

...and then ask you to pull the trigger, and you do! The only reason the credit industry has this power over people is because the people give them the power by becoming indebted to them. When you become dependent upon someone else, you risk becoming their slave, be they a credit card company or the government. Please stop acting surprised!

waynesreed
waynesreed

Over time I have found that it is best to avoid making any cash purchases. I do not try to make money on equipment markups. My position as a consultant is that it is my time and expertise that are worth the money. My advice on equipment is what I charge for, not the equipment itself. This way, I can recommend equipment and advise on potential sources for purchase. If the customer prefers me to make the purchase for them then I get the payment up front. The added benefit is that it helps me keep my impartiality. If you are trying to make money on markups by selling equipment then that is another story, and you need to manage your accounts and billing very carefully.

Sterling chip Camden
Sterling chip Camden

There's no good money in that. My article was more about how to manage your own expenses without using credit.

Sterling chip Camden
Sterling chip Camden

Thanks for the kind words, and good luck on your new venture! I'm sure you won't make the same mistakes.