So you’re thinking about jumping into the growing ranks of the self-employed, eh? There are many advantages to doing so, as any self-help author will be glad to tell you (for a fee). But before you start adding up all the bucks you’re going to make, you need to stop, take a deep breath, and stare one fact in the face: You are now a business, and you’ve got to think like a business owner. There are lots of implications in that statement, but let’s focus on this: Your goal is not to make lots of money; it is to keep lots of money. Here’s what I mean:

Top line vs. bottom line
Everyone who considers going solo looks first at the money to be made. And don’t kid yourself—there is money to be made. If you are both highly certified and great in the classroom, you can easily move into six figures—although the flood of trainers into the marketplace is making that somewhat harder than it was a few years ago.

The problem is that neophytes tend to focus on the fees they’re going to make, which is “top line thinking.” As a business owner, you’ve got to focus on both top line and bottom line factors. The terms come from the typical income statement, where the revenue total is listed on the top line, and what’s left over is listed on the bottom line. In between are all the things that chip away at the profit: cost of goods sold, taxes, salaries, benefits, travel, office supplies, and other expenses.

Ultimately, your goal is to maximize that bottom line. How? By increasing the top line as much as possible and decreasing the cost of the items that appear before the bottom line as much as possible. Increase revenues, decrease expenses.

It sounds baby-simple, and it is. But you’d be surprised how many people forget it. You get that first fee check from your broker, and all you can think about are the cool things you can buy with it. You rationalize (“rational lies”) any number of things that you’ve simply got to have: that new laptop, a nice desk, your own copy of NT Server, or that membership at the country club. Then the tax bill hits, the car breaks down, or that training gig you thought was a sure thing turns out not to be, and suddenly you are looking at a negative cash flow situation. (Gulp!)

First things first
Let me suggest some steps to take to make sure your bottom line doesn’t have parentheses around it.

  1. Get a bookkeeping system, and learn how to use it. I’m not saying spend a bunch of money on the same accounting package your bank uses. You can do just as well with a $5 ledger or a simple home accounting software package. The point is get a system, set it up, learn how to use it, and use it.
  2. Set up a business account separate from your personal checking account. The first thing you should do with that check is put it in your business account. All your business expenses should be paid from this account. Your taxes should also be paid from this account. Then you should pay yourself from this account. That’s right—either transfer the funds into your personal account or actually write yourself a check. If you are audited, it is much easier to prove your case if everything business-related comes from its own account. Plus, the IRS tends to look more favorably on someone who seems to know what they’re doing. (You did get an accountant, right?)
  3. Get a book on small business finances, and learn both the terms and the facts. Should you do mileage or actual expenses on your auto? Do you understand all the lines on your Schedule C? Is a home office a good idea? Do you know the difference between positive cash flow and profit? These are just some of the business issues that you, as a business owner, need to understand. If you don’t, you are either leaving money on the table, or you will have to pay extra later.
  4. Document, document, document. I have an application on my Palm Pilot that I use to track every minute I spend, every mile I travel, and every expense I incur. You can do it with a handheld, a planner, or a simple notepad. However you do it, just do it. Keep it up, keep it filed, and keep it entered. The time you spend documenting will pay you back in taxes saved and revenues billed.
  5. Analyze every expense. Do you really need that book, or can you borrow it from someone? Instead of that new computer, can you upgrade the one you have? Do all your invoices have to be in color? Can your print your business cards yourself? When you are in business for yourself, the old adage about a penny saved becomes your daily reality. I once got a training gig for which I needed some extra knowledge. Like a dunce I ran to the bookstore and bought three books on the subject. I ran because I knew that if I took the time to think about it I wouldn’t buy them. Later I realized that I had spent 10 percent of my profit from that gig on those books. How would you feel if your employer gave you a 10 percent salary cut? Essentially, that’s what I did to myself. I’m a lot less liberal with my book money now.
  6. Develop a budget. The B word scares off so many people, but I’ve got to mention it. What kind of business has no budget? “Well, we’re just going to do our job and hope we have something left over at the end of the year.” If any CFOs said that, they’d be gone before their Gucci shoes had time to get scuffed. Well, guess what, dude: You are now the CFO for Me Inc., and it’s up to you to know at all times how you are doing, actual versus planned.

Be honest with yourself
If all this sounds like a big pain, let me assure you: It is! But, if you want to be on your own, it’s part of the price you pay for “freedom.” Note the quotation marks: All freedom involves trade-offs, and the trade-off for the freedom of self-employment is the risk of no income and the burden of bookkeeping. If you can’t deal with these two trade-offs, then you need to take a long look at your goal of going solo. On the other hand, if you can accept these two factors, perhaps you are ready to make it on your own. Just have your eyes open and a plan in place. And remember: The goal is to keep lots of money. Good luck!

Official Disclaimer
Everything in this column is unofficial advice. I make no claims to be any sort of financial adviser, tax planner, or to have two brain cells to rub together. If you act on anything in this column, you do so at your own risk. Void where prohibited. Your mileage may vary. Do not operate heavy machinery after reading this column.

Bruce Maples is a writer, trainer, and consultant living in Louisville. His latest project is tax advice to lemonade stand proprietors. Follow this link to comment on this article or write to Bruce .