February 26, 2012
Earlier in this series of articles on consulting, I mentioned that my wife and I run our business from our home. This prompted one reader to ask why we didn’t have separate office space. The short answer is because office space is pure overhead. Every month that office space is going to cost me the same amount of money, whether I’m actually billing or not. And if I’m in the middle of a lease, I may not be able to shed that overhead as rapidly as I’d like.
During bad periods, extra overhead is the weight that drags you down. I’ve previously discussed having six months of “burn money” saved up to help you through these periods. One way to make your savings go further is to take a hard look at what recurring costs are necessary, and which can be done away with.
When I think about the absolute necessities for keeping our business going, the list is really very short:
- Internet/Data Service — Obviously, we run a high tech business and Internet and data connectivity are a must. Over the years, the most cost-effective solution that I’ve found is to use an inexpensive residential data plan for our home offices and have a dedicated server at a colocation facility acting as the “public” face of Deer Run. I get better availability and more throughput by having the server at the colo, and “residential service + colo” is still less per month than the expensive “business level” service plans offered by my local data providers.
- Telephony — These days, cell phones are a must. We also have a POTS line from our local telco which is the main number for Deer Run. Extravagantly, we also have a separate POTS line for our fax machine. While I enjoy having the POTS lines around as a backup, the reality is that they’re not at all necessary. If we ever do another move that requires us to print new business cards and letterhead, I would likely drop this service.
- Insurance — An earlier article in the series talks about insurance issues. We carry our general liability coverage and an extra rider on our homeowners policy to cover the replacement cost of our computer systems in the event of a catastrophic event like a fire. Do not try to skimp on this.
- Accountant/Attorney — Also do not skimp on legal and financial advice. The good news about these costs is that they only tend to accrue when you’re actively working. If business drops off, then you won’t need these services as much, other than perhaps year-end tax preparation.
- Taxes — Related to the above, make sure you pay all of the taxes that you owe. The out-of-pocket and opportunity costs related to dealing with an audit, taxes, and penalties are significant.
From a business perspective, anything else falls into the “unnecessary overhead” category in my world. Think long and hard before taking on any additional recurring costs besides those listed above.
We’ve managed to keep our business going through two major economic downturns where business was scarce for 6-12 months. In both cases, we weathered the storm by dialing our expenses down to the bare minimum and deferring maintenance that was not absolutely necessary until the economic outlook improved. In this “hibernation” mode, we were able to turn our “six months” of savings into enough money to get us through an entire year.
Since I started this post by mentioning the office space issue, I did want to note that even though we work from home we do have dedicated office space. In fact, three of the four bedrooms in our home comprise the “World Headquarters” of Deer Run Associates. Laura and I each have separate offices with doors that close– a must for when we’re both working from home. We also have a third “overflow office” for visitors which also holds our server and networking equipment along with our paper files and other storage.
You are allowed to claim a deduction for the office space used for a home-based business. You must be careful to only use the office space for business and not for personal reasons. I will also note that the IRS has sent unannounced representatives to visit both our California and Oregon offices to verify that the office space was being used as we claimed. While the IRS agents were unfailingly polite, I was also glad that our office space looked as professional as could be when they arrived.